Since the 1950s, economic globalization (the increasing economic integration and interdependence through international movement of goods, capital, labor, and technology) has spurred unprecedented economic growth and raised the living standards for billions of people across the world. However, the way in which economic globalization has moved forward has also created volatile financial markets, economic insecurity from competition, and trade disputes. These issues have sparked fierce anti-globalization sentiments in both the global North and South, which now threaten to reverse the process of globalization.
To deal with this, I) the G20 should pursue more international macroeconomic and regulatory cooperation to keep global capital flows stable, II) promote the implementation of adjustment assistance policies to compensate losers from economic competition abroad, and III) create policy space for countries to be able to temporarily “opt-out” out of the international trade regime in order to achieve short- term goals. The G20 could do this by leading in the creation of a framework for financial cooperation, implement adjustment assistance policies domestically and provide assistance to developing countries with weak institutions through the World Bank to do the same, and use its power in the WTO to facilitate negotiations over temporary “opt-outs.”
I. Foreign Capital After the collapse of Bretton Woods, the free movement of capital between advanced industrialized countries and less developed countries (financial globalization) started to pick up dramatically, promising huge returns for first-world investors to make money and for LDCs to develop their economies. And for many years they did; countries in Latin America and East Asia reported massive gains in GDP growth rates in the 1970s and 1990s respectively.
However, without the necessary regulatory mechanisms and banking reforms, these “hot money” inflows (which were central for economic development) could at the smallest sign of uncertainty turn into massive and panicked outflows of capital — which indeed happened, multiple times, throughout the 1980s and 1990s. These capital flights brought economic calamity and chaos upon many developing countries, and the IMF’s strict conditionality clauses would inflict even more pain on their populations. This has left many people suspicious (and even resentful) of financial globalization.
The crisis of the 1980s and 1990s should not, however, lead us to conclude that financial globalization is bad and should, therefore, be rolled back. In fact, the economic miracle generated by the East Asian Development model depended on smart investments of foreign capital in target sectors that boosted long-term growth and competitiveness. The interaction of developments in the international system (such as sudden interest rate hikes and currency fluctuations) and the emerging economies (such as political upheaval and weak financial systems) as the source of the vicious capital cycles.
To shield themselves from future turbulences on the international capital markets, East Asian governments started building up vast reserves of foreign currency and created a regional framework for financial cooperation called the Chiang Mai Initiative where they can coordinate macroeconomic policy. But holding vast sums of foreign currency reserves is both expensive and can contribute to even larger crises abroad (as it did with the 2008-2009 crisis in the United States). In any case, whether they have foreign currency reserves or not, developing countries would be much better off if they could cooperate directly with the US and other advanced industrialized countries to coordinate macroeconomic policy. In return, they could guarantee responsible financial reforms that would make their countries safer for the AICs to invest their capital (assuming that the developing countries have the political will to pursue those reforms domestically). Therefore, to ensure a beneficial future of financial globalization, the G20 should take steps to create a global, Chiang Mai-style, framework for financial cooperation.
II. Economic Competition Diffusion of technology and access to cheap labor markets has allowed companies to dramatically reduce their production costs and expand into whole new markets, spurred competition and innovation, and enhanced the living standards of billions of people across the world. Economic globalization has also allowed rich countries in the global North to import products at much cheaper prices than if they had to produce them at home. This new, global supply chain has spawned entire industries in the global South and completely changed the composition of their economies.
However, in both the global North and South, Ethiopian farmers and American steelworkers alike, many people feel that competition through globalization poses a threat to their economic security. For example, in recent decades the US has witnessed a massive decline in manufacturing due to competition from China. Accurately or not, people in communities in the US and throughout the global North, who have seen their jobs disappear, believe that this is the fault of globalization — which has lead to the electoral successes of anti- globalists such as Donald Trump. In the developing global South, producers have found themselves balancing on a knife’s edge where they could suddenly loose market to foreign rivals due to minuscule changes in conditions and production costs abroad.
As a way to compensate the “losers” in the global North and South, without resorting to expensive protectionism, adjustment assistance could be provided to those industries and workers affected by import competition — while still leaving the “winners” better off. For such compensation to be economically and politically feasible, it would have to take the form of comprehensive schemes such as unemployment insurances and retraining programs for laid-off workers. In many of the AICs of the global North, similar schemes are already in place when it comes to job-losses due to domestic competition, but they should also be expanded to include job-losses from foreign competition.
Through its influence in the WTO, the G20 should attempt to change the rules concerning protection for displacement through trade. Most developing countries, however, lack the institutional infrastructure and funds to provide this sort of safety net for its citizens. Here, the G20 could play a huge role in helping developing countries set up the necessary domestic institutions and secure external financing for this. The World Bank, with its immense professional expertise and its pro-globalization agenda, undertake institutional reform and provide funding; foreign exporting firms could also be willing to finance adjustment assistance in exchange for market access.
III. Trade Regimes
The decades following the conclusion of WW2 and the creation of the Bretton Woods system were marked by pervasive trade liberalization across the world. The creation of the GATT/WTO helped countries progressively eliminate trade barriers, allowing them to harness their comparative advantages and create vast amounts of value (especially between AICs endowed with capital and LDCs endowed with labor). But in the last few decades, the relentless advancement of neoliberal market reform has come under increased criticism. The stringent neoliberal trade regimes in place today are perceived as stringent and are exacerbating tensions concerning fair trade practices — threatening a general catastrophic backlash against globalization. Perceived tensions in developed countries include the inability to apply higher precautionary environmental, health and safety standards to foreign products (for example, fair labor conditions) because of WTO rules, not being able to tax capital and skilled professionals because of unrestricted international mobility, and insufficient legal room to punish other countries for engaging in non-fiscal export subsidization.
Developing countries, on the other hand, are discontented with WTO agreements that restrict their ability to engage in “unorthodox” trade-related investment measures (the type of policies that enabled the East Asian economies to grow themselves out of poverty) and international finance regimes that are more friendly to currency stability than development. Acknowledging that some of these frictions entail difficult trade-offs (e.g. allowing LDCs to engage in trade subsidization would impose costs on AICs), the world must focus on devising smart rules to manage them — rather than just “proceed with a market-opening agenda.”
To preserve globalization in some form, the world ought to place “a high premium” on policies that make a wholesale retreat from globalization less likely — even if they conflict with a market-opening agenda in the short-run. As an alternative to the question of how we should liberalize (i.e. globalize) further, policy space should be created, which would allow countries to temporarily “opt-out” of trade regimes in order to achieve their short-term goals; opt-outs would require due negotiations within agreed-upon constraints that are also subject to multilateral review, and incorporate the views of stakeholders affected by the policy change in question. Instead of quarreling over market access (which could lead to expensive and escalatory protectionist measures), countries would then be engaged in exchanging policy space. For example, the EU could be allowed an exemption to the rule that limits them from imposing trade restrictions on products they deem to be below standard (but which are acceptable under the standing trade regime), and would, in exchange allow China, for example, to subsidize their exports of 5G technology.
The G20 should try to create a semi-autonomous government body that would review and allow these opt-outs on a case-by-case basis. The suggested policy space negotiations-process could be similar to the WTO Safeguard Agreement but for a wider range of circumstances. The deciding body should therefore be created within, or in close conjunction with, the WTO.
These recommendations to the G20 are designed to be digestible for developed and developing countries alike. Their aim is to steer today’s economic globalization to become more fair and beneficial. These policies would satisfy many anti-globalist concerns, thereby decreasing the probability of a wholesale reversal — which would be catastrophic for everyone.
Contributed by Harald Erici