Chapter Three Perspectives on Globalization and Governance David G. Skidmore in Lairson and Skidmore, International Political Economy In this chapter, we review the major trends that have shaped the path of globalization and compare perspectives on how globalization should be governed. A good place to begin is with the term “globalization” itself, which first appeared in a Western dictionary in 1961 1 and has come into widespread academic and popular use only since the early 1980s. In fact, globalization has rapidly come to be viewed as a central motif of modern life, whether for good or for ill depending upon one’s perspective. One indicator of the growing ubiquity of globalization in intellectual and popular discourse is that the number of books focusing upon globalization has risen from less than six hundred in 1980 to over 38,000 today. 2 1 Interview with Nayan Chanda, “Globalization Has a Long History,” SSRC, June 27, 2007, http://www.ssrc.org/features/view/globalization-has-a-long- history/ . 2 Mauro Guillen’s Indicators of Globalization, 1980-2010, http://www-management.wharton.upenn.edu/guillen/2010-docs/Gl
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Chapter ThreePerspectives on Globalization and Governance
David G. Skidmorein Lairson and Skidmore, International Political Economy
In this chapter, we review the major trends that have shaped the path of globalization and
compare perspectives on how globalization should be governed. A good place to begin is with
the term “globalization” itself, which first appeared in a Western dictionary in 19611 and has
come into widespread academic and popular use only since the early 1980s. In fact, globalization
has rapidly come to be viewed as a central motif of modern life, whether for good or for ill
depending upon one’s perspective. One indicator of the growing ubiquity of globalization in
intellectual and popular discourse is that the number of books focusing upon globalization has
risen from less than six hundred in 1980 to over 38,000 today.2
The contemporary fascination with globalization – and especially the sense that it is
something fundamentally new and transformative - is puzzling from several angles. The first
humans originated in Africa and have since gradually migrated to every habitable continent,
forming diverse cultures and civilizations in the process. If we are considering exchange across
distinct populations, flows of people, goods and ideas began to link the great civilizations of
China and the West across the Silk Roads over two millennia ago. The Age of Exploration, by
which European seafarers made their way to Africa, Asian and the Americas, setting the stage
for both commerce and conquest, dates back six centuries and more. And the modern political
economy, based upon the liberal precept of trade as a process of mutually beneficial exchange to
1 Interview with Nayan Chanda, “Globalization Has a Long History,” SSRC, June 27,
Nevertheless, further progress toward global trade liberalization has stalled in recent years.
The WTO-sponsored Doha Round of negotiations has dragged on for over a decade with no end
in sight. The reasons for slower progress on the global front are several: with a growing
membership, the requirement that any WTO agreement be adopted by consensus has become a
more significant hurdle; negotiations have come to address deeper and more sensitive issues
traditionally considered domestic in nature; differences between developed and developing
nations have widened over some issues; and the more formal and binding character of WTO
commitments leave governments less flexibility in building domestic consensus in favor of
liberation among affected interests.
Another sort of barrier arises from policies that discriminate against foreign investors as
compared with domestic investors or that create uncertain legal protections for all investors,
whether domestic or foreign. These kinds of risks discourage otherwise profitable movements of
foreign direct investment. There is no global regime that governs such policies, aside from some
very general and rather weak commitments built into the WTO. As a result, governments seeking
fair and equal treatment for their firms that invest abroad have entered into bilateral investment
treaties (BITs) with one another. Figure x.x shows that the 1990s represented a peak in the
number of new BITs arrived at. In general, the past two decades have brought a growing
cumulative number of BITs, reaching close to 2400 by 2007.
Explosion of Bilateral Investment Treaties
Source: UNCTAD’s World Investment Report, various issues; Richard Baldwin, “21st Century Regionalism: Filling the Gap Between 21st Century Trade and 20th Century Trade Rules,” World Trade Organization Economic Research and Statistics Division, Paper ERSD-2011-08, May 23, 2011; http://www.wto.org/english/res_e/reser_e/ersd201108_e.pdf
Source: Adapted from Paul Bairoch, "International Industrialization Levels from 1750 to 1980,"
Journal of European Economic History, 11, 1982, 296.
Yet at Figure x.x indicates, circumstances have changed dramatically in recent decades.
Globalization has facilitated the shift of manufacturing production from the mature, high-wage
countries of Europe and North America to East Asia and, to a lesser extent, other regions of the
developing world. The share of global GDP accounted for by developing countries has risen
from 30% in 1950 to well over one half today. Much of this shift is related to the relocation of
manufacturing, which rose from 31.4% of developing country exports in 1980 to 68.1% of such
exports in 2005. The developing country share of world manufacturing exports has doubled in
the short space of a quarter century as has the developing country share of capital spending.24
24 David Held and Anthony McGrew, Globalization/Anti-Globalization: Beyond the
Great Divide, Polity, 2nd edition, 2007, 77.
