Global Policy’s February 2014 issue contains special sections on Geotechnology in the 21st Century and Globalising Climate Justice. Survey articles focus on bottom up approaches to and capital controls for development.
Jason Sorens – 20th February 2014
In his most recent book, The Globalization Paradox, Dani Rodrik argues that appropriate regulation of the marketplace requires national, democratic self-determination, even if it comes at the expense of globalisation. His argument was summarised in a recent EUROPP post.
While Professor Rodrik is right to be sceptical of full regulatory harmonisation at the global level, the argument in his book goes beyond this relatively uncontroversial position to reach conclusions that are not supported by the evidence. Instead of pulling back on globalisation, economists should be telling the simple truths about open markets that, if widely understood, could pull many millions of human beings out of poverty.
Professor Rodrik argues that globalisation of capital allows investors to escape domestic regulation. As he states: “Suppose I outsource some of my domestic production to a Bangladeshi subcontractor whose factory is a fire hazard. Is this any different from my importing Bangladeshi workers and putting them to work directly at home under hazardous conditions? From an economic standpoint, the answer is no. From an ethical standpoint, we may split some hairs, but the answer is also no to a first order of approximation. Why should trade allow me to do something that domestic regulations explicitly forbid?”
But in fact, there is very little evidence that multinational firms outsource production to low-regulation destinations, leading to a “race to the bottom”. Among advanced industrial societies, political scientist Geoffrey Garrett has found that countries more open to international capital flows do not have smaller governments. Indeed, the United States, often assumed to be the avatar of small-government capitalism, also has the highest marginal corporate tax rates in the world. Developing countries like Brazil and India also have very high corporate taxes, and Tufts political scientist Dan Drezner has found no tendency for globalisation to undermine labour and environmental standards in developing countries. Multinational firms prefer to invest in stable democracies with better human rights records, not repressive dystopias. They care most about security of their investment, quality of the workforce, and access to markets, not getting rid of fire codes.
Democratic control of national regulatory systems provides contestation, and multiplicity of national regimes allows for experimentation. It is right and good to have multiple experiments in regulatory policy and to make regulatory policies contestable rather than entrenched. Professor Rodrik acknowledges these advantages but maintains that the real value of democracy is that it enacts a society’s “values.”
There are two main problems with this view. First, Arrow’s Impossibility Theorem from social choice theory tells us that it is impossible to aggregate individual preferences into social preferences in a fair and consistent way. Societies don’t have values. Second, detailed studies of real-world regulations show that they are determined either by the machinations of well-connected interest groups or by the preferences of powerful bureaucrats. The social control of regulations that Professor Rodrik imagines is impossible, even in democracies. The most we can hope for is that electoral competition and technological change sometimes “shuffle the deck” so that today’s insiders don’t remain insiders forever.
The tasks still undone
Social scientists should not quail from the responsibility of communicating the advantages of open markets, even when openness is unpopular. The risks of globalising too little are far greater than the risks of globalising too much. There is little prospect of a global analogue of the European Union, harmonising rules for the 190-plus sovereign polities on the planet. Even the European Union’s economic problems have come not so much from harmonising too much (despite the occasional ridiculous overreach in this department), but from a poorly designed currency union. Overall, the single market has greatly benefitted Europe’s people… MORE