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The Clash of Globalizations

Essays on the Political Economy of Trade and Development Policy

Wimbledon Publishing Company

INTRODUCING THE CLASH OF GLOBALIZATIONS

By the turn of the century global trade talks seemed destined to raise the roof of low politics, where international political economy has long been relegated. Large street protests accompanied negotiations, heads of state and hopefuls discussed trade in public and on campaign trails at least as much as security, and the media followed it all in paparazzi-like fashion.

What a difference a decade makes. By 2013 global trade talks at the World Trade Organization (WTO) had come to a complete standstill. None of the major players – the United States, Europe, emerging markets or global justice protestors – had been willing to significantly engage since at best 2008.

For the first time in the history of global trade negotiations, rather than a clash among Western interests, deadlock among negotiators has been a function of a clash between industrialized countries and developing countries with newfound economic power. The seeds of this clash can be found in the Uruguay Round (1986 to 1994), where a deal was struck whereby the industrialized nations traded market access to their large and growing economies for domestic regulatory changes in the developing world in the areas of investment law, intellectual property, services and beyond (Narlikar 2003).

This book collects a number of essays that ask the following questions: To what extent is the global trading regime reducing the ability of nation-states to pursue policies for financial stability and economic growth, and what political factors explain such changes in policy space over time, across different types of trade treaties and across nations?

The essays in this book show that there was a significant constraining of policy space under the Uruguay Round, but there is still a significant amount of room to maneuver for developing countries. However, many regional and bilateral deals, especially with the United States, severely restrict the ability of developing nations to amply deploy a range of development strategies for stability, growth and development.

In the latest round of WTO talks, many emerging market and developing economies saw the benefits of further global trade liberalization as relatively small, and the costs as being quite significant in terms of the loss of "policy space" they see as necessary to develop their economies or stay in office. The WTO's standstill can thus be seen as a relative success from their standpoint. The WTO as an institution for disputes and monitoring remains intact, but it does not further impede regulatory changes at the domestic level that are politically and sometimes economically costly. And with respect to intellectual property rules and public health at least, the developing world has been able to gain back some policy space.

Such findings lead me to characterize twenty-first-century trade politics, at the global level at least, as a "clash of globalizations" whereby developed nations see it as in their interest to promote a global trade regime that helps solidify and expand their current (or static) comparative advantage in capital and knowledge-intensive goods and services. Many developing nations see it as in their interest to build upon their current comparative advantage in primary commodities and light manufacturing and expand into new, more value-added intensive areas where someday they might have a comparative advantage.

The key difference between the recent round of talks – referred to as the Doha Round – and past rounds, is that developing nations have had the economic and political power to refuse industrialized country proposals and to put forth an alternative set of negotiating demands that industrialized countries have to take seriously. Economic power of course isn't the only factor that explains the difference, but it is key among a confluence of factors that also include institutional structure, domestic politics, currency fluctuations and ideas about globalization.

These two approaches to globalization can each be seen as rational. Each has been successful in maintaining or raising living standards for their respective citizens. This at least partly explains why the WTO is in deadlock, why the WTO in relative terms still grants developing nations relatively more policy space (than North–South bilateral investment treaties (BITs) and preferential trade agreements (PTAs)) to pursue their own development strategies, and why regional and bilateral trade treaties have proliferated to such a degree that they may threaten the global trade regime – a regime that has just started to generate more equal outcomes.

Varieties of Globalization and the Trade Regime

During the postwar era many countries deployed a variant of what John Ruggie (1983) called "embedded liberalism" – global trade and investment liberalization "embedded" within national-level institutional frameworks to promote domestic economic growth and financial stability. As is the case in the industrialized world, where there are numerous "varieties" of industrial capitalism, there have been varying regimes of embeddedness across the developing world as well. The key difference between embedded liberalism in the industrialized countries and in the developing world is that, in the industrialized North, the interest was to maintain a high level of industrialization and stability, whereas, in the developing world, the goal was to obtain a satisfactory standard of living and stability for their populations. As countries seek to re-embed markets in the twenty-first century, these different goals persist. Such goals translate into different sets of interests and negotiation stances in trade politics.