Between 1995 and 2010, the percentage of Fortune 500 companies headquartered in the
developing world rose from 4% to 25%.25 Particularly striking is the shift to high-speed growth
in the world’s two most populous countries: China and India. Between 1983 and 2003, India’s
per capita income more than doubled while in China per capita income quadrupled.26
Over the very long term, the world has witnessed striking movements in the global
economic center of gravity, as illustrated by Figure x.x. The westward shift of the nineteenth
through the mid-twentieth centuries is now being reversed in equally dramatic fashion and over a
shorter time scale.
25 “Why the Tail Wags the Dog,” The Economist, August 6, 2011.
26 Charles Kenny, Getter Better: Why Global Development is Succeeding – And How We
Can Improve he World Even More, New York: Basic Books, 2011, 19.
“The Real Wealth of Nations,” The Economist, June 30, 2012
A Partially Globalized World
Globalization is more than just hype. The world economy is knitted together from ever-
tighter networks of production, finance and information flows. Yet the process is far from
complete. International connections are uneven in both sectoral and geographic terms. Most
people’s economic livelihoods depend more heavily upon local and national markets than upon
global markets. States remain powerful and relevant actors and business firms operate within
rules set by political authorities. The world is, at best, “semi-globalized,” to use a term offered by
Pankaj Ghemawat.
Debating Global Governance
Among mainstream scholars and commentators, the crucial question is not whether to
globalize but how to manage the process in a way that best serves the values prioritized by the
author, whether these be economic efficiency, global equity and sustainability or the preservation
of democracy and national autonomy. In other words, the globalization debate has much to do
with questions of governance – who gets to participate in making the rules that govern global and
national economies and through what sort of institutions?
Three alternatives present themselves: Advocates of market-led globalization prioritize
efficiency and output. From this perspective, the role of governments and international
institutions is to clear away those obstacles that prevent self-regulating global markets from
functioning more effectively.
Another set of authors believe that markets cannot and should not be self-regulating.
Markets must be embedded within some set of rules and institutions capable of ensuring that
social values and interests beyond mere economic efficiency are considered. Advocates of state-
led governance argue that globalization must be subordinated to national autonomy and the
participatory mechanisms of democratic states. This approach calls for a “thin globalization” that
regulates international commerce for the common good and preserves the ability of societies to
adopt varying paths to development.
A third perspective agrees that markets must be regulated in order to serve broader
purposes beyond efficiency, but doubts that the nation-state is capable of serving this function
under conditions of capital mobility and international economic openness. Advocates of
institution-led governance thus argue that international institutions must be strengthened,
absorbing some of the market-regulating functions previously undertaken at the nation-state
level.
Market-led Governance
In his 1999 book, The Lexus and the Olive Tree, best-selling author Thomas Friedman used
the metaphor of a “Golden Straightjacket” to illustrate the constrained economic choices
available to governments: “If your country has not been fitted for one” Friedman wrote, “it will
be soon.”27
In Friedman’s view, the ability of capital to flow easily across national borders meant that
governments that adopted policies considered unfavorable by investors would quickly be
punished by financial markets as capital fled to friendlier locales. Whereas in the past states had
the power to force private actors to adjust their behavior in order to serve public ends, Friedman
asserted that globalization now reversed this relationship: states had to adjust to markets or risk
losing access to the capital needed to finance growth. What made the straightjacket imposed by
global markets “golden” was that states going along with this new reality would be rewarded
with growth and prosperity. In short, Friedman envisioned a world in which the task of
governing globalization was largely left to markets, which, through the decentralized power of
an “electronic herd” of investors and currency traders, endorsed some policies choices and
vetoed others.
