Chapter ThreePerspectives on Globalization and Governance

David G. Skidmorein Lairson and Skidmore, International Political Economy

In this chapter, we review the major trends that have shaped the path of globalization and

compare perspectives on how globalization should be governed. A good place to begin is with

the term “globalization” itself, which first appeared in a Western dictionary in 19611 and has

come into widespread academic and popular use only since the early 1980s. In fact, globalization

has rapidly come to be viewed as a central motif of modern life, whether for good or for ill

depending upon one’s perspective. One indicator of the growing ubiquity of globalization in

intellectual and popular discourse is that the number of books focusing upon globalization has

risen from less than six hundred in 1980 to over 38,000 today.2

The contemporary fascination with globalization – and especially the sense that it is

something fundamentally new and transformative - is puzzling from several angles. The first

humans originated in Africa and have since gradually migrated to every habitable continent,

forming diverse cultures and civilizations in the process. If we are considering exchange across

distinct populations, flows of people, goods and ideas began to link the great civilizations of

China and the West across the Silk Roads over two millennia ago. The Age of Exploration, by

which European seafarers made their way to Africa, Asian and the Americas, setting the stage

for both commerce and conquest, dates back six centuries and more. And the modern political

economy, based upon the liberal precept of trade as a process of mutually beneficial exchange to

1 Interview with Nayan Chanda, “Globalization Has a Long History,” SSRC, June 27,

2007, http://www.ssrc.org/features/view/globalization-has-a-long-history/.

2 Mauro Guillen’s Indicators of Globalization, 1980-2010, http://www-

management.wharton.upenn.edu/guillen/2010-docs/Global_Table_1980-2010.pdf.

be encouraged, rather than tightly controlled, by governments, can be traced to the lifting of

British tariffs on corn in the 1830s. Clearly, globalization has a long history that precedes the

popularity of the word itself.3

A second puzzling aspect of what has come to be called the globalization debate is that the

meaning of the term is so broad, varied and nebulous as to ensure confusion and

misunderstanding. One academic blogger, Eric Beerkins has assembled a lengthy list of quotes

that attempt to define, affirm, dismiss or pass judgment over globalization

(http://blog.beerkens.info/global.htm). Skimming through the list, it becomes apparent that

authors are referring to quite different phenomenon, ranging from cultural homogenization to

intensifying information networks, to the growth of global civil society, to threats to the global

commons, to the thickening of global governance and to the quickening movements of goods,

services, money and people across national borders. This raises the question of whether a term

that refers to so many different things is too imprecise to have meaning.

A final puzzle is why globalization has become such a source of intense controversy. The

first major popular demonstration with a specifically anti-globalization agenda took place at the

1999 meeting of the World Trade Organization (WTO) in Seattle, Washington. Protesters had a

variety of complaints about how trade liberalization and intensifying flows of goods and finance

affected their lives. Some highlighted growing inequality. Others underlined threats to the global

environment. Others pointed to the undemocratic character of the global institutions that

increasingly set the rules governing globalization. Among the 40,000 demonstrators, a small

3 For a comprehensive overview of these historical movements, consult Ian Morris, Why

the West Rules – For Now: The Patterns of History and What They Reveal about the

Future, New York: Farrar, Straus and Giroux, 2010 and Jared Diamond, Guns Germs and

Steel, The Fate of Human Societies, New York: W.W. Norton & Co., 2005.

number skirmished with police in the streets, a somewhat larger number engaged in acts of

peaceful civil disobedience while the great majority marched under the slogan – aimed at the

WTO – “Fix it or nix it.”4 In the aftermath of Seattle, meetings of the WTO, the IMF and the

World Bank face the prospect of large protests, with one result that conference organizers now

often schedule such meetings in remote or undemocratic settings where large-scale

demonstrations can be avoided.

Of course, globalization also has ardent defenders. Indeed, pro-globalizers coalesced in the

1990s around a set of economic and political prescriptions for development offered by economist

John Williamson that came to be called the Washington Consensus. While we will put off

detailed discussion of the Washington Consensus until later in this chapter, the major thrust was

an unapologetic embrace of free markets, free trade and a reduced government role in economic

management. Advocates of globalization associated it with growing prosperity, the spread of

democratic government and a more peaceful world built around mutually beneficial webs of

commerce.

Popular perceptions of globalization are mostly positive. A spring, 2011 survey

(http://www.pewglobal.org/2011/07/13/chapter-5-economic-issues/) by the PEW Global

Attitudes Project reveals that two thirds or more of respondents in all twenty one countries

surveyed felt that international trade and business ties were very good or somewhat good for

their country (see Table x.x). In most cases, this figure exceeded 80%. Americans were the most

skeptical, with only 18% convinced that international trade and business were “very good” for

the United States. With the exceptions of Japan, Argentina and Indonesia, majorities in the

remaining countries surveyed agreed that people are better off in free market economies.

4 Janet Thomas, The Battle in Seattle: The Story Behind and Beyond the WTO

Demonstration, Fulcrum Publishing, 2000.

