19 Jan 2011

New Rules for the Global Economy

By Dani Rodrik, Project Syndicate, via Policy Innovations - A Publication of the Carnegie Council

Suppose that the world's leading policymakers were to meet again in Bretton Woods, New Hampshire, to design a new global economic order. They would naturally be preoccupied with today's problems: the eurozone crisis, global recovery, financial regulation, international macroeconomic imbalances, and so on. But addressing these issues would require the assembled leaders to rise above them and consider the soundness of global economic arrangements overall.

Here are seven commonsense principles of global economic governance that they might agree on. (I discuss them in more detail in my new book, The Globalization Paradox.)

1. Markets must be deeply embedded in systems of governance. The idea that markets are self-regulating received a mortal blow in the recent financial crisis and should be buried once and for all. Markets require other social institutions to support them. They rely on courts, legal frameworks, and regulators to set and enforce rules. They depend on the stabilizing functions that central banks and countercyclical fiscal policy provide. They need the political buy-in that redistributive taxation, safety nets, and social insurance help generate. And all of this is true of global markets as well.

2. For the foreseeable future, democratic governance is likely to be organized largely within national political communities. The nation state lives, if not entirely well, and remains essentially the only game in town. The quest for global governance is a fool's errand. National governments are unlikely to cede significant control to transnational institutions, and harmonizing rules would not benefit societies with diverse needs and preferences. The European Union may be the sole exception to this axiom, though its current crisis tends to prove the point.

Too often we waste international cooperation on overly ambitious goals, ultimately producing weak results that are the lowest common denominator among major states. When international cooperation does "succeed," it spawns rules that are either toothless or reflect the preferences of only the more powerful states. The Basel rules on capital requirements and the World Trade Organization's rules on subsidies, intellectual property, and investment measures typify this kind of overreaching. We can enhance the efficiency and legitimacy of globalization by supporting rather than crippling democratic procedures at home.

3. Pluralist prosperity. Acknowledging that the core institutional infrastructure of the global economy must be built at the national level frees countries to develop the institutions that suit them best. The United States, Europe, and Japan have produced comparable amounts of wealth over the long term. Yet their labor markets, corporate governance, antitrust rules, social protection, and financial systems differ considerably, with a succession of these "models"—a different one each decade—anointed the great success to be emulated.

The most successful societies of the future will leave room for experimentation and allow for further evolution of institutions. A global economy that recognizes the need for and value of institutional diversity would foster rather than stifle such experimentation and evolution.

4. Countries have the right to protect their own regulations and institutions. The previous principles may seem innocuous. But they carry powerful implications that clash with the received wisdom of globalization's advocates. One such implication is the right of individual countries to safeguard their domestic institutional choices. Recognition of institutional diversity would be meaningless if countries did not have the instruments available to shape and maintain—in a word, "protect"—their own institutions.

We should therefore accept that countries may uphold national rules—tax policies, financial regulations, labor standards, or consumer health and safety rules—and may do so by raising barriers at the border if necessary, when trade demonstrably threatens domestic practices enjoying broad popular support. If globalization's boosters are right, the clamor for protection will fail for lack of evidence or support. If wrong, there will be a safety valve in place to ensure that contending values—the benefits of open economies versus the gains from upholding domestic regulations—both receive a proper hearing in public debates.

5. Countries have no right to impose their institutions on others. Using restrictions on cross-border trade or finance to uphold values and regulations at home must be distinguished from using them to impose these values and regulations on other countries. Globalization's rules should not force Americans or Europeans to consume goods that are produced in ways that most citizens in those countries find unacceptable. But nor should they allow the United States or the European Union to use trade sanctions or other pressure to alter foreign countries' labor-market rules, environmental policies, or financial regulations. Countries have a right to difference, not to imposed convergence.

6. International economic arrangements must establish rules for managing interaction among national institutions. Relying on nation states to provide the essential governance functions of the world economy does not mean that we should abandon international rules. The Bretton Woods regime, after all, had clear rules, though they were limited in scope and depth. A completely decentralized free-for-all would benefit no one.
What we need are traffic rules for the global economy that help vehicles of varying size, shape, and speed navigate around each other, rather than imposing an identical car or a uniform speed limit. We should strive to attain maximum globalization consistent with the maintenance of space for diversity in national institutional arrangements.

7. Non-democratic countries cannot count on the same rights and privileges in the international economic order as democracies. What gives the previous principles their appeal and legitimacy is that they are based on democratic deliberation—where it really occurs, within national states. When states are not democratic, this scaffolding collapses. We can no longer presume that its institutional arrangements reflect its citizens' preferences. So non-democracies need to play by different, less permissive rules.

These are the principles that the architects of the next global economic order must accept. Most importantly, they must comprehend the ultimate paradox that each of these principles highlights: Globalization works best when it is not pushed too far.

Dani Rodrik is Professor of Political Economy at Harvard University's John F. Kennedy School of Government and the author of One Economics, Many Recipes: Globalization, Institutions, and Economic Growth.

© 2011 Project Syndicate. Republished with kind permission.

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