Monday, January 8, 2018

Caution about globalisation and harmonisation

The very wise Dani Rodrik has this summary of his thoughts on globalisation.
There is little question that multiple rounds of multilateral trade negotiations after the end of the Second World War did a lot of good. Import tariffs and quotas on trade in manufactured goods were back then extremely restrictive; relaxing them allowed the world to reap serious gains. Furthermore, at first, this liberalisation affected trade mostly among relatively advanced economies, where wages and working conditions were not so different. The first signs of trouble started after developing countries began to join the world economy: because their low wages began creating distributional tensions in the importing countries.
All this is just as economics teaches. According to the celebrated Stolper-Samuelson theorem of trade theory, in places—like the US and western Europe—where skilled workers are plentiful, unskilled workers will see their wages decline under freer trade. Openness to trade always hurts some people in society, except in the extreme case (not relevant for any large economy) where the only things imported are things that are never produced at home. In theory, countries could always compensate their losers by redistributing from the winners, and in practice they sometimes did. With its extensive safety nets, Europe in the second half of the 20th century was relatively well prepared to deal with disruptive trade flows. In addition, trade negotiators initially carved out special regimes for garments and textiles exporters in the advanced economies, limiting their exposure.
This explanation of the diminishing returns and rising distributional costs associated with increasing globalisation is less discussed but very important,
Even in the best of circumstances, however, freeing up trade caused pain as well as gain. After the 1980s, the balance began to look worse and worse. When tariffs (like taxes) are too high they distort economic behaviour more, and do more damage to prosperity. Back in the 1950s and 1960s, tariffs were often very high and so their reduction did much to grow the overall economic pie. But four or five decades later, in a world where typical tariffs were in single figures, the picture was different. If you’re starting off with the tariffs of the post-war era, the standard economic models suggest that to achieve an overall net gain of $1 in national income through liberalising trade, you could expect to see around $4 or $5 of income being reshuffled across different groups within a particular country. But under the tariffs that applied by the end of the 20th century, achieving that overall dollar of gain would be associated with as much as $20 being redistributed, implying the creation of an awful lot of losers. And what’s more, by the 1990s we were into an era of welfare state retrenchment rather than expansion. So it became less plausible than it used to be to believe that those losses will be compensated.
Let’s take Nafta, for example, which entered into force in 1994. A recent study of the labour market impact finds that an important minority of US workers suffered substantial income losses. Not surprisingly, the effect was greatest for blue-collar workers: a high-school dropout in heavily Nafta-impacted localities had 8 percentage points slower wage growth over 1990-2000 compared to a similar worker not affected by Nafta trade. Wage growth in the most protected industries that lost their protection fell 17 percentage points relative to industries that were unprotected initially. And the overall benefit of the agreement? According to most recent estimates, the net economic gain to the US was well below 0.1 percentage points of GDP—that is, less than one-tenth of one per cent of national income. 
On the "unfairness" of trade,
Sometimes international trade involves competition that would be ruled out at home because it violates agreed norms. It’s one thing to lose your job to someone who competes under the same rules as you do. It’s another when you lose your job to a company that takes advantage of lax labour, environmental or safety standards abroad. Such competition can undermine important regulations and also tax rules through the back door. The concerns about fairness here go beyond the individuals directly affected. The broader community will be troubled when it sees fellow citizens being denied decent work as the result of “unfair” practices. The hyper-globalisers, however, ignored such concerns. Instead, they doubled down and pushed for trade deals which were, in truth, no longer really about free trade at all. Their focus shifted to regulations beyond the border—restricting agricultural subsidies, standardising investment regulations, product standards, intellectual property rights, financial measures. All of these things are traditionally the product of institutional arrangements, or domestic political bargains. Suddenly, they came to be seen as trade barriers and subject to remake through trade agreements.
On the quest for harmonisation of policies,
Unlike conventional free trade, beyond-the-border harmonisation does not necessarily promise efficiency enhancements. There is no general theory to compare with Comparative Advantage to explain why unified food or banking regulations should, for example, in principle be able to work to the advantage of all countries. What harmonisation does entail, however, is sacrifice of national regulatory autonomy—and with it the ability to respond to the contours of individual economies and societies. Pacts governing cross-border investment and initiatives such as the TRIPS agreement, which has regulated intellectual property since 1995, were certainly what multinationals, financial firms, and big pharma wanted, and often obtained. Such agreements became contentious because they were viewed as privileging corporate interests over societal ones—and also as representing a direct assault on national democratic control.
On the contrast between theory and reality with financial globalisation,
Free flow of finance across the world would, it was confidently predicted, set money to work where it could do most good. With free-flowing capital, savings would be automatically channeled to countries with higher returns; with access to the world markets, economies and entrepreneurs would have access to more dependable finance; and, ordinary individual savers would benefit, too, as they’d no longer be compelled to put all their nest eggs in one national basket.
These gains, by and large, simply never materialised; sometimes, the effect was the opposite of what was promised. China became an exporter of capital, rather than an importer of it, which is what the theory implied young and poor countries should be. Loosening the chains of finance produced a string of extremely costly financial crises, including that in East Asia in 1997. There is, at best, a weak correlation between opening up to foreign finance and economic growth. But there is a strong empirical association between financial globalisation and financial crises over time, as there has been since the 19th century, when freely moving international capital would flow with gusto into the Argentinean railways or some far-flung corner of the British Empire one minute, only to flee away from it the next.
He raises important questions about the conventional wisdom that while short-term portfolio flows are bad foreign direct investments are an unqualified good. In particular, he questions their impact on labour's bargaining power and tax base erosion,
For as long as wages are partly determined by bargaining, employers will benefit from having a credible threat: accept lower wages, or else we move elsewhere. There is some evidence that the decline in the labour share of national income is related to the threat of relocating production abroad. Furthermore, if capital becomes much more mobile than labour, then labour is left more exposed to local shocks. Workers with the lowest skills and qualifications, those least able to move across borders, are typically the most affected. As capital becomes mobile, it also becomes harder to tax. Governments increasingly have to fund themselves by taxing things that are less footloose: consumption or labour. Indeed, corporate tax rates—which Trump is currently engaged in cutting—have come down sharply in virtually all advanced economies since the late 1980s, sometimes by half or more. Meanwhile the tax burden on wages (social security charges, for example) has remained roughly constant, while rates of consumer and value added taxes (VAT) have very often increased.
As to the way forward, he fears for a failure to learn lessons and a continuation of the hyper-globalising agenda which would fuel more populism and protectionism with potential threat to liberal democracy itself. 