“China Seen as Overtaking U.S. as Global Superpower,” PEW Global Attitudes Project,

chapter 5, July 13, 2011, http://www.pewglobal.org/2011/07/13/chapter-5-economic-issues/

Nevertheless, an earlier PEW survey (2009 http://www.pewglobal.org/2009/07/23/chapter-

5-views-on-trade-and-globalization/) also suggested that nationalism continues to influence

economic thinking in most countries. Amidst the greatest global economic downturn since the

1930s, large majorities in 25 countries agreed that their own governments should act to protect

their own country economically, even if other countries object. There was similar majority

support across all countries for the statement: “Our way of life needs to be protected against

foreign influence.” Also, majorities in 22 of 25 countries surveyed supported stricter immigration

controls. Faith in free markets has also been on the wane in recent years. Between 2007 and

2012, PEW surveys showed erosion in the belief that people are better off in a free market

economy in 13 of the 15 countries included in both years. The decline exceeded 10 percentage

points in 7 of these countries. Nevertheless, faith in the free market still drew the support of 50%

or more of respondents in 13 of the 20 countries surveyed in 2012.5

To make better sense of these conflicting perspectives and to rescue the concept of

globalization from the conceptual morass into which it has sunk, we approach the topic with

several precepts in mind. First, we focus in particular on the political economy of globalization.

From this angle, globalization refers to the intensification over time in the flows of goods,

services, money, people and ideas among nations as compared with such flows within nations.

Globalization is thus not an end state, but a gradually unfolding process of growing international

interdependence.

It is also relative. For instance, trade and investment flows across national borders might

increase, but if they do so less quickly than the rate of growth in domestic transactions, then we

would conclude that globalization of the world economy had actually contracted over the

5 Pew Research Center Global Attitudes Project, “Pervasive Gloom About the World

Economy,” July 12, 2012,

relevant time period. In other words, the average person in such circumstances would become

less dependent, in relative terms, upon economic exchanges across borders as compared with

exchanges within the borders of one’s own country. Since there in fact have been periods when

this has been the case (most recently during the 2008-09 global financial crisis), we know that

globalization is not irreversible. One reason for emphasizing the relative intensity of economic

flows within and among states is that it is the balance between them that is most relevant to

political debates over globalization.

Considered in this way, the world economy as a whole has experienced a gradual process of

globalization over at least the past two centuries, although with significant reversals during

particular periods. The pace of globalization has generally accelerated over the past several

decades. Yet we also conclude that the globalization process remains very much incomplete. In

all but a handful of smaller countries, most people depend far more heavily upon economic

exchange taking place within the domestic economy than they do upon international transactions.

Globalization is quite uneven across societies, institutions and various types of exchange. The

emergence of global civil society is, at best, nascent. International economic institutions remain

largely the creations of states and pose only a limited challenge to the power and authority of

national governments. Globalization is neither inevitable nor irreversible. It is largely a product

of political decisions and has in the recent past shifted into reverse gear, at least for a time.

In general, we argue that it makes little sense to cast blankets of praise or blame over a

phenomenon as complex and multi-faceted as contemporary globalization. Indeed, globalization

is too often treated as a cause or cure for problems that have little to do with globalization as

such and that must be approached through a more fine-grained analysis.

This chapter does not attempt to review the full breadth of the globalization debate.

Particular aspects of it, such as financial stability, or inequality or protecting the global

commons, are addressed at various points in other parts of the book. Our goals in this chapter are

two fold:

First, we review the major trends related to globalization in the world economy. We find

that globalization is real, significant and ongoing. At the same time, globalization is also an

uneven process and its pervasiveness and effects are often exaggerated.

Second, we examine three perspectives on how the global economy should be governed. We

adopt this approach, rather than toting up globalization’s pros and cons, because governance

focuses on the locus and processes by which decisions over how to deal with both the benefits

and drawbacks of globalization are made. This draws our attention to those aspects of the

globalization debate that are most relevant to a book on political economy – how interested

groups work through institutions to shape political and economic outcomes. Another advantage

of this approach is that questions of governance allow us to move beyond popular punditry to

address the relevant theoretical literatures that shed light on such choices.

Globalization can take varied forms with quite different outcomes depending upon how the

rules of the game are structured. We focus on three possible governance arrangements: market-

led globalization, nation-state-led globalization and (global) institution-led globalization.

Obviously, these are not mutually exclusive. Any global system is likely to include markets,

states and international institutions. The question is where the balance among these entities is to

be struck and how regulation is to be managed: by market participants themselves, by individual

states or by overarching global rules and institutions.

Trends in Globalization

We begin by charting some of the key trends and features that have shaped the evolution of

the global economy.

Governments have lowered legal and political barriers to the movement of goods,

services and finance across borders.

The General Agreement on Tariffs and Trade (GATT), signed in 1947 established a process

designed to gradually lower tariffs, quotas and other government-imposed impediments to trade.

The core principals guiding the multiple negotiating rounds carried out over subsequent decades

were reciprocity (concessions by one country should be matched by trading partners), non-

discrimination (imports from all member countries should receive the same treatment and local

firms should not be favored over foreign firms), transparency (trade regulations and statistics

should be openly shared) and liberalization (the process as a whole should reduce barriers to

trade over time). Over time, the membership of GATT grew in number, the scope of trade

barriers addressed broadened (including so-called non-tariff barriers, such as discriminatory

subsidies and regulations) and, with the transition to the World Trade Organization in 1995, the

rules governing global trade became more formal while dispute resolution and enforcement

mechanisms became more clearly defined and legally binding.