Friedman’s celebration of market-led globalization captured the spirit of the eighties and
nineties; decades when free market enthusiasts gained the upper hand in intellectual and policy-
making circles.28 The post-World War II era had brought the rise of the welfare state and more
interventionist government regulation of economic activity. The backlash against such policies
began with the electoral triumphs of Ronald Reagan and Margaret Thatcher, respectively, as
27 Thomas Friedman, The Lexus and the Olive Tree, New York: Anchor Books, rev. ed., 2000.28 Other works that offer generally positive appraisals of market-led globalization
include Martin Wolf, Why Globalization Works, Yale University Press, 2005; Jagdish
Bhagwati, In Defense of Globalization, Oxford University Press, 2nd edition, 2007; and
Michael Spence, The Next Convergence: The Future of Economic Growth in a
Multispeed World, Farrar, Straus and Giroux, 2011.
president of the United States and prime minister of the United Kingdom in 1979. Harking back
to nineteenth century concepts of laissez faire – a French phrase meaning “hands off” or “let
them be” – Reagan, Thatcher and their supporters celebrated the wonders of free markets while
seeking to reign in the power of states to regulate economic decision-making. In the United
States and Great Britain, the Reagan and Thatcher years brought reduced taxes on corporations
and top income earners, privatization of public enterprises and services, deregulation of certain
industries and efforts to weaken the power of labor unions.
These ideas –sometimes labeled neo-liberalism - represented an updating of liberal
economic thinking that stretched back to eighteenth and nineteenth century thinkers such as
Adam Smith, Jeremy Bentham and John Stuart Mill. Neo-liberalism is based upon the notion that
markets function best to maximize efficiency of production and satisfy consumer demands when
free of government interference. The neo-liberal concept of a “self-regulating market” refers to
the equilibrating qualities of uninhibited exchange within a market system: the price mechanism
serves to ensure that the collective but decentralized decisions of thousands or millions of
producers and consumers result in a balance between supply and demand. In this sense, the
market “governs” itself.
This does not mean that government is superfluous from a neo-liberal perspective.
Governments are necessary to provide for the common defense, define and enforce property
rights, supply legal currency, provide public goods that would be undersupplied by markets,
issue patents and copyrights to encourage innovation, offer a social safety net for individuals
who are temporarily or permanently unable to effectively compete in the labor market and
compensate for market failures, such as the negative externality of pollution, through appropriate
regulatory policies. Governments should not, however, compete with the private sector, set
prices, subsidize production or consumption, impose taxes that discourage investment or inhibit
competition.
It follows from these neo-liberal precepts that governments should also refrain from
interfering with the transnational movement of goods, services, money and people, unless there
exist compelling public rationales for doing so that trump considerations of maximizing
efficiency and income (such as, for instance, national security). Neo-liberals recognize that states
have in fact historically engaged in costly protectionist policies, whether due to erroneous
economic doctrines, the political clout of special interests or the competitive nature of the nation-
state system. In order to curb such behavior, liberals favor global institutions, such as the WTO,
that encourage the removal of such barriers and punish states that engage in protectionism.
These ideas gained wide currency during the 1980s and 1990s. The eclipse of the state in
favor of an increasingly globalized marketplace seemed confirmed most dramatically by the
collapse of communism in Eastern Europe and the Soviet Union and the introduction of market
reforms by surviving communist party rulers in China and Vietnam. Indeed, many observers
began to argue that globalization tended to force countries in the direction of convergence around
a single model of state-society relations.
In 1990, for example, economist John Williamson, reflecting upon the lessons from a
decade of policy reform in Latin America as countries in that region grappled with international
debt, developed what he dubbed the “Washington Consensus.29” These were a set of policies that
others, if not Williamson himself, soon embraced as a universal formula for economic
development. The original list included:
- fiscal discipline
29 John Williamson, “What Washington Means by Policy Reform,” in John Williamson, Latin American Adjustment: How Much Has Happened? Washington, D.C.: Institute for International Economics, 1990.
- reorientation of public expenditures- tax reform- financial liberalization- unified and competitive exchange rates- trade liberalization- openness to FDI- privatization- deregulation- secure property rights
Largely endorsed by the International Monetary Fund and the World Bank, this formula
served as a template for the conditions that these institutions attached to the loans they made to
troubled debtor countries.
In short, neo-liberals expected states to converge around a free market approach to
economic development and governance under the combined influences of economic logic (i.e.,
the persuasiveness of neo-liberal ideas), the pressures exerted upon states by transnational capital
markets and the rules and norms embodied in the major international economic institutions.
The convergence thesis has been criticized from a number of angles. Economist Pankaj
Ghemawat argues that the world economy is far less globalized than has often been assumed.30
This finding leads him to three conclusions: First, the forces of globalization are too weak to
compel states to adopt policies that they otherwise find objectionable. Second, the success or
failure of economic growth in any given country is principally due to domestic factors. Third,
there remain enormous efficiency gains to be had from reducing the considerable obstacles that
continue to inhibit transnational economic integration.
Some scholars have questioned both the empirical and the causal claims of convergence.
