Wednesday, May 7, 2008

Summers rephrases the case for globalization and trade!

Lawrence Summers acknowledges the well-known secret that after-all, in a world where emerging economies are booming, un-adulterated free-trade as we commonly refer to, may not be fully in America's interests. In two FT articles, he sounds a refreshingly welcome note of caution, on the gung-ho march of globalization and free-trade. He lists out three reasons why American workers may not buy the arguement that globalization improve economic welfare.

1. Developing countries increasingly export goods such as computers that the US produces on a significant scale, putting pressure on wages. While workers disproportionately bear the brunt of the competition induced higher wages, the consumers benefit from cheaper and better quality products. At the same time, rising global prosperity increases the rewards accruing to the already highly paid producers of intellectual property goods such as films, where the US has a comparative advantage.

2. The growth of countries such as China raises competition for energy and environmental resources, raising the price for Americans.

3. Growth in the global economy encourages the development of stateless elites whose allegiance is to global economic success and their own prosperity rather than the interests of the nation where they are headquartered. The older "what is good for America is good for GM" is now being replaced by "what is not good for America is no
longer necessarily not good for GM"! He claims that "a decoupling of the interests of businesses and nations may be inevitable"! Companies have less of a stake in the quality of the workforce and infrastructure in their home country when they can produce anywhere.Businesses can use the threat of relocating as a lever to extract concessions regarding tax policy, regulations and specific subsidies. Inevitably the cost of these concessions is borne by labour.

He writes, "When other countries develop, American producers benefit from having larger markets to sell into but are challenged by more formidable competition. Which effect predominates cannot be judged a priori."

Prof Summers argues that any policy promoting globalization should be accompanied by domestic policies that seeks to address "inequality and insecurity". This is precisely what many of the left leaning globalization sympathizers have long been advocating. While globalization is bound to expand the pie and more efficiently allocate resources across the global economy, it will cause significant labor dislocation and hardships in individual countries besides increasing uncertainty in many areas. This can be addressed only through policies aimed at substantially cushioning the poorest and providing everyone with all the basic opportunities for competing in this global economy.

He also highlights the need for harmonization of tax and regulatory policies across nations, so as to avoid competitive policies in these sectors that engenders both protectionism and an unhealthy race to the bottom. He writes, "There has been a race to the bottom in the taxation of corporate income as nations lower their rates to entice business to issue more debt and invest in their jurisdictions. Closely related is the problem of tax havens that seek to lure wealthy citizens with promises that they can avoid paying taxes altogether on large parts of their fortunes." I am not sure whether any voluntary tax agreement can be achieved among nations, and whether they are even desirable.

Regulatory policies should involve a global consensus on the right amount of regulation in each sector. This is a highly contentious area, and there is considerable distrust among developing countries that, in the guise of standardaization and harmonization of regulatory policies, the developed economies have been trying to foist favorable regulatory standards that are widely perceived as being inimical to the interests of the former. The negotiations on labour, investments, phytosanitary conditions etc under the WTO have clearly highlighted the divisions. The challenge here lies in arriving at a mutually acceptable consensus on regulatory standards.

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