In the context of the widespread populist resentment at globalization, Larry Summers makes the point about the need to circumscribe the urge to harmonize everything globally (reflex internationalism) so that governments have the flexibility to respond to their citizens' first order problems,
If Italy’s banking system is badly undercapitalised and the country’s democratically elected government wants to use taxpayer money to recapitalise it, why should some international agreement prevent it from doing so? Why should not countries that think that genetically modified crops are dangerous get to shield people from them? Why should the international community seek to prevent countries that wish to limit capital inflows from doing so? The issue in all these cases is not the merits. It is the principle that intrusions into sovereignty exact a high cost.
What is needed is a responsible nationalism — an approach where it is understood that countries are expected to pursue their citizens’ economic welfare as a primary objective but where their ability to harm the interests of citizens elsewhere is circumscribed. International agreements would be judged not by how much is harmonised or by how many barriers are torn down but whether citizens are empowered.
This is all great. But only till he goes on to suggest areas for future international co-operation,
This does not mean less scope for international co-operation. It may mean more. For example, tax burdens on workers around the world are a trillion dollars or more greater than they would be if we had a proper system of international co-ordination that identified capital income and prevented a race to the bottom in its taxation. Taxes are only the most obvious area where races to the bottom interfere with the achievement of national objectives. Others include labour and financial regulation and environmental standards. Reflex internationalism needs to give way to responsible nationalism or else we will only see more distressing referendums and populist demagogues contending for high office.
Now this is really odd and reveals latent prejudices. Why should any country accept some global best practice financial regulation? Why should a developing country forego its major source of competitiveness by incorporating several layers of labor protections and resultant costs, with also the attendant risk of driving even more workforce informal? Why should the present and future generation of developing countries be denied the competitiveness arbitrage benefit that has been a major driver of economic growth in all previous examples of transition from developing to developed status? Why should they risk their "citizen's economic welfare" and disempower their citizens by embracing some idealistic notion of internationalism? What way is a country's inclination to arbitrage its "stage of development" advantages (like lower labour and environmental costs) any more abhorrent or any less acceptable than the imposition of capital controls or bans on genetically modified foods?
Stripped off its moral dimensions, on a utilitarian calculus, the quest for harmonization in standards trades-off with the struggle to retain competitiveness. Such harmonization, by limiting the legitimate sphere of action of national governments not only circumscribes genuine national interest but also undermines democracy itself. I have blogged here, here, and here refuting the conventional wisdom on harmonization of international trade policies.
It is ironical that this comes from Summers, an ardent advocate of accommodatory monetary policy in the US. Now that the shoe is on the other feet, how would he view Raghuram Rajan's argument in favor of global monetary policy co-ordination, one which would invariably demand restraints on the extraordinary monetary accommodation that Summers and Co have staunchly supported?
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