State behaviors with respect to fiscal, monetary, tax, regulatory and labor policies remain quite
30 Pankaj Ghemawat, World 3.0: Global Prosperity and How to Achieve It, Cambridge, Ma.:
Harvard Business Review Press, 2011.
diverse and show little evidence of converging around a single standardized model. For example,
the most successful developing economies of recent decades – those of East Asia – have not
followed neo-liberal prescriptions, but have instead featured strong states which actively direct
the accumulation and allocation of capital toward national development goals. These hybrid
systems that combine market mechanisms with state ownership and regulation have generated
rapid growth in China and other East Asian countries and thus pose a major challenge to neo-
liberal thinking about the proper relationship between state and society.
Nor is there compelling evidence that investors have strong and fixed preferences for
particular policy mixes. Some studies find that capital is likely to flee economies where loose
fiscal and monetary policies raise the risks of inflation. But the size of government (as opposed
to whether revenues and expenditures are in rough alignment) does not appear to dissuade
investment. Nor does investment behavior appear strongly correlated with government policies
with respect to labor, the environment or government support for targeted industrial sectors.31
Indeed, fears among some globalization critics that capital mobility would lead to a “race to
the bottom” as corporations and investors sought havens from taxation, strong labor movements
and strict environmental regulations appear to be exaggerated.32 While some kinds of labor-
intensive or polluting industries may gravitate toward investment sites that offer these sorts of
advantages, there exist other industries where firms are attracted by the lure of healthy, skilled
workforces, ample infrastructure, public support for research, development and education and
close proximity to high income consumers. In such cases, corporations may be willing to tolerate
31 Layna Mosely, Global Capital and National Governments, Cambridge University
Press, 2003.
32 Daniel Drezner, “Globalization and Policy Convergence,” International Studies
Review, vol. 3, no. 2, 2001.
high tax rates and strong protections for labor and the environment. Indeed, those countries most
open to the global economy also tend to have larger public sectors.33
Another criticism of neo-liberal prescriptions has to do with financial globalization. During
the 1980s and 1990s, the IMF and rich country governments encouraged developing countries to
deregulate their financial sectors and open their economies to international financial flows.
While many countries in Latin America and East Asia did so, the results were not as expected.
Destabilizing flows of short-term investment capital led to asset bubbles and inflation, eventually
triggering financial crises even in those countries that otherwise pursued cautious fiscal and
monetary policies. The Asian financial meltdown of 1997-98 produced a severe, if temporary,
economic downturn across much of the region, eventually spreading to Russia, Brazil and
Argentina. China, which retained controls on international capital flows, was spared the
economic pain experienced by its neighbors. Roughly a decade later, financial deregulation was
blamed by many observers for the massive banking crisis that hit the United States in 2008-09,
followed soon by the Euro crisis.
Although certainly not vanquished, the neo-liberal vision of market-led globalization has
lost ground over the past decade in the debate over the future of globalization. Neo-liberals such
as Friedman exaggerate the depth of globalization and the degree to which world economic
integration compels governments to converge upon a single, standardized recipe for growth and
development. Indeed, as the fastest growing economy of the past three decades, China offers a
sharp counterpoint to the Washington Consensus as that country has managed to combine market
incentives with continuing state dominance over the Chinese economy. Finally, the financial
crises of the late nineties and since 2008 have offered reminders that markets do not police
33 Dani Rodrik, “Why Do More Open Economies Have Bigger Governments?” Journal
of Political Economy, vol. 106, no. 5, 1998.
themselves, but work best within a framework of regulation and governance that considers the
broader public good.
If global markets require some form of oversight and regulation, then which institutions –
national governments or global organizations – are better suited to set relevant rules and norms?
It is to this question that we now turn.
State-led Governance
Economist Dani Rodrik has offered perhaps the most comprehensive critique of what he
labels “hyper-globalization” – the pursuit of wholesale global integration as an end in itself.
Rodrik argues that hyper-globalization requires the sacrifice of either democracy, as under
market-led globalization in which free-flowing capital exercises veto-power over government
choices, or national autonomy, as under institution-led globalization in which supranational
institutions set global rules to which individual states much conform.34
Rather than surrender choices over the character and direction of economic development to
markets or global institutions, Rodrik advocates a “thin globalization” that removes those
protectionist barriers which mainly serve narrow interests, while nevertheless preserving the
capacity of states to regulate cross-border flows of capital and labor, to pursue varied
development strategies, including different levels of state intervention in markets, and to set
different standards of regulation with regard to health, safety, the environment and consumer
rights. According to Rodrik, a more modest path of globalization mediated by strong and capable
states would avoid the imposition of a singular economic model while enhancing both
democracy and national autonomy. In his words: “Democracies have a right to protect their