Politics of Globalization

Political Economy of the Global SouthProf. Tyson Roberts

Does Globalization Promote Democracy?

Bhagwati: Yes

• Directly: Rural farmers can bypass dominant classes and take produce directly to market thanks to modern information technology

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State-run marketing boards enabled the state to exploit farmers in the 1960s-70s

Today, farmers & fishermen in India use computers & cell phones to bypass middleman, get higher prices

Does Globalization Promote Democracy?

Bhagwati: Yes

• Directly: Rural farmers can bypass dominant classes and take produce directly to market thanks to modern information technology

• Indirectly: Globalization => Economic Development => Social Development => Democratization

Source: PWT & Polity IV via QoG; Year: 2007

Does economic development really lead to democratization?

• Most countries with high income level and a large middle class are democratic

• But authoritarian regimes that deliver economic growth are supported by middle class– Brazil in 1970s, China today

• More on economic growth and democracy next week!

“democracy is constrained by globalization, even as globalization promotes it” (Bhagwati p. 96)

Why might globalization constrain democracy?

Clues from “Our Brand is Crisis”?

Why might globalization constrain democracy?

• The majority of most countries in the Global South are poor

• Poor people, given political power, may want to expropriate/redistribute property from the rich

• This can lean to capital (physical and human) outflow

• In order to prevent capital from fleeing, democracy may be sacrificed

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The political trilemma of the global economy (Rodrik 2011)

Democratic politics

Hyperglobalization Nation state

Bretton Woods com

promise

Global

gove

rnan

ce

“Golden Straitjacket”

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Hyperglobalization

• Elimination of all trade barriers– Tariffs, quotas, subsidies, standards favoring local

labor• Elimination of all capital controls– Currency exchange, FDI, financial securities

In Global North countries, increased exposure trade leads to higher social spending to address disruption

However, many Global South countries do not have the capacity to do this

• How did globalization affect the masses in Bolivia?

• Was Bolivia unable to use government social spending to address disruptions?

• If not, why?

Argentina’s attempt to harness (hyper)globalization for

economic growth

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Argentina introduced convertibility (including currency board) to kill inflation

Domingo Cavallo“a man of action”

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Out with the old, in with the new

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One source of foreign exchange was rapid privatization to foreign firms, sometimes using unconstitutional emergency decrees

(Saba and Manzetti 1997)

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Many firms repatriated profits, continuing pressure on the peso.International crises & strong dollar forced Argentina to raise

interest rates to maintain peg, raising the cost of capital

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The high cost of capital made borrowing expensiveThe overvalued exchange rate made exports expensive

The economy shrank, the government adopted austerity budgetDepositors got nervous, began to pull money from banks

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Government limited withdrawalsArgentinians were not pleased

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Dollarization abandoned, peso lost 75% of its valueSavings and purchasing power decimated

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Argentinians were not pleased

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Over time, lower borrowing costs & cheaper exports helped the economy (in spite of default reputation costs) until the start of

the global financial crisis

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ISI policies and commodity prices enabled growth for some time but it was unsustainable. Inflation, capital

flight, followed by new capital controls

Where did Argentina go wrong?

• Pegging to the dollar, with full convertibility, was a risky strategy– Stronger dollar => stronger peso => lower exports

=> lower growth– Full convertibility doesn’t allow for capital controls

• Capital controls were a successful part of Bretton Woods that the IMF now agrees can be useful

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The political trilemma of the global economy (Rodrik 2011)

Democratic politics

Hyperglobalization Nation state

Bretton Woods com

promise

Global

gove

rnan

ce

“Golden Straitjacket”

How hyperglobalization impinges on democratic choices

• Labor standards• Corporate tax competition• Health and safety standards• “Regulatory takings” – regulations that favor

domestic over foreign producers• Industrial policies in developing nations

Morales thus far has been successful in compromising globalization in favor of redistribution

The economy in Bolivia has been growing under Morales …

Mostly because of gas revenues

Despite Morales’s nationalization policies, investors are happy to invest in gas opportunities – and Morales is

happy to accept the FDI

Morales’s government uses the funds to invest in public spending

Just as Global North countries do

Resulting in income growth, reduced poverty rates, etc.

WTO and Democracy

• WTO agreements can trump democratically passed laws

• For example, WTO ruled against US in meat-labeling case

• In developing countries, WTO restrictions can block developmental strategies such as infant industry protection

• However, the WTO can also promote economic development – e.g., Brazil won coffee subsidy case against US; China won tire case against US

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Conclusions

• Globalization brings economic benefits:– Increased trade, increased access to capital or

investment opportunities• However, globalization can also be disruptive – Cheap imports destroy some jobs

• And globalalization constrains governments– To attract and retain capital, the government has

less discretion to meet voter demands for redistribution, etc.

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Conclusions

• Wealthy democracies with strong state capacity (often in Global North) can address disruptive effects of globalization with social spending

• Some Global South countries can afford such social spending, but not all => tradeoff between globalization and democracy

• Globalization is necessary for strong long-term economic growth, but hyperglobalization often undermines democracy; instability harms growth – Argentina: convertibility law => voter revolt– Bolivia: Gas capitalization => voter revolt