Models of global governance

Outline

• What are the problems• A range of remedies• The political geography of approaches• Three illustrations• A “traffic rules” approach• The climate change analogy

The globalization debate

• Pro- or anti- ?

• A more useful debate is about what the rules ought to be

Current “strategy” of globalization

• Continue to lower economic barriers at the border– Doha Round– Strengthen international codes and standards in global finance– Cautious capital-account opening in LDCs

• While strengthening institutions– In the rich countries

• Social safety nets– In the poor countries

• Enhanced “governance,” deregulation of product and labor markets, improved financial market regulation and supervision

• Maintained hypothesis: the greatest bang for the buck lies in pushing for increased openness and market access– But is this view correct?– What if the binding constraint on maintaining a healthy global

economy lies elsewhere?

What’s the problem?

• Lack of legitimacy and popular support in advanced countries– Popular attitudes– NGOs

• Complaints by developing countries– Asymmetric power and rules

• Economic malfunctions – Financial instability and crises

• Insufficient global cooperation and coordination– Failure to make progress on multilateral trade negotiations – Global imbalances – Climate change

Globalization attitudes in the U.S.

http://www.thechicagocouncil.org/UserFiles/File/POS_Topline%20Reports/POS%202008/2008%20Public%20Opinion%202008_US%20Survey%20Results.pdf

Globalization anxiety and inequality

David Coe, Finance & Development, March 2008

Remedy I

Domestic compensation• Not all benefit (equally) from globalization

– Perception or reality? Doesn’t matter for sustaining globalization

– Left- versus right-wing rationales• If overall gains from globalization large, as

advocates argue, there must also be significant possibility for redistribution

• TAA and investment in education for starters• (greater) progressivity of taxation

– in part through reduction in payroll taxes

Remedy II

Rules that “level the playing field” for developing nations

• Removing Northern agricultural protection• Liberalizing services (esp. labor)• Relaxing TRIPs• Permitting capital-account regulations• Enlarged temporary financing through IMF and

other multilateral organizations• Redistribute SDRs to developing countries• Reduce conditionality in lending

Remedy III

Reform international institutions to give more power to developing nations

• Governance of the IMF– Voting shares, recruitment and staffing partners

• WTO negotiation practices

• BW institutions versus the U.N.

Remedy IV

Reform international institutions to enhance accountability, transparency, and legitimacy

• A FIA for international institutions?• Openness to NGOs

– E.g., in WTO DSPs

• Encourage competition among int’l agencies– AMF? Regional lenders?

• International labor standards

Remedy V

Strengthen international institutions and regulations to deal with global market failures

• Global regulation of cross-border lending• IMF as a ILLR• Global bankruptcy rules• A global reserve currency• Global carbon emission rules• A global “Tobin tax”• Global financing of vaccines and other public health

needs

Remedy VI

Global governance without a global state

• Transnational networks of administrators and regulators– checked by new forms of accountability (mutually accountable rule making sensitive

to both local differences and international “scientific” standards)– an evolving system of “global administrative law,” developed by global policy

makers and regulators, that effectively shapes and constrains domestic practices – Cohen and Sable (

http://www2.law.columbia.edu/sabel/papers/NYI403Cohen&Sabel.pdf), Anne-Marie Slaughter (A New World Order, 2004)

– Examples of what these authors have in mind• Basle Committee on Banking Supervision, International Accounting Standards Board,

Financial Stability Forum (now Board)• In WTO: Agreement on SPS

• A cosmopolitan social democracy (Held and McGrew)– Internationalize the principles of the rule of law, political equality, social justice,

social solidarity—as well as the management of the global economy– Through the creation of a multilayered, non-state-centric, transnational political

community– Essentially, a version of global federalism built around social democratic lines

• Emphasis on processes rather than technocratic solutions

Two key questions

• How much can we rely on markets?• How much can we rely on cosmopolitanism?

communitarian

cosmopolitan

market-enthusiastmarket-skeptic

The political geography of global governance proposals

The “deep integration” agenda

Conservative isolationists

Scheve-Slaughter

Stiglitz

The Pope

Protectionists

Embedded liberalism

Collectivism

Global reformers

A reality check: three problems in globalization…

How do we deal with the problems created by:

• Chinese exports of toys containing lead paint• The spread of the sub-prime mortgage lending

crisis from the U.S. to the rest of the world• The use of child labor in internationally-traded

products

…which are less different than it seems

• In all three cases, a country is exporting a good, service, or asset that is problematic for the importing country– Chinese exports of lead-tainted goods– U.S. exports of mis-priced mortgage-based assets– Developing country exports of child-labor services

• International rules (and our prevailing conception of globalization) do not provide clear-cut solutions

Consider the similarities

• In all of the cases, selling goods that are “sub-standard” is cheaper and provides a competitive advantage.

• In all of the cases, we deal with exporting countries that have, in effect, different standards– On paper, strong domestic regulations and standards

• Chinese lead standards are more stringent than those in the U.S.

• In the labor standards arena, most countries have ratified more ILO conventions than the U.S. has.

• Credit rating agencies in the U.S. are presumably the best in the world.

