Download Market‐Led Globalization and World Democracy

Market-Led Globalization and World Democracy:
Can the Twain Ever Meet?
Servaas Storm and J. Mohan Rao
INTRODUCTION
‘The decadent international but individualistic capitalism [. . .] is not a success. It is not
intelligent, it is not beautiful, it is not just, it is not virtuous — and it doesn’t deliver the
goods. In short, we dislike it and we are beginning to despise it. But when we wonder what to
put in its place, we are extremely perplexed’. John Maynard Keynes (1933).
In a wide-ranging, thought-provoking and controversial contribution to this
journal, Professor Keith Griffin (2003) has argued that many problems
generally attributed to economic globalization, viz. the increase in and the
perpetuation of global income inequality and poverty, arise because, so far,
we lack effective democratic institutions at the global level that can ‘govern’
global market forces, supply global public goods, and bestow legitimacy on
the institutions of global governance. We have, in Griffin’s words, a closely
integrated and rapidly expanding global economy, but not a global political
system. As a result of this asymmetric globalization, the present system of
global governance favours the rich and the powerful — the large transnational
corporations (TNCs) and rich and powerful nation states (particularly the
USA). The poor and the weak (mostly in low-income countries) are placed at a
considerable disadvantage, due to the continuing trade discrimination against
their export products; existing restrictions on the cross-border movement of
low-skilled labour; the creation of ‘intellectual property rights’ that severely
restrict the flow of knowledge, ideas and technology; and, finally, the severe
undersupply of such global public goods as peace, security, equity, health, a
healthy global natural environment and knowledge.
Griffin sets out an agenda of reform for redressing global economic
governance to enhance well-being in developing countries, focusing on
economic policies that need to be pursued globally to accelerate development, the constituent elements of a global institutional architecture that will
articulate, enact and enforce this agenda, and the nature of democratic
representation in these supranational institutions. While it would be interesting to evaluate the various substantive elements of Griffin’s reform
agenda, this is not attempted here. Instead, we focus on Griffin’s (2003:
793) basic theme, underlying his reform proposals, that ‘greater globalization, not less, is desirable’ for global economic development, provided that
it is regulated by democratic institutions of global governance. We do so for
Development and Change 35(3): 567–581 (2004). # Institute of Social Studies 2004. Published
by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main St.,
Malden, MA 02148, USA
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two reasons. First, in our view, serious reservations in regard to the desirability for development of free trade and unregulated capital flows are in
order. Second, there is a conflict between ‘greater globalization’, as long as
it is market-led, and greater (deeper) democracy. This means that global
democratic governance can only come about if the nature of economic
globalization is changed: that is, the power of global commodity and
financial markets needs to be curbed or, put differently, the autonomy of
nation states needs to be restored. The big challenge — not addressed by
Griffin — is how this is to be achieved.
CONTEXTUALIZING GRIFFIN’S PROPOSAL
In Griffin’s view, critics of economic globalization can be divided into two
broad groups. The first group responds to the absence of democratic institutions of global governance by advocating a return to economic nationalism.
Critics of the second group, including Griffin himself, argue, in contrast,
for more, rather than less globalization, provided that it is regulated by
supranational institutions, far more democratic than the existing international institutions. The globalization package proposed by Griffin is a
remarkable combination of bold radical reforms, such as the removal of
restrictions on (unskilled) labour mobility across countries and the abolition
of property rights in knowledge (turning knowledge into a free good), and
orthodox neo-liberal reforms, including the further liberalization of international trade and the strengthening of the WTO in its role as creator and
enforcer of (supposedly) ‘equitable rules of the game’ in the sphere of trade.
In addition, Griffin insists that greater global economic liberalism should be
balanced by a set of democratic supranational institutions that are able to
deal collectively with a range of transnational issues in such areas as international trade and finance, labour migration, intellectual property rights,
health, and environment. This requires nothing less than the establishment
of a ‘global welfare state’, involving: (a) a (progressive) tax and transfer
mechanism, automatically redistributing income from rich to poor countries; (b) a rule-based system of governance, backed by international law
and effective enforcement mechanisms that ensure that the rule of law does
indeed prevail; (c) a rationalized and strict functional specialization among
global institutions, that have the authority and enforcement power to
provide the much-needed global public goods; and (d) representative
democracy at the global level to ensure the legitimacy and wide acceptance
of the expanded and reformed global governance system.
