Download The National Interest vs. Global Rules: Issues in the Future

The National Interest vs. Global Rules: Issues in the Future
Horst Siebert*
Paper presented at the XII Saint Petersburg International Economic Forum
June 6-8, 2008
June 7, 2008
Mr. Honorable President,
Mr. Honorable Prime Minister,
Ladies and Gentlemen,
In the conflict between the national interest and multilateral rules, nation states define their
policy according to their national interest, according to their conditions, their preferences and
their political processes. Admittedly, power plays a role. The other side is that rules emerge as
the result of learning from experience, most importantly from negative experiences that inflict
severe hardship on people. Historical disasters like the “Thirty Years War” in the 17th century
become the underlying origin of a new rule, the Peace of Westphalia. Rules arise from the
attempt to prevent human tragedies in the future. Without rules, in the words of Thomas
Hobbes life would indeed be “solitary, poore, nasty, brutish and short”.
Disastrous harm and hardship can be interpreted in terms of unnecessary transaction costs in
the categories of economics. Rules reduce needless transaction costs. In a globalized
economy, interdependence intensifies and rules become more important.
Economic history has seen severe clashes between the national interest and multilateral rules,
accompanied by brutal setbacks. An example is the disintegration of the world economy in the
1930s. But gladly enough we also have seen periods of an increase in the well-being of
people.
*
President-Emeritus of the Kiel Institute for the World Economy, Germany; Heinz Nixdorf Professor in
European Integration and Economic Policy, Johns Hopkins, SAIS Bologna Center, Italy; and Member, Group of
Economic Policy Analysis of the European Commission advising EU President José Manual Barroso.
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A look at history is instructive. The following diagram shows GDP/capita in constant 1985
US-$ (in purchasing power parity) in the period 1820-1995 for 16 early industrialized
countries, mostly European, but also including the US and Australia. 1
Setbacks, openess and growth, 1820- 1990
Real per capita income
1,000 US-Dollars (PPP)
in prices of 1985
16
14
1990
1980
12
10
1970
8
1960
6
1944
1945
4
1940
1918
2
1820
0
0
1850
1830
1840
2
4
1947
1950
1930
1920
1860
1919
1870
6
8
1914
1910
1900
1880
10
1912
Export ratio,
in percent
12
14
16
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This diagram tells us that an increase in real GDP per capita is correlated with more openness
of the economies, measured by exports relative to GDP. But unfortunately we also observe
that the world economy experienced a severe setback in the two world wars and in the
interwar period. After 1945, a continuous improvement in the human condition set in, also
due to a positive multilateral institutional arrangement. For instance, Europe has not seen a
war in six decades.
1
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, Netherlands, Norway, Sweden,
Switzerland, United Kingdom, United States - Source: Table 4.1 Siebert (2007b); Source for data: Maddison (1992), own
calculations.
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What are the challenges for the future? Challenge 1: The world
trade order, as laid down in GATT and the WTO, should be strengthened.
As we have seen in the previous diagram, economics has a clear message: The international
division of labor is not a zero-sum game in which one nation loses what the other wins. It is a
positive sum-game, in which [– under conditions-] all can win. Trade can lift all boats.
The world trade order should remain a corner stone of the international economic rule system.
It is in the interest of all countries that it should be strengthened and not weakened. Luckily,
the world trade order satisfies two important conditions for an international rule system,
namely that - as an essential condition - the trade order generates visible and direct benefits
for each member. As a second crucial condition, each country can indeed expect an increase
in visible and direct benefits in the future. It therefore pays to stick to the rules, because there
will be a reward later on. Countries have an interest to join. We can explain such rule systems
in a Hayekian way; the subsidiarity principle applies.
In the trade order, many desiderata are open:
-
Prevent opportunistic behavior of nation states, especially strategic trade policy;
-
Open up market access for agricultural products of developing countries in the
industrialized countries;
-
Get rid of subsidies for agriculture in the developed countries;
-
Do not subsidize “bio”-fuels since they contribute to the food price rise in the
developing countries;
-
Prevent export constraints since they artificially increase scarcity;
-
Open up markets for services; and
-
Avoid negative spillovers between trade and investment. We surely can add other
aspects.
Challenge 2: Global warming. An institutional arrangement for the global
environment, for instance the global atmosphere, is far more difficult to reach than for trade.
The problem here is that the environment as a resource or as a good has two different and
competing functions: it provides the air we breathe and the climate we enjoy; as such it is a
public good with the characteristics that must be consumed in equal amounts by all. It also
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serves as a sink for pollutants, for instance CO2–emissions, and as such it is similar to a
private good for which rules can be formulated and prices can be set (Siebert 2008b).
The solution with global environmental media is much more difficult than for trade since the
public good of reduced global warming often is conceived as generating no direct national
benefits so that nations may be tempted to behave as a free rider. However, an improvement
in the public good requires abatement activities with costs of abatement, and these costs
accrue to the nation state, for instance its industry. Thus, in this rule area we have other
conditions than in the world trade order. And we have to rely on other approaches such as side
payments to join an agreement, technology transfer and rather complex self-enforcing
multilateral contracts.
