Global Governance: An Architecture for the World Economy

Contents

I. Fears and Benefits of Globalization

Horst Siebert: On the Fears of the International Division of Labor: Eight Points in the Debate with Anti-Globalizationers. — Jagdish Bhagwati: Coping with Anti-Globalization. — Pranab Bardhan: International Economic Integration and the Poor. — Oliver Lorz: Do National Governments Lose Their Maneuvering Space in the Era of Locational Competition and What Can They Do?

II. Designing Global Governance

Ann Florini: From Protest to Participation: The Role of Civil Society in Global Governance. — Sylvia Ostry: What Are the Necessary Ingredients for the World Trading Order? — Barry Eichengreen: Predicting and Preventing Financial Crises: Where Do We Stand? What Have We Learned? — Jason F. Shogren, Stephan Kroll: Globalization & Climate Protection: Some Microeconomic Foundations for Integration. — Geoffrey Heal: Biodiversity and Globalization. — Gary C. Hufbauer: Looking 30 Years Ahead in Global Governance.

Abstracts:

The first paper by Horst Siebert lays out the benefits from opening up to international trade and capital mobility: scarce production factors are employed more efficiently, consumption and investment frontiers shift outwards, and technological progress and economic growth accelerate. For these benefits to materialize, however, countries have to adapt flexibly to changing economic conditions, to pursue a credible monetary and fiscal policy backed up by sound regulatory and supervision mechanisms of the domestic financial markets, and to compete for internationally mobile production factors. In a globalized economy, a multilateral order for the international division of labor gains greater importance. In the areas of international trade, finance, and environmental goods, nation-states have to renounce part of their sovereignty and bind themselves to a system of international rules in order to avoid strategic behavior of individual countries and to reduce negative external effects. Popular measures such as the Tobin tax or target zones for the exchange rates of major currencies, however, are often not implementable or are even counter­productive. Instead, countries should build upon the existing international institutions and treaties.

Jagdish Bhagwati explores the reasons why anti-globalization protests have gathered considerable momentum in recent years. He argues that the anti-globalization movement is very heterogeneous. At the one end of the spectrum, there are those who wish to engage in a constructive dialogue with policy makers. But there is also the “trilogy of discontents”, i.e., activists with an anti-capitalist, anti-globalization movement is very heterogeneous. At the one end of the spectrum, there are those who wish to engage in a constructive dialogue with policy makers. But there is also the “trilogy of discontents”, i.e., activists with an anti-capitalist, anti-globalization, or anti-corporation mindset, who have found a new target for their undifferentiated and inconsistent criticism. He emphasizes that the public – and to a certain extent also the academic – debate on the virtues and vices of globalization is overlaid and overwhelmed with two fallacies. First, globalization is a highly multifaceted phenomenon, embracing international trade, foreign direct investment, multinational corporations, and short-term capital flows, to name but a few. Yet, in the debate on globalization the lines between the different dimensions tend to be blurred. Second, far from being monolithic – as portrayed in the media – the anti-globalization movement is a fragile coalition of disparate groups unified only by a negative agenda. In order to refute the fears and follies that animate anti-globalization protesters, it is important to get across that globalization itself has a human face and that globalization is part of the solution, not part of the problem, if you are interested in improving social outcomes.

Pranab Bardhan assesses the widely held belief that globalization is causing hardship for the poor. In the first part of his contribution, he focuses on the poor in their capacity as wage earners and as recipients of public services. He identifies six transmission mechanisms through which international trade affects the absolute level of the real wage of unskilled workers. Taken together, the net distributional effect of international trade is almost always context dependent, belying any oversimplified statements for or against globalization made in the opposing camps. Turning to public services in developing countries, he argues that recent budget cuts in basic services like health and education, which are often blamed on globalization, are to a large extent attributable to domestic institutional failures. In the second part, he analyzes the ways in which policies meant to relieve the economic conditions of the poor are curtailed by global constraints. He shows that while globalization can constrain some policy options, domestic vested interests are the main culprit for socially damaging policies.

The question of whether national governments lose their fiscal maneuvering space in the era of locational competition is addressed by Oliver Lorz. Drawing on several theoretical models, he demonstrates that fiscal competition (a) may increase the elasticity of the tax base, primarily, but not only, with respect to internationally mobile production factors, (b) may change the level and composition of government consumption and transfers, and (c) may have consequences for the employment of immobile production factors. The policy implications that follow from the theoretical models on locational competition are less clear. In models with welfare-maximizing governments, fiscal competition can lead to inefficiencies with respect to the level and composition of taxes and public expenditure. When political economy aspects are incorporated into the models, positive and negative welfare effects of fiscal competition are not exclusive but coexist. The empirical support for the theoretical models is at best mixed. Although some tax and expenditure changes have taken place, a collapse of the welfare state has not occurred and mobile production factors still contribute substantially to the financing of the welfare state.