Griffin’s analysis of desirable changes in the system of global governance
in the context of globalization is firmly, though implicitly, based on neoclassical (Pigouvian) welfare economics — a framework used to provide a
justification for national development planning back in the 1950s. The
essential idea, following from the second theorem of welfare economics, is
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that — in principle — a perfectly competitive market system, when left to
itself and undisturbed by government intervention, produces an efficient
allocation of resources and maximum (consumer) welfare, provided a set of
conditions regarding tastes, technology and consumer and producer behaviour is satisfied.1 However, in practice, these conditions are not met, because
of market imperfections, externalities, imperfect (asymmetric) information
and/or the presence of public goods. Accordingly, free, unregulated markets
do not produce an efficient outcome and there emerges a potential role for
government to improve market efficiency and equity — although the theory
is notoriously unclear how precisely the government should intervene, and
more modern welfare economics has argued that (presumably rent-seeking)
government intervention creates more inefficiencies than it cures and,
hence, that an imperfectly functioning market economy is preferable to an
imperfectly functioning government-directed economy.
Applying this welfare economics approach to market-led economic globalization, Griffin (ibid.: 793) argues forcefully against trade interventions:
‘They are, in effect, a denial of liberalization and competition, the very
foundation of an efficient market economy, and are incompatible with an
equitable global economy’. Griffin repeatedly points to what he calls ‘the
benefits of globalization’, which — although he does not explicitly define
these — must include the (global) welfare gains that he believes will result
from a reduction of trade and other distortions in the context of perfectly
competitive global markets in goods and services. Likewise, such benefits
must include the increase in efficiency in resource allocation, the rise in global
income, as well as the improved distribution of world income (in favour of
low-skilled workers in developing countries), which Griffin (ibid.: 793)
believes will materialize once restrictions on the movement of (low-skilled)
labour across countries are removed — implicitly assuming, it must be
emphasized, perfectly competitive labour markets in rich and poor countries.
While more market liberalization, and, by implication, less government intervention is thus held to be welfare-enhancing, Griffin identifies two distinct
cases of ‘global market failure’ that provide justification for an expanded,
more balanced system of global governance, namely the under-supply of
global public goods and the profoundly inequitable distribution of world
income. The latter will deteriorate further as the future benefits of globalization are distributed unequally across high- and low-income countries, unless
the asymmetric structure of global governance is amended. The correction of
these problems requires the creation of the global welfare state described
above.
1. The conditions include: (i) that all firms and households are price-takers in input and
output markets (thus ruling out increasing returns to scale and indivisibilities in
production); (ii) that firms and households have perfect information (also regarding
futures markets); and (iii) that firms maximize profits and households maximize utility.
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BEYOND THE NARROW COMPASS OF WELFARE ECONOMICS
The ‘narrow compass of economics’ within which Griffin (ibid.: 792) constructs his argument, is, therefore, the narrow compass of ‘old-style’ welfare
economics. This is a much too limited and unrealistic perspective. First, it is
well-known that the fundamentally micro-economic argument for liberalization is invalidated once it is acknowledged that markets are not perfectly
competitive (but oligopolistic or monopolistic), technology exhibits increasing returns to scale (and not constant or decreasing returns to scale), and
production processes are laden with significant indivisibilities (Ocampo and
Taylor, 1998). In such obviously more realistic circumstances, trade intervention can be shown to be welfare-enhancing and the case for free trade
breaks down. It can then also no longer be maintained — as Griffin does —
that externalities or other problems should be corrected at their source, and
not indirectly, in ‘second-best’ manner, by interventions in external trade. In
fact, ‘second-best’ considerations are of enormous significance for developing countries. For example, one reason why such countries intervene in
trade is because ‘first-best instrumentalism’ would be fiscally infeasible2 or
gravely inefficient. Similar considerations may well apply at the global level,
where fiscal constraints are even more severe, as is reflected in the fact that
foreign aid has fallen to a miserly 0.25 per cent of the GDP of advanced
countries (from more than twice that a decade ago) and in the constant
financial problems of the UN agencies. In such tight financial conditions,
trade policy interventions (at the global level) may well prove both effective
and fiscally feasible in restraining the worst abuses of child labour, flagrant
violations of workers’ rights or safety, egregious depredations of the global
environment, and so on. At least until the fiscal problems at the global level
are overcome, therefore, free trade fundamentalism must be seen as part of
the problem, not part of the solution.