The global trading order served to virtually eliminate the use of quotas and brought average

tariff levels down from 40% in the late 1940s to roughly 4% today. Barriers to trade in

manufacturing goods fell the most during the early rounds of GATT negotiations. More recently,

restrictions on trade in textiles, previously allowed under the GATT, have been largely

eliminated and some progress has been made in liberalizing trade in services. Liberalization has

made the least progress in agriculture, which remains heavily subsidized by many governments

and encumbered by rules restricting both imports and exports as well as differing standards for

food safety and quality. Figure x.x summarizes the history of the post-World War II trade

regime.

Richard Baldwin, “21st Century Regionalism: Filling the Gap Between 21st Century Trade and

20th Century Trade Rules,” World Trade Organization Economic Research and Statistics

Division, Paper ERSD-2011-08, May 23, 2011;

http://www.wto.org/english/res_e/reser_e/ersd201108_e.pdf

Nevertheless, further progress toward global trade liberalization has stalled in recent years.

The WTO-sponsored Doha Round of negotiations has dragged on for over a decade with no end

in sight. The reasons for slower progress on the global front are several: with a growing

membership, the requirement that any WTO agreement be adopted by consensus has become a

more significant hurdle; negotiations have come to address deeper and more sensitive issues

traditionally considered domestic in nature; differences between developed and developing

nations have widened over some issues; and the more formal and binding character of WTO

commitments leave governments less flexibility in building domestic consensus in favor of

liberation among affected interests.

Another sort of barrier arises from policies that discriminate against foreign investors as

compared with domestic investors or that create uncertain legal protections for all investors,

whether domestic or foreign. These kinds of risks discourage otherwise profitable movements of

foreign direct investment. There is no global regime that governs such policies, aside from some

very general and rather weak commitments built into the WTO. As a result, governments seeking

fair and equal treatment for their firms that invest abroad have entered into bilateral investment

treaties (BITs) with one another. Figure x.x shows that the 1990s represented a peak in the

number of new BITs arrived at. In general, the past two decades have brought a growing

cumulative number of BITs, reaching close to 2400 by 2007.

Explosion of Bilateral Investment Treaties

Source: UNCTAD’s World Investment Report, various issues; Richard Baldwin, “21st Century Regionalism: Filling the Gap Between 21st Century Trade and 20th Century Trade Rules,” World Trade Organization Economic Research and Statistics Division, Paper ERSD-2011-08, May 23, 2011; http://www.wto.org/english/res_e/reser_e/ersd201108_e.pdf

Such agreements lower the risks to foreign investment and facilitate the transnationalization

of production into complex networks that spread various tasks, such as product design and

engineering, extraction of raw materials, fabrication of parts, final assembly, marketing and

sales, across multiple national economies and involving layers of suppliers and sub-contractors.

As a result, the transnational corporation has become the preeminent agent of globalization. In

2005, 77,000 transnational corporations controlled 770,000 foreign affiliates, employed 62

million workers and sold goods and services roughly equal to 54% of global GDP (although the

latter figure falls to 11% on a value added basis).6

The declining costs of international transportation and communication have facilitated

globalization.

Government-imposed tariffs and quotas constitute one form of impediment to international

trade. Another is simply distance. Shipping goods across vast oceans or continents adds to the

final cost of the product. Similarly, globe-spanning communications infrastructures are costly to

construct and maintain. Over time, however, one of the major contributing factors to global

economic integration has been the rapidly declining costs of international transportation and

communication, due to improved technologies and infrastructure investments. Figure x.x shows

the relative decline in various types of international transportation and communication linkages

over time on an index with initial prices set at 100.

6 David Held and Anthony McGrew, Globalization/Anti-Globalization: Beyond the Great

Divide, Polity, 2nd edition, 2007, 111. Pankaj Ghemawat, World 3.0: Global Prosperity

and How to Achieve It, Boston, Ma.; Harvard Business Review Press, 2011, 211.

Source: UNDP, INTELSTAT

One key innovation was containerization of non-bulk goods, which began in the 1950s.

Bulk goods, such as corn or oil, can be stored in a ship’s hull. But prior to the 1950s, consumer

goods had to be lashed down on a ship’s deck during transport. Containerization entailed packing

non-bulk goods in boxes that could be loaded and off-loaded from semi-trailers or cargo trains.

This allowed containers to be moved more quickly and stacked upon one another, while also

packing together goods bound for the same destination. Containerization reduced transport time

by 85% and costs by 35%.7

Cheaper transportation combined with rising incomes have also led to increased

international mobility, as illustrated in the growth of tourism (see Graph x.x)

7 Bohlman, Michael T. (September 2001) "ISO's container standards are nothing but good

news" ISO Bulletin (Geneva: International Standards Organization): 12–15.