In her analysis of the role of civil society in global governance, Ann Florini starts by outlining why NGOs and other advocacy groups have recently become so prominent in the globalization debate. Rising education levels and living standards have enabled more and more people to participate in civil society networks. The information revolution has provided the means to collaborate across borders and to disseminate their message to a greater audience. Global integration itself and the efforts to govern it through international institutions such as the World Bank, IMF, and WTO have created targets against which advocacy groups can mobilize and focal points around which they can coalesce. She argues that it is neither possible nor desirable to exclude civil society from the decision-making process. NGOs can give a voice to the politically marginalized and speak for the global public good. More importantly, ignoring civil society could generate a backlash against global governance. Hence, the question is now not so much whether civil society groups should be participating, but how. More transparency and forthcoming disclosure would be a first step towards more inclusion.

Sylvia Ostry starts her contribution by discussing three new challenges to the World Trade Organization. First, the number of member states has increased rapidly, thereby making it more difficult to reach unanimous decisions. Second, the WTO agenda has been burdened with “new issues” which are far more intrusive into domestic sovereignty than previously agreed-upon accords. In the Uruguay Round, agriculture, trade in services, intellectual property rights, and foreign direct investment were put on the negotiation table. Doha further added environmental and development goals. Third, the WTO became one of the prime targets of anti-globalization activ­ists. As a result, the institutional infrastructure of the WTO has been stretched to the limit and is in dire need of reform. She then goes on to sketch two suggestions for overhauling the WTO. To avoid the paralysis of consensus, the day-to-day management of the WTO should be delegated to an Executive Board, as proposed in the former ITO Charter. As concerns the issue of civil society involvement in the decision-making process, the WTO should follow the example of the OECD by increasing external transparency.

Barry Eichengreen gives an overview of the state of the art in predicting and preventing financial crises. He argues that crises have multiple causes rooted in the interaction of market fundamentals and investor psychology. In addition, they are contingent on the domestic, foreign, and international policy responses to growing financial pressure. For these reasons, crisis prediction will always be imperfect. But it is still possible to limit the incidence and severity of financial crises. The key to crisis prevention is to increase transparency on the part of the borrowers, lenders, and international financial institutions so that markets begin to take corrective actions before things go out of hand. He then offers an indepth discussion of six steps to achieve this goal. Strengthening the regulation and supervision of financial institutions, and rationalizing the exchange rate regimes should be top on the agenda. Finally, he gives two hypotheses for why contagion of the Argentinean crisis was initially milder than expected. On the one hand, since the Asean crisis in 1998, leverage in the international financial system had declined, its transparency had increased, and Chile, Brazil, and other neighboring countries had adopted more flexible exchange rate regimes. On the other hand, the Argentinean crisis was long anticipated. Discriminating empirically between these hypotheses will be crucial to determining whether contagion in general has diminished.

The next two contributions concern the link between globalization and environmental problems. Jason F. Shogren and Stephan Kroll explore the microeconomic foundations of global climate policy. Using the Kyoto Protocol as point of reference, they stress two prerequisites for any international environmental agreement: the contract must be self-enforcing and the burden sharing between developed and developing country must be equitable. To get the incentive structure right, several issues have to be taken into account in the negotiation process. First, linking climate protection with social issues might backfire because not only does it make the negotiations more complex, but it also invites opposition that might not appear if the environmental issue were negotiated alone. Second, when opting for emission trading, the seller country, rather than the buyer country, should be held responsible for overselling permits beyond quotas. It is also important to consider that in competitive emission markets, the prices for permits do not equate marginal abatement costs, since they do not reflect the ancillary benefits of reduced local environmental pollution. Finally, policy makers have to address the problem that the risk of climate change is both ambiguous and endogenous so that individual behavior towards this risk is distorted.

The link between globalization and biodiversity is analyzed by Geoffrey Heal. He briefly outlines the benefits of biodiversity. Access to genetic diversity stored in wild races of plants and animals has helped to raise the productivity of commercially valuable species and to provide in­surance against attack by pathogens. Natural organisms have also inspired the development of new products, especially in the pharmaceutical industry. He then argues that biodiversity loss is a global problem but not a problem of globalization. It is occurring globally and has global consequences, but it is not driven by the expansion of international trade, investment, and capital flows. Globalization has rather the potential to help the conservation of biodiversity. The fact that many of the services of biodiversity are public in nature does not rule out using market mechanisms for its support. Using the examples of ecotourism and certified sustainably logged timber, he shows that bundling biodiversity with private goods can be an effective way of internalizing some of the external effects of biodiversity conservation by channeling willingness-to-pay from rich to poor countries.

In the final contribution, Gary C. Hufbauer takes a look thirty years ahead in global governance. Drawing upon economic history, he stresses the overriding importance of the security context in shaping the global economic and political landscape. He predicts that the early 21st century will resemble the Concert of Europe following the Congress of Vienna of 1815. Global powers, among them the United States, China, the European Union, and possibly Japan and Russia, will agree on basic security principles to avoid confrontation between them. However, this arrangement does not rule out wars between secondary powers nor worldwide terrorist attacks. As concerns the global economic order, he identifies five issues that will compel the greatest attention in the next thirty years – global warming, poverty, oil politics, financial crises, and trade and investment – and speculates on the institutional framework needed to handle them. He envisages increasing polarization around the global powers as countries affiliate their trade, investment, and currency regimes with regional economic blocs. Global governance will mainly be conducted through loose arrangements between the global powers. International organizations such as the World Bank, IMF, and WTO will focus on mediating between the economic blocs and on dealing with those countries left outside.