A second problem of the neo-classical welfare economics approach is
that, even according to standard empirical evaluations based upon this
approach, the static welfare gains from liberalization are of negligible size
(Ocampo and Taylor, 1998). For example, major (general equilibrium)
studies, sponsored by such institutions as the OECD, the World Bank and
USDA, of the (global) welfare consequences of complete agricultural trade
liberalization by developed and developing countries, typically suggest a
one-off increase of significantly less than 1 per cent of the relevant output
indicator, even when a dubious positive feedback between agricultural price
change and productivity growth is incorporated. In addition — and something not stressed by Griffin — the income-distributional effects associated
with liberalization can be very large indeed, both within and between
2. Of the total tax revenue of low-income and lower-middle income countries during 1970–
98, about 35 to 40 per cent is due to the taxation of external trade; see Khattry (2003).
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countries. This was already clearly understood by Marx who, following the
repeal of the Corn Laws in 1846, argued that the aim of freedom of trade in
food was to reduce ‘the price of bread’ in order to reduce wages (as well as
agricultural rents) and raise (industrial) profits. In this context, Marx (1848:
250–1) warned: ‘Do not let yourselves to be deluded by the abstract word
freedom. Whose freedom? It is not the freedom of one individual in relation
to another, but the freedom of capital to crush the worker’.
The same issue — who gains and who loses from liberalization — is
central to understanding contemporary economic globalization. For example,
in a general equilibrium study for India, Subramanian (1993), assuming full
employment, finds that trade liberalization, while having a negligible impact
on GDP, leads to significant declines in real incomes of urban workers,
rural landless labourers and small farmers, and a significant real income rise
for medium and large farmers (see Storm, 2003 for similar findings).
Regarding international inequality, Prebisch-type arguments underscore the
unequalizing effects of free trade. Not surprisingly, therefore, distributional
concerns are the single most important factor explaining developing countries’
reluctance to liberalize their external trade — all the more so, because, in
these countries, the mechanisms for arranging suitable (lump-sum) transfers
among those who gain and those who lose from liberalization, are generally
absent.
A third limitation of Griffin’s case for trade liberalization is that, macroeconomically, it is based on Say’s Law, according to which (a) all local
resources will always be fully employed, as they can always be (re-)deployed
to produce something; and (b) balanced trade assures that it will always find
an external market. This is not an innocent assumption, because — due to
its imposition — trade liberalization can only have substitution effects, while
all income effects are ruled out (Ocampo and Taylor, 1998). To see the
details, assume that import protection is reduced, leading to a rise in
imports and an incipient trade deficit. To close the trade gap, the exchange
rate will depreciate, stimulating the production of exportables and import
substitutes, with resources transferred from the non-traded sector. With
resources automatically remaining fully employed, liberalization pays off
in the form of reduced allocative inefficiency via a larger share of exports in
national income. But what if Say’s Law does not hold? What if resources are
not automatically fully employed and/or if the country in question can
borrow abroad? Then income as well as substitution effects of both trade
liberalization and exchange rate changes matter. That the net impact can
easily be aggregate welfare losses is demonstrated by Storm (2001), whose
(structuralist) general equilibrium model analysis for India shows that the
medium-run effects of agricultural trade liberalization are significantly
‘stagflationary’ (real GDP growth declines and inflation rises), while income
distribution deteriorates dramatically.