Source: Internet World Stats Graph by Tom Hale, July 2003; updated by Leila Farahani,

February 2009

The laying of trans-Atlantic and trans-Pacific cables allowed almost instantaneous telegraph

and, later, telephone and internet communication among major cities. Satellites have further

enhanced the speed and lowered the cost of sending words, images and data across long

distances. In 1930, a three minute phone call from New York to London cost several hundred of

today’s dollars. Today, through voice-over-internet protocols, the cost of an international phone

call has been reduced to pennies per call. The rapid spread of mobile phones and computers has

produced expodential increases in communication via email, the internet and social media.

Source: Internet World Stats Graph by Tom Hale, July 2003; updated by Leila Farahani,

February 2009

Most types of international economic exchange have outpaced growth of national

economies.

It is relatively easy to describe the overall pattern of globalization. Trade has grown faster

than national income. Over the long term, the growing weight of international trade is evident in

the fact that exports rose from 1% of global GDP in 1820 to a peak of 29% in 2008.8 (see Figure

x.x). Over the past two decades, in particular, foreign direct investment has grown more quickly

than either trade or national income (see figure x.x).

8 Pankaj Ghemawat, World 3.0: Global Prosperity and How to Achieve It, Boston, Ma.;

Harvard Business Review Press, 2011, 10,27-28.

Source: HM Treasury

Yet other types of financial transactions, such as bank lending, stock and bond purchases

and exchanges of currency have grown even more quickly than foreign direct investment (see

Figure x.x). In 1989, for example, the average daily turnover in foreign currency exchanges was

$590 billion. By 2010, this figure had risen to $4 trillion

(http://www.bis.org/press/p100901.htm). Cross-border banking external assets have risen from

13.7% of world GDP in 1980 to 47.9% in 2010. The cross-border stock of bank loans and

deposits has growth from 13.9% of world GDP in 1980 to 34.9% in 2010.9 As these figures

suggest, finance, rather than trade, is the leading edge of globalization in the world economy.

9 Mauro Guillen’s Indicators of Globalization, 1980-2010, http://www-

management.wharton.upenn.edu/guillen/2010-docs/Global_Table_1980-2010.pdf.

“Regional Capital Flows,” Address by Mr R Battellino, Assistant Governor (Financial

Markets), to the 6TH APEC Future Economic Leaders Think Tank, Sydney, 28 June 2006,

Reserve Bank of Australia, Reserve Bank Bulletin, July, 2006

http://www.rba.gov.au/publications/bulletin/2006/jul/pdf/bu-0706-1.pdf

In short, market participants have responded to lowered political and technological barriers

by seeking profitable opportunities abroad, though the pace of integration has varied across

economic sectors.

Small countries have benefited from globalization more than large countries.

The benefits of free trade are especially pronounced for small countries. This is because

roughly one third of industries experience increasing returns to scale.10 In other words, the unit

cost of a good goes down as the volume of production goes up. Only at high volumes can

producers of such goods achieve favorable economies of scale, which allow profits at low and

globally competitive prices. Confined to service only national markets with limited consumer

demand, producers in small countries cannot achieve economies of scale. Consumers thus pay a

premium for domestically produced goods. Assuming comparative advantage, the same

producers can increase volumes, lower prices and increase profits if given access to global

markets. Likewise, consumers in small countries will enjoy lower prices and greater variety of

choice if given the opportunity to purchase goods produced beyond their nation’s borders. In

large countries, by contrast, local producers may achieve economies of scale even if limited to

servicing the national market alone. While large countries still benefit from trade, they therefore

do so less than small countries. For this reason, small countries are typically far more dependent

upon trade than large countries.

10 Pankaj Ghemawat, World 3.0: Global Prosperity and How to Achieve It, Boston, Ma.;

Harvard Business Review Press, 2011, 70.

The different dependence upon the global economy for small and large countries is evident

in the country rankings produced by the KOF globalization index. For 2012, the top ranked

countries in terms of economic globalization are Singapore, Luxembourg, Ireland, Malta and

Belgium – all small and thus heavily exposed to global markets. By contrast, large countries tend

to rank well down the list – the United States is 79th among 208 countries, Russia comes in at

98th, Brazil ranks 100th, China appears in the 107th position and India is the 129th most globalized

economy.

One consequence of a more open global economy is that small political units become

economically viable. This is perhaps one factor helping to explain the growth in the number of

independent states from 75 after World War II to over 200 countries today.11

Contemporary globalization is neither unprecedented nor irreversible.

The period of 1870 to 1914 witnessed levels of global economic integration that rival and in

some cases exceed those of recent years. Finance and labor, in particular, moved easily and in

great quantities across borders. While levels of trade protection varied across countries,

international trade grew more quickly than national income almost everywhere. Yet this golden

age of globalization collapsed under the weight of two world wars and the Great Depression of

the 1930s. By mid-century, the world economy was again fragmented into a series of largely

self-contained national economies. Viewing this circumstance as not only economically

irrational, but also politically dangerous given perceptions that economic nationalism had set the

stage for World War II, the United States and its allies met at Bretton Woods, New Hampshire in

July, 1944 to create a new set of rules and institutions designed to serve as the foundation for a

new era of global integration. Out of this conference emerged the major international economic

11 Pankaj Ghemawat, World 3.0: Global Prosperity and How to Achieve It, Boston, Ma.; Harvard Business Review Press, 2011, 220.

organizations of the post-World War II era: the General Agreement on Tariffs and Trade

(GATT), the International Monetary Fund (IMF) and the World Bank (WB).