Similar to the experiences of industrialized countries, embedded liberalism lost momentum in the developing world beginning in the 1980s (more so in Latin American than in East Asia). For close to two decades the "Washington Consensus" approach characterized much of developing country economic policy – an approach that stresses the liberalization of trade and investment alongside the general reduction of the role of the state in economic affairs. Though many nations still espouse the Washington Consensus approach, some nations such as Brazil, South Africa, India, China, Malaysia and others began to re-embed markets with state activity to diversify economies and reach global markets with the goal of raising living standards. These nations represent a variety of globalization that has not received much attention in academic and policy circles. Indeed, some treatments of China and Brazil attribute the growth of those nations to "globalizing" although both nations have done so with a mix of industrial policy and state-facilitated macromanagement for development.

There is an enormous literature in political economy circles known as the "varieties of capitalism" literature. The originators of this body of work, Peter Hall and David Soskice (2001), focused mainly on the West and keenly categorized industrial capitalism as having "liberal market economies" that are more market-based (US, UK) and "coordinated market economies" where the state plays a stronger role in coordinating market activity (Scandinavia, Germany, Japan).

The core of the "varieties of capitalism" literature is largely focused on varieties of industrial capitalism in the West. However, a related discourse has been occurring among political economists of economic development, albeit under a different guise (standout exceptions are Schneider 2009 and Breslin 2007). In the 1980s and the 1990s there was significant attention paid by political economists to the role of the state in economic development (the classic summary volume is Woo-Cumings 1999). This literature, which focused on East Asian nations beginning with Japan, as well as some Latin American nations (especially Brazil and Mexico in the early 1980s), suggested that:

In states that were late to industrialize, the state itself led the industrialization drive, that is, it took on developmental functions. These two differing orientations toward private economic activities, the regulatory orientation and the developmental orientation, produced two different kinds of business–government relationships. The United States is a good example of a state in which the regulatory orientation predominates, whereas Japan is a good example of a state in which the developmental orientation predominates. A regulatory, or market- rational, state concerns itself with the forms and procedures – the rules, if you will – of economic competition, but it does not concern itself with substantive matters. (Johnson 1982, 19)

The two literatures have never been neatly knit together, but a global look at economies and the role of the state would put many developmental states into a separate "variety" of capitalism. In today's light, it should be stressed that globalization of trade, or at least export orientation, was the key goal of the most successful developmental states in Asia. And that the most significant emerging market players in the WTO and beyond are at least hybrid developmental states. While many of those nations that were developmental states in the past are not so today, such as South Korea, a new crop has arisen. Today, China is the exemplar developmental state, and Brazil, South Africa and India today are lesser variants as well. It should also be noted that developmentalism is not simply a state-centric "decision" but the outcome of a political process. In the case of Brazil, for instance, decision makers in the government who subscribe to a more developmentalist perspective are bolstered by (or in office because of) a domestic industrial or service class that cannot yet compete with its industrialized country counterparts.

This "variety" of globalization – one where developing countries seek to integrate with the world economy in order to achieve a higher standard of living by having the state play a key role diversifying their product and export base – stands in contrast with the liberal market economy model and to some extent with the coordinated market economy models found in the West. In parallel to the description of embedded liberalism above, Western nations seek to maintain and expand global markets for those sectors where they enjoy an existing (or static) comparative advantage. Developing countries, at least some of them, seek to change the underlying structure of their economies over time and someday gain a comparative advantage in a broader set of sectors. The state may play a key role in such diversification.

What is clear is that liberal market economies pursue the most liberal trading arrangements, as do coordinated market economies from Europe, though to a lesser extent (see Gallagher and Thrasher 2010). Western nations are seeking to consolidate and expand their current comparative advantages on a global level. Let us call them "consolidating globalizers." Meanwhile, poor and middle-income countries in other regions have a different variant of globalizing capitalism. They are "developmental globalizers" that are still working the right mix of markets and states in order to achieve higher standards of living.

Emerging market and developing countries have been growing faster than their industrialized counterparts since the turn of the century. The developing world "took off" in terms of gross domestic product (GDP) per capita growth from 2000 to 2008, then dipped as the industrialized world did due to the financial crisis. Developing countries grew 4.7 percent per annum in per capita terms, whereas the industrialized nations grew at 1.5 percent. Since the trough in 2012, developing countries have grown 5.5 percent versus 0.46 percent in the North.