The consequences for global governance of going beyond the narrow
compass of neo-classical welfare economics and dropping the assumption
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of Say’s Law are profound. First, theoretically, it can no longer be maintained that ‘more market-led globalization, not less, is desirable’ for development. On the contrary: regulation of and active intervention in markets
by government, at national and international levels, is generally found to be
welfare-improving and development-enhancing. This is also demonstrated
by an abundance of empirical historical studies. For instance, reviewing the
trade and industrial policies pursued during Britain’s Industrial Revolution,
the nineteenth century German economist Friedrich List (1841: 111) concluded that successive British government administrations
perceived that their newly established native manufactures could never hope to succeed in
free competition with the old and long-established manufactures of foreigners [the Italians,
the Hansards, the Belgians and the Dutch] . . . Hence, they sought, by a system of privileges,
and encouragements, to transplant to their native soil the wealth, the talents, and the spirit
of enterprise of foreigners.
One-and-a-half centuries later, List’s conclusion was confirmed by research
for a wide range of countries by the well-known economic historian Bairoch
(1993: 79–81), who concluded:
There is no doubt that the economic liberalism imposed on the Third World in the nineteenth century is one of the main factors that explains its delayed industrialization . . .
It would be difficult to find factual examples — at least in nineteenth-century economic
history — that are in more flagrant contradiction with the dominant theory, which holds
that protectionism has a negative impact. Protectionism, if not a source of industrialization
and economic development, has always accompanied them.
Likewise, historically-based country analyses for the twentieth century,
such as those by Helleiner (1994) and Amsden (2003), convincingly demonstrate that government regulation of and interventions in markets have been
significantly development-enhancing. And recently, following the series of
calamitous financial crises of the 1990s, even many a neo-liberal economist
recognizes that — imperfect3 — global capital markets and countries’
capital accounts require regulation rather than liberalization.4 It is remarkable that Griffin ignores this spectacular case of global market failure and
does not mention the role that a tax on foreign exchange dealings could play
to better world economic governance and help restore national macro–
economic policy autonomy (Eatwell and Taylor, 1998).
Second, the potential role for global government that emerges, is much
more (pro-) active, developmentalist and substantive than that envisaged by
Griffin, who merely appends global government intervention to market
3. Global capital and foreign exchange markets are characterized by excessive volatility,
widespread speculation, rampant (irrational) herd behaviour by participants, and an
inherent proneness to contagious crises and breakdown.
4. For example, free trade economist Bhagwati (1998) argues that ‘the claims of enormous
benefits from free capital mobility are not persuasive’, but a myth, ‘created by what one
might christen the Wall Street–Treasury complex’.
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failure. In the short run, a major task for global government is to stabilize
global aggregate demand at a level providing full employment — in traditional Keynesian fashion. In the longer run, there is a major role for a
developmentalist global government in catalysing structural, institutional
and distributional change by means of global public investment in physical
infrastructure, education and health, strategic industrial and trade policy at
the global level aimed at developing and redistributing technological capabilities, agrarian reform, and global taxation and redistribution. There are
excellent reasons to defend development-enhancing protectionism and
developing-country exceptionalism (in trade and other policies), and to
vigorously reject the ‘level playing field’ premise that forms the foundation
of WTO disciplines and standards.5
Third, it leads to the recognition that understanding distributional change
and consequent distributional conflict — in poor and rich countries alike —
is essential to understanding the process of economic globalization. Griffin
(2003: 793) recognizes that economic globalization has indeed increased
income inequality within most countries,6 but he refrains from an analysis
of why this is so. Debate on this important issue is still open. One explanation, advanced by Rao and Storm (2003), is that the advanced countries
have, in Ricardian terms, an ‘absolute productivity growth advantage’ in all
sectors vis-à-vis the developing countries, whereas their comparative advantage, in productivity growth rates, lies — surprisingly — in agriculture. As a
result, unmanaged global trade liberalization will not benefit labour-intensive
agriculture in developing countries, but rather will undermine the viability
of small farms and force agriculture to shed labour faster than it can be
productively absorbed in industry or high value-added activities. Another
explanation stresses the de-industrialization in much of the developing world
due to liberalization (and the accompanying exchange rate appreciation
and high interest rates) which, through Verdoorn–Kaldor effects, has had
far-reaching adverse consequences on the rest of the economy and aggregate
economic growth (Ghosh and Chandrasekhar, 2003).
