A few months ago I published an oped in the Financial Times arguing that in order to sustain globalization we need to change the way we go about negotiating international agreements. I emphasized that the binding constraint on globalization is the narrowing of policy space for countries, not inadequate market opening.
Here is a longer paper which makes the case in fuller form. An excerpt from the introduction
In this paper I present a forward-looking evaluation of globalization. I accept as my premise that globalization, in some appropriate form, is a major engine of economic growth .... But I will argue that several paradoxical features require us that we rethink its rules. First, ... globalizations’ chief beneficiaries are not necessarily those with the most open economic policies. Second, globalization has come with frequent financial crises and considerable amounts of instability, which are both costly and in principle avoidable. And third globalization remains unpopular among large segments of the people it is supposed to benefit (especially in rich countries).
It is not that these features have gone unnoticed in the recurrent debate on globalization. In fact, we can talk of a new conventional wisdom that has begun to emerge within multilateral institutions and among Northern academics. This new orthodoxy emphasizes that reaping the benefits of trade and financial globalization requires better domestic institutions, essentially improved safety nets in rich countries and improved governance in the poor countries. With these institutions in place (or in construction), it remains safe and appropriate to pursue a strategy of “more of the same, but better:” continue to open markets in trade and finance, while strengthening institutions. Enhanced trade adjustment assistance (and perhaps more progressive taxation) in the advanced countries, the Doha trade agenda, IMF surveillance over exchange rate policies, the World Bank’s governance agenda, “aid-for-trade, and international financial codes and standards are some of the visible markers of this approach.
This strategy is predicated on the presumption that insufficiently open markets continue to pose an important constraint on the world economy. Its proponents’ concerns therefore center on the question: what institutional reforms are needed at home and internationally to render further market opening politically acceptable and sustainable?
But is this presumption really valid? I shall argue here that lack of openness is (no longer) the binding constraint for the global economy. I will provide a range of evidence on trade and capital flows that indicates the obstacles faced by developing countries do not originate from inadequate access to markets abroad or to foreign capital. The gains to be reaped by further liberalization of markets are meager for poor and rich countries alike.
This leads me to an alternative approach to globalization, one that focuses on enhancing policy space rather than market access. Such a strategy would focus on devising the rules of the game to better manage the interface between national regulatory and social regimes. A good argument can be made that it is lack of policy space—and not lack of market access—which is (or likely to become soon) the real binding constraint on a prosperous global economy. This argument can be buttressed both by current evidence from rich and poor countries, and by reference to historical experience with the previous wave of globalization.
But what do we mean by policy space and can we really create it without running into the slippery slope of creeping protectionism? By the end of the paper, I hope I will have given the reader some reason to believe that an alternative conception of globalization—one that is more likely to maintain an enabling global environment than the path we are on currently—is worth thinking about and potentially workable.
Comments are welcome and appreciated.
UPDATE: Thank you all for the comments, and paine, Steveb, and Andrew in particular for the corrections.