The experience of the interwar period suggests that globalization cannot be taken for

granted. Under the right (or wrong) political circumstances, political leaders may face

overwhelming domestic pressures to cut economic ties with other countries. Business firms

themselves may retreat from international exposure during periods of financial instability or

economic downturn. Thus, the global financial crisis of 2008-09 brought sharp, though

temporary, disruptions to international trade and finance, along with limited, but nevertheless

worrisome, protectionist responses on the part of national governments.12 Nor is globalization the

only form that international economic integration can take. Indeed, as our next trend suggests, it

is unclear whether the current period is dominated by globalization or regionalization.

The global economy has become increasingly segmented into a series of regional

economies.

In place of global trade agreements, recent years have brought an explosion of bilateral and

regional trade deals that lower barriers selectively among small groups of countries. The WTO

has received notification of 511 regional trade agreements (RTAs), most concluded over the past

two decades13. Whether this trend represents a deepening of globalization is uncertain. Some

argue that the growth of RTAs undercuts incentives for progress in global negotiations.

Moreover, whether the lowering of tariffs and other barriers among members of an RTA

creates more trade or merely displaces trade from non-members to members is an empirical

12 Annie Lowrey, “An Increase in Barriers to Trade is Reported,” New York Times, June

22, 2012.

13 World Trade Organization, “Regional Trade Agreements,”

http://www.wto.org/english/tratop_e/region_e/region_e.htm.

question, the answer to which varies across cases. What seems evident is that the proliferation of

RTAs and bilateral trade deals introduces greater legal complexity into the global trade order,

complicating the calculations of business firms and possibly introducing incentives that distort

markets.

Share of Imports with MFN Zero Tariffs, Various RTAs, 1995-2008

Richard Baldwin, “21st Century Regionalism: Filling the Gap Between 21st Century Trade

and 20th Century Trade Rules,” World Trade Organization Economic Research and Statistics

Division, Paper ERSD-2011-08, May 23, 2011;

http://www.wto.org/english/res_e/reser_e/ersd201108_e.pdf

“NAFTA@10: A Preliminary Report,” Foreign Affairs and International Trade Canada,

2003; http://www.international.gc.ca/economist-economiste/analysis-analyse/research-

recherche/10_pre.aspx?view=d

Figure x.x shows that states in North America, Europe and Asia conduct more than half of

their trade with other states within their own region. The concentration of FDI flows is less

marked (Figure x.x), but still exceeds one half of outward-bound FDI for members of the

European Union. Overall global figures on trade and investment thus mask an underlying trend

toward regionalization: most countries trade most intensively with their closest neighbors. This is

due to lower costs of transportation, the geographic concentration of production networks,

greater congruence in consumer tastes among culturally similar societies, fewer language barriers

and the preferential incentives created by regional trade agreements that favor trade among

member states over trade with non-member states.14

Where commonalities such as geographic proximity, cultural and linguistic similarity, past

colonial ties, and closeness in political regime type are lacking, economic ties are generally slow

to form. In this sense, markets are products of the social systems in which they are embedded.

The organizational density of transnational connections has risen.

The number of formal international government organizations (IGOs), addressing issues as

disparate as health, trade, weapons proliferation, international justice and environmental

problems, grew from 36 to 7,350 over the course of the 20th century. Moreover, one study

counted 1,600 international treaties created between 1976 and 1995, giving rise to 100 new

international organizations. The growing density of global civil society has been even more

explosive. The number of international non-governmental organizations (INGOs) mushroomed

from 176 in 1900 to 51,500 in 2000.15

Collectively, this thickening in the organizational architecture of international cooperation

represents a substantial investment in global problem-solving capacity. Within most

governments, virtually every major bureaucratic agency finds itself drawn into regularized

communication, information-sharing and problem-solving with counterpart agencies in other

governments. Among civil society actors, transnational coalitions have developed along many

issue-areas, creating political struggles that cut across traditional national lines.

14 Pankaj Ghemawat, World 3.0: Global Prosperity and How to Achieve It, Boston, Ma.;

Harvard Business Review Press, 2011, 58.

15 David Held and Anthony McGrew, Globalization/Anti-Globalization: Beyond the

Great Divide, Polity, 2nd edition, 2007, 22-23.

The global penetration of local and national economies is uneven and often

exaggerated.

Despite the declining costs of moving goods, people and information across borders, it

remains striking the degree to which most people remain dependent upon local and national

economies. Only 1% of letters physically mailed each year cross a national border. Only 2% of

telephone calling minutes connect people across an international border. From 2006-2008, only

17-18% of internet traffic crossed a national border. Only 21% of U.S. news reporting deals with

international topics and one half of that coverage focuses on U.S. foreign relations. Despite

growth in the numbers of students who study abroad, the overall number of students enrolled

outside of their home country remains only 2%.16

The limits of globalization are also evident in so-called “border effects.” This term refers to

the dampening effects of political borders between two countries on the intensity of economic

exchange even where formal protectionist barriers have been removed. Despite the absence of

tariffs or other formal restrictions on trade between the United States and Canada, for instance,

trade among Canada’s provinces is somewhere between 5 and 10 times as intense as trade

between those provinces and the United States. Price differentials also remain significant.