In addition to understanding the causes of worsening income distribution,
it is crucial to recognize that it implies an (often significant) intensification
of distributional conflict — not least because liberalization is generally
5. The outstanding features of the Kennedy and Tokyo rounds under GATT were that
(1) most of the commitments on trade liberalization were made by the high-income
countries, and (2) there were explicit agreements that exempted the developing countries
from the disciplines and standards that were then established. This is no longer the case
under the WTO, which rejects developing-country exceptionalism and applies the same
‘one size fits all’ rulings to all member countries.
6. Note that in the case of the developing countries this contradicts the Stolper–Samuelson
prediction, also advanced by Griffin (ibid.: 792–3), that trade liberalization should benefit
unskilled labour, that is, the input intensive element in production of developing countries’
exports.
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accompanied by, or even leads to, a significant decline in government
revenues, seriously compromising the fiscal autonomy of the state (Khattry,
2003; Rao, 1999). The varying success with which countries have tried to
resolve or manage such distributional conflict, triggered by globalization,
has been found to be an important factor explaining differences in country
growth performance: ‘stable’ countries with relatively strong institutions of
conflict management and effective social protection experience significantly
higher per capita income growth than ‘unstable’ countries, where there are
deep social cleavages and the institutions of social conflict management are
weak (Rodrik, 1998). Globalization thus poses a major dilemma: while the
need to provide social protection in order to insulate and cushion broad
segments of society from market risks increases following liberalization, the
fiscal means to offer effective protection are significantly reduced by it (Rao,
1999). The challenge is to escape the horns of this dilemma.
DEMOCRACY OR CONCENTRATION OF WEALTH
Griffin’s advocacy of ‘greater globalization’ is conditional: it should be
accompanied by ‘institutional innovation that combines jurisdictional
authority in the provision of global collective goods with democratic decisionmaking which gives that authority political legitimacy’ (Griffin, 2003: 799).
This qualified sanctioning of greater global marketization reflects — in a
fundamental sense — the classic liberal position that a liberal political
system (democracy) and a liberal economic system (capitalism) are compatible
and, in fact, may often be mutually reinforcing. It is, however, based on a naı̈ve
and ahistorical conceptualization of ‘economic globalization’, which ignores
the unprecedented centralization of economic decision-making and the
concentration of power and control in the hands of a relatively few agents
and entities, based in the metropolitan centres of capitalism,7 over the
disposition of resources, the nature of economic activity and the making of
economic policy across the world, that globalization has entailed (see the
essays in Ghosh and Chandrasekhar, 2003). It also ignores the fact that the
greater the inequalities in income and wealth, the more difficult it becomes
to have what Rao (2001) calls ‘deep’ democracy.8 This is what worldwide
experience within nations shows and it is even more true at the global level,
where there is not even the shallow democracy that exists under the standard
model of nation-state democracy.
7. These include New York’s Wall Street, London’s Financial City, the IMF and World
Bank in Washington, the WTO in Geneva, the US Federal Reserve in New York and
European Central Bank in Frankfurt, and the boardrooms of large TNCs.
8. This conflict was aptly summarized by Thomas Jefferson (1743–1826), third President of
the USA, saying that we can have a democratic society or a great concentration of wealth,
but not both.