– But enforcement of these domestic regulations and standards turns out to be weak and problematic.

• For implementation or other reasons, the problem is created by the difference in national institutions

Consider the similarities

• The relevant attribute of the exported good is not directly observable to the consumers in the importing country – A consumer cannot tell whether the toy contains lead paint

or has been manufactured using child labor under exploitative conditions; nor can a lender really tell the risk characteristics of the bundled assets it holds.

• Consumers in the importing countries have preferences over this "hidden" attribute.– We are less likely to buy the good, ceteris paribus, if it

contains lead paint or has been made by children, or is likely to cause financial havoc.

• Consumers' preferences are heterogeneous. That is, each one of us is likely to have a different evaluation of the tradeoff between the "hidden" attribute and other aspects of the good, such as its price. (Put differently, the price discount at which we are likely to prefer buying the leaded or child-manufactured good differs across consumers.)

Possible solutions (1)

• Do nothing– This is the current approach– Deal with problems on a case-by-case basis

• At the cost of– inefficient outcomes– erosion of public support for and legitimacy of

globalization

Possible solutions (2)

• Market-based approach: labeling– Currently preferred approach for “fair” labor

standards: “fair trade”– In principle, that is what credit-rating agencies did

• The information conveyed was not nearly as meaningful as it appeared

• Possibly similar problems with fair trade?

– Plus, we routinely and instinctively reject it in other areas

• e.g., food and child safety

Possible solutions (3)

• International rules– Requires harmonization of policies and practices

• E.g., Basle standards, a “global college of regulators”• Global labor standards

– Combined with international “policing” and monitoring– Practical and substantive difficulties

• Norms and values are divergent• Few countries are likely to accept the constraints on

national sovereignty that this would require– Example of US versus Europe following sub-prime mortgage

crisis

• International rules as likely to get it wrong as to get it right– Basle as an example

Possible solutions (4)

• New traffic rules to manage the interface between national regulatory settings and social orders

• Creation of policy space to allow: – rich nations to provide social insurance, address

concerns about labor, environmental, health, and safety consequences of trade, and shorten the “chain of delegation”

– poor nations to position themselves better for globalization through economic restructuring

– all nations to create financial systems and regulatory structures more attuned to their own conditions and needs

What might such traffic rules look like?

An illustration from trade: generalizing the WTO safeguards/escape-clause approach

• Allows countries to re-impose tariffs under certain circumstances• Principle behind safeguards: negotiated opt-outs, with procedural constraints,

better than disorganized opt-outs• Restricted at present to very limited circumstances

– An import surge, causally linked to “injury” to domestic industry; must be applied on MFN basis; must be temporary; requires compensation

• Can be broadened to wider set of circumstances in which the legitimacy of trade is at issue – Subject to transparency, accountability and other institutional and procedural

prerequisites• Which, in particular, provide standing to beneficiaries of trade

• A “development box” for developing countries– Recognition that structural transformation requires subsidies and other currently

prohibited practices• Exchange of policy space instead of market access• Risk of slippery slope?

– Limited if experience with anti-dumping is a guide

What might such traffic rules look like?

An illustration from finance: a nationally-based, but globally consistent regime of regulation

• Recognize that the governance of financial markets will be done mainly at

the national, not international level• Recognize that different countries/regions will make different regulatory

choices– Preferences, administrative capabilities, developmental needs

• Recognize that there will be strong pressures towards regulatory arbitrage when national regulatory arrangements vary

• Recognize that governments have the right to interfere in cross-border financial flows to prevent undermining of domestic regulations

– Analogy with “harmful” tax competition • Recognize that the resulting financial segmentation is the necessary price to

pay for financial stability• If the experience of the last quarter century is a guide, we should not

exaggerate the economic costs of a certain amount of financial de-globalization

The analogy with climate change

• Climate change presents clear trans-boundary externalities– Greenhouse gas emissions do not respect political borders

• Therefore can only be addressed through international agreements and governance

• International trade and finance are the same ?– Decisions taken in one country affect the well-being of citizens

elsewhere– Open markets and global financial stability are public goods “just

like” the environment

• So global problems, global solutions in both cases?

The analogy with climate change: differences upon closer look

• Climate change a pure public good– National controls on carbon emissions provide no advantage or benefit

at home (beyond those created for other nations)– Absent cosmopolitan considerations, each nation’s “optimal” strategy

would be to completely free ride on carbon controls• Trade and financial policies are mostly private goods, with some

externalities– The main beneficiary of open trade and financial policies are domestic

groups; the main losers from closure would also be domestic groups• E.g., agricultural protection

– Absent cosmopolitan considerations, each nation’s “optimal” policies, in the absence of second-best issues, would be to follow free trade policies

– The second-best considerations that may lead nations to follow less than completely open policies are mostly not of the beggar-thy-neighbor type

• E,g., industrialization-related externalities in developing countries• E.g., “protection” of national standards and institutions

A parable

• A lake surrounded by different communities• A common pool problem: fish and over-fishing

– Solution?

• A trade problem: one of the communities introduces restrictions on trade with the other communities– What might be the rationale?

• Support local artisans

• “Protect” local culture

– Who gains or loses?

– Solution?