Are democracy and globalization in tension?

Democracy versus globalization: the crude debate

• Globalization reduces capacity and effectiveness of governments and renders decision-making less accountable– Public Citizen: “The combination of the WTO's powerful new

enforcement capacities and the Uruguay Round's expansive new rules encroaching into areas traditionally considered the realm of domestic policy effectively shifted many decisions regarding public health and safety, environmental and social concerns from democratically-elected domestic bodies to WTO tribunals.” (http://www.citizen.org/trade/wto/Dispute/)

• Globalization enforces economic discipline and enhances the quality of policy-making (by increasing costs of bad policy and benefits of good policy)

• Examples: trade policy, tax policies, fiscal policies

Questions

• What kind of constraints, if any, does full globalization (deep integration) impose on national democracies?

• What kind of restraints on globalization may be required for the pursuit of national democratic goals?

• A question of compromise: how can a liberal international economic order be rendered compatible with a liberal domestic political order?– What kind of restrictions on deep integration may be necessary

to create democratic “space”?– What kind of restrictions on domestic political processes may be

appropriate to reap the benefits of globalization?

Democracy vs. globalization: an impossibility theorem?

• Perfect globalization => full market integration => absence of transaction costs on international trade and finance

• Implications for nation-states – cannot impose restrictions on goods, services, and assets at the

border– must harmonize monetary, legal, and regulatory regimes– must credibly pre-commit to not deviating from those

harmonized regimes

Democracy vs. globalization: an impossibility theorem?

• Compatible with democracy at the level of nation-states?– Where do the rules of the regime come from?

• “technocratic” vs. “democratic” decision-making

• the “democratic deficit” problem

– Is a single set of rules appropriate for all?• need to manage macroeconomy in response to shocks

– Requires national flexibility in monetary, exchange-rate, fiscal, and financial policies

– Britain in 1931, Argentina in 2002

• legitimate desire to choose institutions compatible with domestic preferences

– E.g., the trade-offs between financial stability and financial innovation, between redistribution and incentives

• context-dependence of appropriate institutions

– E.g., industrial policies in developing countries

When globalization clashes with domestic regulatory arrangements

• Labor standards– Domestic labor laws protect workers from displacement through the hiring of

child labor; should trade be allowed to contravene this norm?

• Environmental, health and safety standards– If European citizenry want to apply a higher precautionary standard than

other countries, should trade rules prevent them?

• Regulatory spillovers– Should countries allow free trade in financial assets by default, even if these

assets are poorly regulated by issuing jurisdictions (e.g., trade in CDOs)

• Regulatory “takings”– Should foreign firms in the U.S. receive greater protection from domestic

policy changes than domestic firms (as NAFTA and BITs may require)?

• Currency “manipulation”– Does it make sense that WTO rules permit countervailing for export duties,

but not for undervalued currencies?

When globalization clashes with domestic regulatory arrangements

• Redistributive provision of social insurance– If taxation of capital and skilled professionals has historically helped fund

social insurance programs, should their mobility be allowed to undercut this “social compact”?

• Trade versus technological change– Domestically, R&D and technological progress are highly regulated (cf.

stem cell research, GMOs); should trade, which is analogous to technological change, be left unregulated as a rule?

In each of these cases, the choice is between deep economic integration (minimization of transaction costs at the border) and the maintenance of domestic “difference.” Each case involves difficult questions, without clear-cut answers. The salience of the trade-offs increases with services off-shoring.

• Is there evidence that more than narrow self-interest is at work in rich countries?– Greater concern about foreign labor practices in skill-rich

congressional districts (Krueger 1996) – Anti-trade attitudes determined only in part by labor-market

impacts; values and norms seem to matter too (Mayda and Rodrik 2005)

• Women and individuals with high levels of “neighborhood attachment” are more protectionist

– Positive willingness to pay by rich-country consumers for improved labor standards in poor nations (Hiscox and Smyth, 2006)

When globalization clashes with domestic regulatory arrangements

When globalization clashes with domestic regulatory arrangements:

developing countries• Trade regime

– Agreements on subsidies, TRIMs, TRIPs, and other negotiations on services narrowing room for “industrial policies”

• International capital markets– Financial codes and standards no roles for development

banking and credit market interventions

• Monetary rules– CB independence and “free floating” no role for exchange

rate as developmental policy instrument • FTAs and BITs

– Further restrictions in all areas above

Democratic politics

The political trilemma of the world economy

Golden Straitjacket

Pick two, any two

Global Federalism

Bretton Woods compromise

National self-determination

Deep economic integration

Discussion• Golden straitjacket

– Gold standard, and its collapse in interwar period– Convertibility Law in Argentina (1991-2001)

• The exception that proves the rule

• Global federalism– EU model

• From nation states to EU members

– The U.S. analogy (van Doren; Tomasi)• From the articles of confederation to a federal political union

– Possible to replicate and extend?