Borders still serve to inhibit economic exchange even in the absence of protectionist barriers

for several reasons. The need to exchange currencies imposes added costs on cross-border

exchange. Administrative and regulatory differences – everything from labeling requirements to

health and safety standards – force manufacturers in one country to make costly adjustments in

products and processes when selling into a neighboring market. Even differences in language and

16 Pankaj Ghemawat, World 3.0: Global Prosperity and How to Achieve It, Boston, Ma.;

Harvard Business Review Press, 2011, 26-27.

culture make it easier and less costly to market goods in one’s home country as compared with

another country.17

Immigration illustrates the limits of contemporary globalization. First generation immigrants

to the United States have risen from 4.7% of the resident population in 1970 to 12.5% in 2009,

fueling a backlash against the supposed cultural and economic costs of large-scale immigration.

In fact, however, the present level of immigration only mirrors earlier such movements in

American history. Between 1860 and 1920, immigrant levels fluctuated between 13% and 15%

of the U.S. population. At that time, immigrants required no visa to enter the United States and

were typically turned away only in cases where an individual was considered to pose a threat to

public health or safety.18 Today, by contrast, immigration to the United States and most other

countries is highly regulated and sharply restricted.

On a global basis, only 3% of people live outside of the country of their birth – about the

same as in 1910 - and one half of immigrants return to their home country within five years of

their initial move. Sixty percent of international migrants move from one developing country to

another developing country, with most staying within their home region.19 Those who move

instead from a developing country to an already developed country will, on average, experience a

tripling of real income. The relatively few who move from one of the least developed countries

17 Pankaj Ghemawat, World 3.0: Global Prosperity and How to Achieve It, Cambridge,

Ma.: Harvard Business Review Press, 2011, 42-48.

18 "Frequently Requested Statistics on Immigrants in the United States", Aaron Terrazas

and Jeanne Batalova, Migration Policy Institute, October 2009.

19 Pankaj Ghemawat, World 3.0: Global Prosperity and How to Achieve It, Boston, Ma.;

Harvard Business Review Press, 2011, 27.

to a developed country typically enjoy a 15 fold increase in income, a doubling of educational

enrollment and a 16 fold decrease in child mortality.

Given such incentives, the fact that immigration remains so modest is testimony to the

effectiveness of state controls on the movement of people across borders, the inability of the very

poor to afford the costs and risks of travel to distant places and the depth of attachments to

culture, place and family that discourage displacement. Indeed, 90% of the world’s population

will never leave the country of their birth.20

Most economists agree that the freer mobility of labor across countries would do far more to

spur aggregate growth in the global economy than further decreases in already low barriers to the

movements of goods and capital. Economist Dani Rodrik has estimated that a temporary work

visa scheme that allowed an expansion of the rich country labor force of three percent through

increased immigration from developing countries would add $360 billion annually to the global

economy, a sum that dwarfs any expected benefits from further reductions in tariffs from their

already low levels.21 The fact that governments have instead opted to sharply increase

impediments over the past century illustrates that globalization is not an autonomous process but

one that depends upon the selective willingness of states to open or close their borders to various

types of exchange.

Illicit globalization

Globalization has a dark side that even states have found difficult to control. The same quick

and efficient transportation and communications networks that permit us to enjoy legal goods

20 Pankaj Ghemawat, World 3.0: Global Prosperity and How to Achieve It, Boston, Ma.;

Harvard Business Review Press, 2011, 27, 174, 179.

21 Dani Rodrik, The Globalization Paradox, W.W. Norton & Company, 2011, 268..

and services from around the world also facilitate transnational organized crime. The variety and

scope of illicit globalization is immense. Shipments of cocaine and heroine to North America,

Europe and Russia amount to $105 billion in value per year. Europe imports over $8 billion in

counterfeit goods annually while the smuggling of undocumented immigrants from Latin

American to the United States brings $6.6 billion per year to criminal organizations. Other major

types of illicit globalization include human trafficking, maritime piracy, trade in counterfeit

medicines, identity theft, child pornography, shipments of ivory and exotic species and illegal

timber exports. Even human organs have become a focal point for illegal international trade.22

Although Interpol23 and other information-sharing efforts connect police forces from around

the world, the same measures that ease the movement of legal goods, service, finance and

information in a more globalized world also create spaces through which transnational organized

crime can thicken connections and evade control.

The globalization of production networks has shifted manufacturing and growth from

the developed to the developing world.

Over most of the past two centuries, the story of globalization was connected to the

industrialization of the Western world and the growing gap between these economies and the rest

of the globe. The rise of the West was both cause and consequence of the colonization of much

of Latin America, Africa and Asia. Developing countries were relegated to the production of raw

materials for export to Europe, North America and a few other high income industrial countries

while manufactured goods flowed in the other direction, as well as among the developed

22 Patrick Di Justo, Adam Rogers and Allison Davis, “Organized Crime: The World’s

Largest Social Network,” Wired Magazine, January 31, 2011

(http://www.wired.com/magazine/2011/01/ff_orgchart_crime/).