Challenge 3: Increasing energy scarcity. Rising income per capita will
exercise demand pressure on energy and other natural resources, together with rising energy
and resource prices. Instead of dashing each other’s heads over the scarce energy, we have a
normal mechanism at our disposal to come to grips with this phenomenon, namely to let real
energy prices rise and let the market mechanism do its job. This is a peaceful way to
accommodate additional demand. It is the role of markets to allocate the scarce resource
“energy” to the competing users. In addition, we should deepen mutual foreign direct
investment in the energy area; let intensive resource users invest in the upstream activities of
resource countries and let resource countries invest in the downstream activities of resourceimporting countries, i.e. in the distribution systems. The alternative is to answer a resource
monopoly with a monopsony of resource-importing countries. Apparently, the issue of
increasing energy scarcity will lose prominence if the world succeeds in finding a backstop
technology.
[Unfortunately, we have not established an international competition policy preventing
resource cartels and national strategic trade policy. Competition policy is not part of
the WTO and we only have a very informal cooperation among the competition
authorities. The important resource “energy” is not really part of the world trade order.
In this area, we have an unsolved conflict between the trade order and national
strategic trade policy.]
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Rising income per capita also leads to an increase in demand for food. Unfortunately, the
problem of rising food prices is worsened by “bio”fuel subsidies which drive out traditional
agricultural production (Siebert 2008a). We should stop these subsidies. However, the
problem of rising food prices is less severe than energy since additional land can be put into
cultivation and agricultural productivity can be increased. [If the productivity increase is
larger than the increase in demand, food prices need not rise.]
These are only some examples of problems in the rule systems. And they belong to what I call
trends, where we have some information on their patterns in the past and on how – under
normal conditions – the world will look like in the future. Examples for such trends are
population growth and urbanization, ageing in some regions, an increasing demand for food
stuff due to an increasing income per capita, the just mentioned rising energy scarcity, the
integration of developing countries into the international division of labor, the rising
awareness of environmental deterioration, especially in the industrialized countries, the
pattern of expanding regional integrations, and possibly a partial shift in the lead currency.
In contrast to such trends, other phenomena come more or less as unexpected surprises such
as September 11, 2001, i.e. the sudden appearance of international terrorism on the global
scene, or the subprime crisis. It is impossible to forecast such uncertain events in the future.
One of the reasons for this impossibility is that economic and political conditions are subject
to changing human behavior, to altering expectations and varying preferences. Another reason
is that technological breakthroughs may occur that affect the underlying production
conditions. I leave it to your imagination which events could play a role. [Consequently, what
we can say about future challenges stands under the proviso that the future is highly
uncertain.]
Let me look shortly at three such uncertain events.
Challenge 4: Financial crises. Financial crises, including currency crises and bank
runs, can have a severe impact on the real side of the economy. In the Great Depression in
1929-1933, the US lost one third of its GDP; Japan - a dynamic economy in the 1980s - was
weakened considerably through its bubble, going into stagnation for more than a decade;
Argentina shrunk by 20 percent in 2001-2002 and the countries affected by the Asian
currency crisis in 1997 had negative growth for some years.
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The answer to these issues has a national and an international dimension: 2 Nationally,
monetary policy must make sure that inflationary expectations are kept low; that the price
level remains stable; that the central bank is independent; that the banking sector is robust;
that prudent supervision does its job; that regulators are not outsmarted by the financial
industry; and that the financial markets have a reliable interemporal fix point as protection
against financial bubbles. Internationally, countries must be robust and economically viable to
withstand contagion; countries have to use similar standards for their banking system and
financial supervision in order to prevent a financial and currency crisis; the IMF has to make
sure that a systemic crisis does not arise; central banks will have to step in as lenders of last
resort in a worst case scenario.
Challenge 5: Mass border-crossing migration. With diverging income per
capita between countries and different living conditions, in the past people have set in motion
and simply moved to other, more promising regions. We have seen signs of this phenomenon
when Africans crossed the Sahara desert and climbed the barbed fences in the Spanish
enclaves Ceuta and Melilla to get into the European Union. We cannot be sure that this will
not occur on a wider scale. Luckily enough, income per capita has improved in many
developing countries in the world 3, among them China and India. This makes migration of
people unnecessary. Indeed we have a “pecking order” between trade and capital flows
(Siebert 2009). When products between countries are traded, people do not have to move.
Instead of moving they sell the products they can produce best. In addition it is better to bring
capital and jobs to the people than to move people to capital.
Challenge 6: Terrorism. Terrorism can be understood as a phenomenon in which a
group of people is prepared to do harm to other people, ready to kill. The terrorist group is
2
The crisis that invaded the international banking industry in the years 2007 and 2008 has many culprits:
Monetary policy of the Fed under Greenspan with low interest rates feeding the bubble; financial innovations
such as the securitization of high risk loans, for instance mortgages in the housing market; losing information on
the kind of risks bundled in asset-backed securities when securities change hands; using extremely high levers of
own equity to credits of up to one to thirty by hedge funds and putting risks simply off the balance sheets
through conduits – all these factors can have the implication that it needs only a small disturbance for banks to
lose confidence to each other. A credit crunch is the consequence, and bank failures can follow. In some of these
developments, such as taking risks off the balance sheets, the banking industry violated its own standards, in
contravening what is professionally sound and required. Regulators were unable to keep up with the product
innovations of the banking industry.