Instead he suggests a 'democratic rebalancing',
Stepping back from hyper-globalisation without slamming the door, while restoring greater national autonomy in the service of a more inclusive domestic order... We can prioritise corporate tax co-ordination over stronger patent protections; better labour standards over special tribunals for investors; and, greater regulatory autonomy over the minimisation of behind-the-border transaction costs.
I am not sure about the benefits from what appears to be global policy harmonisation in areas where electorate in developed economies are aggrieved. What about the concerns of electorates in the developing countries or in the poorest economies? 

For example, a "fair trade" agenda is likely to become a convenient alibi to push through labour and environmental standards harmonisation policies to the detriment of developing countries. Economic theory may find it appropriate to extend the logic of anti-dumping and countervailing duties to cover "social dumping" with policies to harmonise away the labour market and other advantages of developing countries.

But this is a slippery slope. Which (perceived) advantages to address and which not? Why either ways? And what about those which are similarly perceived by the other side (the electorates in the poorest and other developing countries)? We also know that in such instances, the power balance in any multilateral negotiations will always favour the interests of the powerful (developed countries in this context). 

The whole argument about a level-playing field, especially in such contexts, is questionable. The electorate in rich countries will doubtless find it unfair that they are losing jobs due to imports from companies located in countries with poor labour and environmental standards. But doesn't the superior technologies, access to global finance at cheaper rates, access to large domestic markets, capture of national and global regulators, and the associated economies of scale "unfairly" benefit the large multinational corporations compared to the local enterprises in the developing country employing local workers which are shackled by restrictive regulations, harassed by corruption, hobbled with poor infrastructure, and constrained by smaller markets and all forms of resources? Each one of these advantages in turn can be traced back to beneficial eco-system effects that go far beyond the inherent enterprise and efforts of the company itself. Some would trace the beneficial eco-system itself to the good fortune of historical developments. Why should then the electorate in the developing world who lose their jobs not feel similarly short-changed due to imports from MNCs located in developed countries? 

Perceptions of "fairness" is not exclusive to electorates in one part of the world. They are universal. Also, apparent advantages have stories that goes far beyond the conventional notions of merit and innate abilities. Further, once we get into this territory, we would quickly realise that it would go against the whole historical dynamics of development, where arbitrage of various advantages have been the driving force.

Finally, I cannot but not feel a moment of schadenfreude here. All these debates appear like a reprisal of the debates of nineties when countless articles by the likes of Jayati Ghosh, CP Chandrasekhar etc from the left in India who questioned the "fairness" of policies like TRIPS and TRIMS. In the euphoria surrounding the collapse of Soviet Union and the triumphalism around the "end of history", these critics were denounced by esteemed intellectuals as being communist lackeys by esteemed intellectuals in India itself and in the West.  

Having said this, I will emphatically refrain from bracketing Dani Rodrik in the category of these "esteemed intellectuals". That would be "unfair" to someone who has consistently held firm to his beliefs even as the world has shifted around him chaotically! 

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