A significant amount of this growth was due to China's emergence in the world economy and its subsequent demand for developing country goods (especially commodities), and the price effect that comes with such demand. China's growth is at least in part a function of developmental state policies, and other large emerging and developing nations such as India, Brazil and South Africa – all the most significant WTO players – could be called neodevelopmental states as well. We could call this variety "developmental globalization." All of these nations have been slow to open their capital accounts to foreign investment, and maintain capital controls to that end. All engage in industrial and state-led innovation policy to some degree. And together these nations form the heads of significant coalitions in global trade talks that have pushed back on industrialized country proposals aimed at making developing countries look more like industrialized liberal market economies. They have clout because these nations are fast growing markets to which firms and investors want greater access. They have clout because (in purchasing power parity terms) they lead an emerging market world that has a larger share of GDP in the world economy than Western nations. Western nations want that market share.

Development success stories from the twentieth century all struck a unique blend between state and markets not because they just lifted certain policies off the shelf – they did so because they got the political economy of industrialization right. Indeed, the risks of trying to deploy capital controls and industrial policy can be at least as concerning as unbridled liberalization. Two key problems can be rent seeking and picking winners (Krueger 1996). The nations with the most success find a way to at least partly circumvent these problems. To circumvent the rent-seeking problem, political scientists have shown that successful industrializers have had states that were "embedded" in the private sector while maintaining "autonomy" from sectional elite interests seeking rents. State agencies that are charged with correcting market failures have to maintain constant communication and input with the private sector (Evans 1995).

Perhaps most importantly, the problem of picking winners has been circumvented by having a good deal of discipline over private actors. Alice Amsden (2001) has referred to the need for "reciprocal control mechanisms." A control mechanism is "a set of institutions that disciplines economic behavior based on a feedback of information that has been sensed and assessed" (2003, 43). In other words, firms have performance requirements that, when they are not met, are no longer supported. The most successful industrializers were able to abandon projects that were not performing; in other countries, such projects were perpetuated because bureaucrats became hijacked by business interests who were dependent on the state.

These two varieties of globalization – a consolidating globalization in the North and a developmental globalization in the South – clash in global trade talks. The theoretical underpinning of the WTO is to aid nations in maximizing their static comparative advantage. This is solidified by the principles of nondiscrimination and national treatment. Nondiscrimination entails treating imports from a nation on the same basis as that given to the most favored other nation. National treatment means that foreign sellers and producers receive the same treatment in a host nation as domestic firms do. Until the last (Uruguay) round of global trade talks, the WTO's predecessor, the General Agreement on Tariffs and Trade (GATT), largely pertained to Western countries and when developing countries took part there were a number of exceptions. All that changed with the establishment of the WTO in 1995, as did the political economy of trade policy.

More than Market Power at the WTO

Developing countries pursuing a more developmental variety of globalization were able to capitalize on their newfound economic power in the Doha Round. In previous trade rounds industrialized nations were able to use their market power to extract concessions by offering market access for regulatory change in the South. In a turnaround, beginning at the turn of the century the developing nations were able to use their market power to exert bargaining power at the WTO. But there was more to it than having a different set of ideas about globalization and development and having newfound economic power. Developing country policies were backed by domestic political actors. Perhaps most importantly, the institutional structure of the WTO worked to their benefit as well.

Many developing countries have sought to globalize in order to achieve a dynamic comparative advantage (Amsden 2001; Wade 2004a). As Amsden suggests, in many cases that entails favoring domestic firms or industries over foreign ones, and thus at least in spirit would violate the principle of national treatment. Tariffs in the world economy are relatively low by historical standards and therefore this clash is often not seen to occur in discussions over goods tariffs. What has gone unrecognized by some is that trade treaties are no longer about trade in goods, but rather are about domestic regulations that could be seen as violating the two principles. Robert Lawrence (1996) has referred to this as "deep" integration, whereas trade talks of yesteryear were "shallow" integration arrangements that just dealt with tariffs and quotas at the economic borders of nations. New rules for services, investment and intellectual property all constrain the ability to maintain financial stability and diversify the product base of a developing economy.

As China, India, Brazil, South Africa and others have continued to grow their economies at a significant pace since the turn of the century, they (and their domestic constituents) have fought hard to maintain at minimum the level of policy space they have at the WTO. Developed nations desperately want market access to these dynamically growing economies, as the industrialized growth is lower and markets have become saturated. At the WTO, this meant rejecting the proposals by the developed world to deepen international investment rules, intellectual property rules, government procurement and financial services (the so-called "Singapore Issues" and others).

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Excerpted from The Clash of Globalizations by Kevin P. Gallagher. Copyright © 2013 Kevin P. Gallagher. Excerpted by permission of Wimbledon Publishing Company.
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