3
See figure 10.4 in Siebert (2007b).
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violently opposed to the way of life of others. See Al-Queida. Under such conditions, it is
impossible to find and establish global rules and to avoid a Hobbesian perspective of human
life being “poore, nasty, brutish and short”.
The solution to terrorism consists in eradicating the very reasons for terrorism: poverty,
illiteracy, poor education; a low level of development, among other factors. As with mass
migration, this is also a promising approach against terrorism.
In addition, the mutual respect for the way of life of others has to be developed. Yet, the
strongest weapon against terrorism is rationality being based on human experience, including
natural science, knowledge, open access to information, know-how; open societies and
practice. It is this rationality which the Western World has experienced in the age of
enlightenment. Rationality most likely will be able to put irrational beliefs, illogical attitudes
and unfounded viewpoints to a test. Rationality may also be capable to transform identities
and interest into different positions.
I invite you to use your imagination to come up with other unexpected events. Such
phenomena require that the rule system is flexible enough to accommodate shifts and changes
in the world economy, robust enough to withstand blows, credible due to being underpinned
by the commitments of nation states and sustainable, being able to digest major changes in the
fundamentals of the world economy. We want to prevent the phenomenon known from the
earth’s crust when tectonic plates lock as they move past each other, creating frictional stress.
When the plates then are displaced, energy is set free and the quake is the only consequence.
We want to prevent “economic quakes” by simply postponing the necessary adjustment and
relying on pathological learning. Unfortunately, when we study this requirement of
rationality, we cannot forget that sometimes man seems to be only one generation away from
the stone age.
With the desire for a flexible, robust, credible, and sustainable arrangement of rules in mind,
let me come to my last challenge:
Challenge 7: Geopolitical shifts in the world economy. The option for
developing countries to participate in the international division of labor also means an
increase in the developing countries’ share in world GDP. This implies a relative decline in
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the output share of the industrial countries. The actual distribution of output shares is given by
the following diagram.
Regional structure of the world‘s gross domestic
product, 2006
Source: World Development Report 2008.
Looking at the US and China, the US’ share of world output stood at 27.4 percent of world
GDP in 2006, China’s at 5.5 percent. In another thirty years, the shares of output are likely to
be 24 percent and 9 percent, respectively. The underlying assumption for these calculations is
that China’s growth rate in the years to come will be 5 percent instead of 10 percent since
many mechanisms towards a lower growth rate (Siebert 2007a); the US’ growth rate is set at
2.5 percent, the world’s rate 3 percent. [A more plastic description on how the world looks
like can be found in work of journalists. 4]
Admittedly, such calculations are subject to many qualifications, such as the assumed growth
rates of the US and China as well as for the world economy. Moreover, the change in
exchange rates will impact on the shares; an appreciation of the renminbi will increase
China’s share.
4
Khana, P. (2008). Waiving Goodye to Hegemony, New York Times, January 27.
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[Instead of working with such simplified assumptions, one would need a structural
model with several equations. But even such a more refined forecasting model could
not include structural breaks, i.e. patterns that are completely different from the past. ]
This economic shift can be interpreted as a geopolitical shift of power. I leave it to the
imagination of the audience where in a multipolar world, with the other players US, Europe,
China and India, Russia will be.
History tells us that geopolitical shifts in the balance of power often are accompanied by
struggles and wars between the incumbent hegemon and the newcomer. Witness the birth and
the rise of Germany in the second half of the 19th century relative to the already industrialized
Great Britain. Since then, Europe and the World have seen two world wars. [Similarly, the
emergence of Japan on the world scene can be cited as an example.] We cannot claim that a
law exists according to which a war is the unavoidable implication of a shift in the balance of
power, but we can postulate that the likelihood of a conflict a war increases.
For these reasons, it is necessary to have appropriate international forums and forms of
intermediation in which potential conflicts can be discussed and which serve to channel
conflicts. Let me therefore close with a question: Does the world have the institutional
arrangements to mediate such conflicts?
---------------------------------------References
Hufbauer, G.C. (2003). Looking 30 Years Ahead in Global Governance. In H. Siebert (Ed.).
Global Governance: An Architecture for the World Economy. Berlin: Springer. 245-269.
Maddison, A (2001). The World Economy: A Millennial Perspective. Paris: Development
Centre of OECD
Siebert, H. (2007a). China: Coming to grips with the new global player. The World Economy.
Vol. 30 (6), 893-922.
------ (2007b). The World Economy. A Global Analysis. Third edition. Abingdon: Routledge.
------ (2008a). Die verfehlte Subvention der Biokraftstoffe. Frankfurter Allgemeine Zeitung.
May 16.
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------ (2008b). Economics of the Environment. Theory and Policy. 7th ed., Berlin: Springer.
Siebert, H. (2009). Rules for the Global Economy. Princeton: Princeton University Press,
forthcoming.
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