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That there may indeed be a fundamental incompatibility between
increased marketization and greater democracy is brought out by many
historical analyses of the evolution of capitalism. For example, Polanyi
(1944) argued that the economic liberalism of the 1920s, when the belief in
a self-regulating market mechanism led to the elimination of ‘all interventionist policies which interfered with the freedom of markets’ (ibid.: 231),
effectively disembedding the economy from society, led to increased
inequality and greater instability and insecurity, eventually resulting in the
economic depression of the 1930s and the rise of fascism. By historical
analogy, present-day market-led globalization is leading to a new era of
upheaval, in which — in Polanyian fashion — the economy becomes more
and more disembedded from society; as a result, inequality, insecurity and
poverty have been rising to the point that they threaten the sustainability of
the economic and political system itself. Although one should be cautious
not to overstate historical regularities, one should, at the same time, not
close one’s eyes to signals of growing (political) frustration and popular
resentment, caused by rising Polanyian pressures on ‘society’ by unregulated
global markets. In high-income countries, rising pressures are caused by the
liberalization of labour markets, the replacement of consensus-oriented
corporatist labour–capital relations by the anonymous, globalized and
highly competitive structures of the neo-liberal order, the deregulation of
financial markets, and the reduction of government interventions in general
and a drastic decline in the size of the welfare state, in particular. In lowincome countries, increased societal stress is the result of the demise of the
developmental state (with significant adverse effects on employment and
income growth in the ‘informal’ sectors), an intensification of competitive
pressures, a further flexibilization of labour markets, a greater concentration of production, and a greater power of capital; and globalization has
significantly increased their exposure to turbulence in world markets, as
manifested by the Asian and other currency crises (Ghosh and Chandrasekhar,
2003). As a result of these changes there has been, in high- and low-income
countries alike, a growing sense of economic and social insecurity, anxiety and
powerlessness among large sections of their populations,9 which — in terms of
Fromm’s (1941) social-psychological analysis — has found an ‘avenue of
escape’ in growing support for cultural-nationalist populist, sometimes
fascist, parties. Recent political trends in France, the Netherlands, and other
European countries provide clear evidence of growing populist forces
(Storm and Naastepad, 2003), as does the political strength of the Hindunationalist BJP (and related parties and organizations) in India. Likewise,
Islamic fundamentalism, with its anti-imperialist thrust, may be regarded
9. This is recognized by Griffin (2003: 800): ‘Much of the opposition to globalization, I
believe, arises from the fact that ordinary people have little control over the global forces
that increasingly shape their lives’.
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as providing an escape mechanism from the growing sense of economic and
political insecurity and powerlessness experienced as a result of market-led
(and US-led) globalization.
The Polanyi–Fromm argument thus implies that the rapid marketization
of the world economy is likely to erode the (already shallow) democracy of
most nation states, thereby increasing the (already massive) deficit of
democracy at the global level. The more the economy is liberalized and
deregulated, the less democratic society becomes and, hence, the more
difficult it will be to impose some form of democratic control on markets
and TNCs — at least until, eventually, the economic and political system
breaks down under the pressures of heightened inequality, insecurity, exclusion and poverty.
RESTORING NATIONAL AUTONOMY
If we accept that, for a long time to come, greater market-led globalization
will make it more difficult to achieve ‘deep democracy’, we must reject
Griffin’s argument in favour of more market liberalization in combination
with step-by-step attempts to impose a new, democratic global regulatory
system. Not because democratic control of global market forces is impossible — it certainly is not — but because a pre-condition to achieve it
is less, not more, market-led liberalization. This is yet another, indeed
fundamental, instance of a ‘second-best’ reason against leaving things to
(global) markets. If one is serious about democracy in the global order,
this requires (at a minimum) that economic globalization become considerably less market-led by a restoration of the policy autonomy of nationstates. This importance to democracy of national policy autonomy was well
understood by Keynes (1933), who in his famous Yale Review article
observed that:
We do not wish . . . to be at the mercy of world forces working out, or trying to work out,
some uniform equilibrium according to the ideal principles, if they can be called such, of
laissez-faire capitalism . . . . The point is . . . that we all need to be as free as possible from
economic changes elsewhere, in order to make our own favourite experiments towards the
ideal social republic of the future; and that a deliberate movement towards greater national
self-sufficiency and economic isolation will make our tasks easier . . .
The restoration of our ability to ‘make our own favourite experiments’, it
must be emphasized, does not require a ‘return to narrow economic nationalism’, which Griffin sees as the only alternative to his own proposals. The
choice is not a binary one: complete openness in all dimensions of international exchange (that is, ‘greater globalization’ or ‘close integration’ with
world markets) versus autarky behind high barriers to international
exchange. In the real world of static and dynamic economies of scale,
learning by doing and rampant market imperfections, it may be desirable
for countries to ‘strategically integrate’ with world markets (Chakravarty
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and Singh, 1988), that is, to integrate only in those dimensions10 and to such
an extent as to promote national economic development as well as (deep)
democracy. It must be stressed that there is no unique optimum form or
degree of strategic integration which holds true for all countries at all times;
the desirable form and degree of openness depends on such factors as the
world configuration, the past history of the economy, and its state of
development. Chakravarty and Singh (1988) point out that the timing and
sequence of opening up are also critical and should be left to a country’s
discretion: serious irreversible losses may result if the wrong kind of openness is attempted or the timing and sequence are incorrect.