• Bretton Woods compromise– Why did it collapse?– A more feasible alternative for the future?

• Negotiating reciprocal “policy space” instead of reciprocal market access• Will return in next section

A critique (after Keohane et al.)

“Fallacious” arguments:

• Globalization undercuts legal sovereignty– No, since democratic sovereign states ought to be free to enter into

binding legal contracts with each other– Nothing inherently undemocratic about “delegation”

• Existing polities always adhere to high democratic standards– No, and international rules may enhance democratic processes

• Constitutional democracy must maximize popular participation– No, participation is only one among several values (other being

deliberation, suppression of factions, and minority inclusion)– The role of checks and balances and insulated institutions (e.g.

constitutional court)

How do these counter-arguments apply to the examples we considered earlier?

Are there counter-counter-arguments to these?

What kind of global institutions?

• A look back at history• Can multilateral institutions be designed in ways that are

compatible with (and in fact enhance) democracy?\• And how much economic globalization would such

institutions permit?

Where do the rules come from?Who/what provides the institutional infrastructure of global

trade?

• Mercantilism– State power + chartered trading companies

• Classical liberalism– Britain and other big powers’ formal and informal empires– Informal cooperation among central banks

• Interwar period– ?

• Bretton Woods– U.S. power + multilateral institutions (IMF, GATT)

• Post-1990 globalization– U.S., regional institutions (EU), IMF, WTO

A trend from exercise of naked power to international cooperation?

“Democracy-enhancing multilateralism”

How international institutions can enhance democracy:• offsetting factions

– E.g., prevent protectionist special interests from getting the upper hand (by strengthening the president over congress, international adjudication in WTO)

– Providing credibility and commitment by tying a government’s hands – [But not always: TRIPs, AD, KAL, …]

• protecting minority rights– E.g., human rights norms and conventions

• enhancing the quality of democratic deliberation– E.g., through more scientific assessment of policies in health and

environmental areas– [But not always: int’l agreements with WTO, IMF are used to curtail

debate in many cases]

“Empirical evidence shows that multilateralism helps combat dominant factions, protects vulnerable minorities, and enhances democracy’s epistemic virtues.”

Conditions under which DEM is more likely

• “multilateral institutions in which countries with well-functioning domestic constitutional democratic procedures predominate are more likely to function in such a way as to enhance domestic democracy than those dominated by nondemocracies”

• “multilateral institutions that generate and involve civil society networks and organizations can thereby enhance transnational discussions, creating new forms of participation that may partially compensate for participatory forms that are lost”

• “smaller and more homogeneous societies may have more to lose in terms of citizen participation by shifting some decision making toward multilateral institutions”

How much economic globalization would DEM permit?

• Deep integration, or shallow integration?• Under what conditions the former, and what conditions

the latter?– Is EU a good candidate for deep integration? East Asia?

• If deep integration, whose standards will prevail?– The race to the bottom or the top?

• If shallow integration, what kind of restrictions are legitimate and which not?– Should countries be allowed to restrict international exchange to

prevent the undermining of domestic regulations?• Taxes, environmental policy, labor standards, financial regulation

– Example: if the U.S. passes more stringent carbon rules, is it OK to restrict imports from countries with more permissive standards?

Application: the offshoring challenge

Blinder: “The normal gains from trade mean that the world as a whole cannot lose from increases in productivity, and the United States and other industrial countries have not only weathered but also benefited from comparable changes in the past. But in order to do so again, the governments and societies of the developed world must face up to the massive, complex, and multifaceted challenges that offshoring will bring. National data systems, trade policies, educational systems, social welfare programs, and politics all must adapt to new realities. Unfortunately, none of this is happening now.

• What is the nature of the challenge?– Most people employed in services, much of which may become tradable– Not unemployment, but restructuring

• How are democracies likely to respond?– Globalization backlash and protectionism, or training/safety

nets/adjustment assistance• How can international institutions help (or hurt)?