23 Interpol (http://www.interpol.int/).

countries themselves. This dramatic shift in the locus of productive capacity is captured in Table

x.x, based upon calculations by economist Paul Bairoch.

Relative Shares of World Manufacturing Output: 1750-1900

(in percentages)

_____________________________________________________________________________

1750 1800 1830 1860 1880 1900

_____________________________________________________________________________

Europe 23.2 28.1 34.2 53.2 61.3 62.0

United States 0.1 0.8 2.4 7.2 14.7 23.6

Japan 3.8 3.5 2.8 2.6 2.4 2.4

Global South 73.0 67.7 60.5 36.6 20.9 11.0

_____________________________________________________________________________

Source: Adapted from Paul Bairoch, "International Industrialization Levels from 1750 to 1980,"

Journal of European Economic History, 11, 1982, 296.

Yet at Figure x.x indicates, circumstances have changed dramatically in recent decades.

Globalization has facilitated the shift of manufacturing production from the mature, high-wage

countries of Europe and North America to East Asia and, to a lesser extent, other regions of the

developing world. The share of global GDP accounted for by developing countries has risen

from 30% in 1950 to well over one half today. Much of this shift is related to the relocation of

manufacturing, which rose from 31.4% of developing country exports in 1980 to 68.1% of such

exports in 2005. The developing country share of world manufacturing exports has doubled in

the short space of a quarter century as has the developing country share of capital spending.24

24 David Held and Anthony McGrew, Globalization/Anti-Globalization: Beyond the

Great Divide, Polity, 2nd edition, 2007, 77.

Between 1995 and 2010, the percentage of Fortune 500 companies headquartered in the

developing world rose from 4% to 25%.25 Particularly striking is the shift to high-speed growth

in the world’s two most populous countries: China and India. Between 1983 and 2003, India’s

per capita income more than doubled while in China per capita income quadrupled.26

Over the very long term, the world has witnessed striking movements in the global

economic center of gravity, as illustrated by Figure x.x. The westward shift of the nineteenth

through the mid-twentieth centuries is now being reversed in equally dramatic fashion and over a

shorter time scale.

25 “Why the Tail Wags the Dog,” The Economist, August 6, 2011.

26 Charles Kenny, Getter Better: Why Global Development is Succeeding – And How We

Can Improve he World Even More, New York: Basic Books, 2011, 19.

“The Real Wealth of Nations,” The Economist, June 30, 2012

A Partially Globalized World

Globalization is more than just hype. The world economy is knitted together from ever-

tighter networks of production, finance and information flows. Yet the process is far from

complete. International connections are uneven in both sectoral and geographic terms. Most

people’s economic livelihoods depend more heavily upon local and national markets than upon

global markets. States remain powerful and relevant actors and business firms operate within

rules set by political authorities. The world is, at best, “semi-globalized,” to use a term offered by

Pankaj Ghemawat.

Debating Global Governance

Among mainstream scholars and commentators, the crucial question is not whether to

globalize but how to manage the process in a way that best serves the values prioritized by the

author, whether these be economic efficiency, global equity and sustainability or the preservation

of democracy and national autonomy. In other words, the globalization debate has much to do

with questions of governance – who gets to participate in making the rules that govern global and

national economies and through what sort of institutions?

Three alternatives present themselves: Advocates of market-led globalization prioritize

efficiency and output. From this perspective, the role of governments and international

institutions is to clear away those obstacles that prevent self-regulating global markets from

functioning more effectively.

Another set of authors believe that markets cannot and should not be self-regulating.

Markets must be embedded within some set of rules and institutions capable of ensuring that

social values and interests beyond mere economic efficiency are considered. Advocates of state-

led governance argue that globalization must be subordinated to national autonomy and the

participatory mechanisms of democratic states. This approach calls for a “thin globalization” that

regulates international commerce for the common good and preserves the ability of societies to

adopt varying paths to development.

A third perspective agrees that markets must be regulated in order to serve broader

purposes beyond efficiency, but doubts that the nation-state is capable of serving this function

under conditions of capital mobility and international economic openness. Advocates of

institution-led governance thus argue that international institutions must be strengthened,

absorbing some of the market-regulating functions previously undertaken at the nation-state

level.

Market-led Governance

In his 1999 book, The Lexus and the Olive Tree, best-selling author Thomas Friedman used

the metaphor of a “Golden Straightjacket” to illustrate the constrained economic choices

available to governments: “If your country has not been fitted for one” Friedman wrote, “it will

be soon.”27

In Friedman’s view, the ability of capital to flow easily across national borders meant that

governments that adopted policies considered unfavorable by investors would quickly be

punished by financial markets as capital fled to friendlier locales. Whereas in the past states had

the power to force private actors to adjust their behavior in order to serve public ends, Friedman

asserted that globalization now reversed this relationship: states had to adjust to markets or risk

losing access to the capital needed to finance growth. What made the straightjacket imposed by

global markets “golden” was that states going along with this new reality would be rewarded

with growth and prosperity. In short, Friedman envisioned a world in which the task of

governing globalization was largely left to markets, which, through the decentralized power of

an “electronic herd” of investors and currency traders, endorsed some policies choices and

vetoed others.