The general implication for the system of global governance is that it
should be structured so as to allow individual countries, low-income as well
as high-income, to ‘make their own favourite experiments towards the ideal
social republic of the future’; in other words, it should be consistent with a
degree of national policy autonomy, at least sufficient to make (representative) nation-state democracy meaningful and worthwhile. This general
requirement has major consequences for the global governance of international trade, capital and finance, FDI, technology transfers, and intellectual
property rights.
First, the rules of the multilateral trading system should be changed so as
to exempt the developing countries from some of the general disciplines and
standards, particularly in the area of agriculture and intellectual property
rights, and allow them to pursue development-enhancing protectionist trade
policies. The ‘level playing fields’ on which current WTO regulations are
supposedly based should be replaced by an approach that is more flexible,
more limited in scope, and significantly more sympathetic to the special status
of developing countries. In particular, developing countries should not be
obliged to liberalize their agricultural (food) trade, because (1) exposure to
narrow and unstable international agricultural markets is a major source of
food price instability and, in the absence of large-scale welfare systems,
associated food insecurity; and (2) free trade provides the wrong (price)
signals, while also weakening national agricultural capacities required for
economic diversification and equitable growth (see Rao and Storm, 2003).
Second, with respect to global flows of capital and foreign exchange, the
experience of the past twenty-five years has demonstrated that complete
liberalization is inefficient: unregulated financial markets are too prone to
volatility and contagion to provide the stable financial framework necessary
for high rates of growth and employment (Eatwell and Taylor, 1998). This is
because the ability of governments to moderate cyclical forces by fiscal and
monetary policy has been severely diminished by international liberalization, while firms are deterred by the additional costs and risk of committing
10. ‘Openness’ is a multi-dimensional concept involving trade, financial and capital markets,
technology, science, culture, education, and inward and outward migration.
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resources to investment. There is thus an urgent need for a new regulatory
system, guided by principles of economic stability as well as fairness. At the
global level, following Eatwell and Taylor (1998), this may require the
establishment of a World Financial Authority (WFA), which develops
regulatory policies to manage systemic risk, within which national monetary
policies are co-ordinated, and which evaluates the activities of the IMF and
the World Bank. A main element of the global regulatory framework,
already mentioned above, is the introduction of a small sales tax on all
financial transactions (that is, on the sales of all stocks, bonds, derivatives,
and foreign currencies), which — by raising its costs — discourages speculative trading, thus enhancing the stability of financial markets and reducing
the risk of financial crisis. Other global regulatory measures could
include the establishment of a publicly managed closed-end mutual fund
for developing countries’ securities, focused on the long-run performance of
enterprises and countries rather than short-term financial returns; and the
development of procedures to ensure that in the case of liquidity crises
creditors (mainly international commercial banks) are ‘bailed-in’ to support
the rescue rather than have their positions ‘bailed-out’. At the national level,
governments should be empowered to impose restrictions on external capital
movements11 as necessary to create some autonomy in terms of interest
rate, exchange rate and fiscal policy, that can be used to pursue domestic
development goals. Further, governments should be required to improve
control of national financial systems by imposing asset-based reserve
requirements on all major financial institutions (that require them to maintain
a proportion of their assets in the form of a cash reserve). Attempts to rewrite
the IMF Articles of Agreement to require full capital market liberalization by
all member countries, and the OECD proposal to write full capital account
liberalization requirements into a multilateral agreement on investment,
should be abandoned.
Third, the global regulatory framework should be conducive to the
transfer of technology, knowledge and ideas from high-income to lowincome countries. At the global level, what needs to be done — and here
we closely follow Griffin — is to make it more difficult for firms to obtain
(defensive) patents, and access to patented information should be made
open and free; the ultimate aim should be to make knowledge a free good,
which is something of immediate relevance in the area of medicines and
seeds. At the national level, governments should be empowered to create
and maintain a ‘national system of innovation’, which includes the educational and technological infrastructure, both human and physical, that
developing countries require to change their comparative advantage and
11. Examples of restrictions are constraints on currency convertibility, particularly in the case
of capital account transactions, residence requirements on FDI, and non-interest bearing
reserve requirements on external loanable funds.
Market-Led Globalization and World Democracy
579
to catch-up with the advanced countries. To build up this essential infrastructure and have the time to ‘learn-by-doing’, countries must have the
option to protect and nurture infant industries and to pursue a marketguiding industrial policy; they should also be allowed the policy freedom to
develop their productive capabilities through appropriate regulation of
FDI, which may include the (re-)imposition of local-content requirement
and technology-sharing restrictions.
Finally, the global governance system should not compromise the fiscal
autonomy of the nation-state: that is, it should not undermine the state’s
capacity to mobilize the resources necessary for the provision of economic and
social protection to its population and for financing essential developmentoriented public investment programmes in infrastructure development,
science and technology, education, and health. In particular, the global
governance system itself, with its functions of stabilization, regulation, and
redistribution, must be financed by some combination of global regulatory
taxes (such as the taxes on financial transactions mentioned above) and
progressive international taxation.
BY WAY OF CONCLUSION
We live in a transitional phase in which, as a result of new technologies and
of deliberate liberalization policies, global markets are becoming more and
more disembedded from society. Economic development, based on the
values of security, equity and social solidarity, requires that the globalized
economy be re-embedded in society. This re-embedding of globalized markets requires new, development-oriented forms of national and global governance, of which we have tried to provide a broad sketch. Nevertheless, one
might ask how we envisage the existing system moving in the direction of
our proposed alternative. As a first step, we do foresee a revival of the
nation-state, particularly in the high-income countries, because — following
Polanyi — it is quite difficult to imagine that the currently prevailing high
levels of unemployment and the rising social-economic inequality can
endure for a very long period without causing serious social disruption.
Any attempt to reduce unemployment and inequality would necessitate a
restoration of national policy autonomy in the high-income countries and
controls over cross-border capital flows. If it happens, this would, in turn
(as argued by Patnaik, 1995), create the space required for a similar revival
of the nation-state in the low-income countries.
The restoration of the nation-state in rich and poor countries should be
accompanied, at the global level, by a reduction in the power of the Bretton
Woods institutions and the WTO, and a strengthening of the position of the
UN and its organizations. To achieve this may seem a Herculean task, if not
an utopian idea, in view of the present global hegemony of the US. But
while recognizing the economic and political realities, we must also not
580
Servaas Storm and J. Mohan Rao
underestimate the possibilities for change that exist in the rather fluid
situation of the moment. Fundamental demographic and economic forces
are undermining the dominance of the US, while strengthening the position
of major developing countries including China, India and Brazil. The
Bretton Woods institutions and the WTO are in a serious and growing crisis
of legitimacy — witness the mass demonstrations and protests at their
meetings and the increasing importance and visibility of the World Social
Forum. The recent unwillingness of major developing countries to further
compromise their development policy autonomy, which led to the fiasco of
trying to revive the so-called ‘Development Round’ of multilateral trade
negotiations under the WTO at Cancun, may be seen as a first signal of
their co-ordinated emancipation from the restrictions imposed by OECDdominated global capitalism. This emancipatory process is likely to gain
strength as international inequalities increase, as a result of market-led
globalization. In our view, the restoration of national policy autonomy,
a significant change in the global power structure in favour of the UN,
and further emancipation of the developing world may create the conditions
for a more equitable, more democratic process of economic globalization,
within which we can all indeed ‘make our own favourite experiments
towards the ideal social republic of the future’.
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Servaas Storm (Department of Economics, Faculty TBM, Delft University
of Technology, Jaffalaan 5, 2628 BX Delft, The Netherlands; e-mail:
[email protected]) works on globalization, economic development,
agricultural trade liberalization, and structuralist macroeconomics.
J. Mohan Rao (124 Walnut Hill Road, Newton, MA 02461, USA; e-mail:
[email protected]) is Professor of Economics at the University of
Massachusetts, Amherst. Educated at Bombay, Ahmedabad and Harvard,
he has previously taught at Harvard, Boston and Rome Universities. His
current research interests include the political economy of the state and the
impact of globalization on development, inequality and poverty. He has
published widely on structuralist macroeconomics, agriculture–industry
interactions, microeconomics of agrarian institutions, and government
interventions in agriculture.