Friedman’s celebration of market-led globalization captured the spirit of the eighties and

nineties; decades when free market enthusiasts gained the upper hand in intellectual and policy-

making circles.28 The post-World War II era had brought the rise of the welfare state and more

interventionist government regulation of economic activity. The backlash against such policies

began with the electoral triumphs of Ronald Reagan and Margaret Thatcher, respectively, as

27 Thomas Friedman, The Lexus and the Olive Tree, New York: Anchor Books, rev. ed., 2000.28 Other works that offer generally positive appraisals of market-led globalization

include Martin Wolf, Why Globalization Works, Yale University Press, 2005; Jagdish

Bhagwati, In Defense of Globalization, Oxford University Press, 2nd edition, 2007; and

Michael Spence, The Next Convergence: The Future of Economic Growth in a

Multispeed World, Farrar, Straus and Giroux, 2011.

president of the United States and prime minister of the United Kingdom in 1979. Harking back

to nineteenth century concepts of laissez faire – a French phrase meaning “hands off” or “let

them be” – Reagan, Thatcher and their supporters celebrated the wonders of free markets while

seeking to reign in the power of states to regulate economic decision-making. In the United

States and Great Britain, the Reagan and Thatcher years brought reduced taxes on corporations

and top income earners, privatization of public enterprises and services, deregulation of certain

industries and efforts to weaken the power of labor unions.

These ideas –sometimes labeled neo-liberalism - represented an updating of liberal

economic thinking that stretched back to eighteenth and nineteenth century thinkers such as

Adam Smith, Jeremy Bentham and John Stuart Mill. Neo-liberalism is based upon the notion that

markets function best to maximize efficiency of production and satisfy consumer demands when

free of government interference. The neo-liberal concept of a “self-regulating market” refers to

the equilibrating qualities of uninhibited exchange within a market system: the price mechanism

serves to ensure that the collective but decentralized decisions of thousands or millions of

producers and consumers result in a balance between supply and demand. In this sense, the

market “governs” itself.

This does not mean that government is superfluous from a neo-liberal perspective.

Governments are necessary to provide for the common defense, define and enforce property

rights, supply legal currency, provide public goods that would be undersupplied by markets,

issue patents and copyrights to encourage innovation, offer a social safety net for individuals

who are temporarily or permanently unable to effectively compete in the labor market and

compensate for market failures, such as the negative externality of pollution, through appropriate

regulatory policies. Governments should not, however, compete with the private sector, set

prices, subsidize production or consumption, impose taxes that discourage investment or inhibit

competition.

It follows from these neo-liberal precepts that governments should also refrain from

interfering with the transnational movement of goods, services, money and people, unless there

exist compelling public rationales for doing so that trump considerations of maximizing

efficiency and income (such as, for instance, national security). Neo-liberals recognize that states

have in fact historically engaged in costly protectionist policies, whether due to erroneous

economic doctrines, the political clout of special interests or the competitive nature of the nation-

state system. In order to curb such behavior, liberals favor global institutions, such as the WTO,

that encourage the removal of such barriers and punish states that engage in protectionism.

These ideas gained wide currency during the 1980s and 1990s. The eclipse of the state in

favor of an increasingly globalized marketplace seemed confirmed most dramatically by the

collapse of communism in Eastern Europe and the Soviet Union and the introduction of market

reforms by surviving communist party rulers in China and Vietnam. Indeed, many observers

began to argue that globalization tended to force countries in the direction of convergence around

a single model of state-society relations.

In 1990, for example, economist John Williamson, reflecting upon the lessons from a

decade of policy reform in Latin America as countries in that region grappled with international

debt, developed what he dubbed the “Washington Consensus.29” These were a set of policies that

others, if not Williamson himself, soon embraced as a universal formula for economic

development. The original list included:

- fiscal discipline

29 John Williamson, “What Washington Means by Policy Reform,” in John Williamson, Latin American Adjustment: How Much Has Happened? Washington, D.C.: Institute for International Economics, 1990.

- reorientation of public expenditures- tax reform- financial liberalization- unified and competitive exchange rates- trade liberalization- openness to FDI- privatization- deregulation- secure property rights

Largely endorsed by the International Monetary Fund and the World Bank, this formula

served as a template for the conditions that these institutions attached to the loans they made to

troubled debtor countries.

In short, neo-liberals expected states to converge around a free market approach to

economic development and governance under the combined influences of economic logic (i.e.,

the persuasiveness of neo-liberal ideas), the pressures exerted upon states by transnational capital

markets and the rules and norms embodied in the major international economic institutions.

The convergence thesis has been criticized from a number of angles. Economist Pankaj

Ghemawat argues that the world economy is far less globalized than has often been assumed.30

This finding leads him to three conclusions: First, the forces of globalization are too weak to

compel states to adopt policies that they otherwise find objectionable. Second, the success or

failure of economic growth in any given country is principally due to domestic factors. Third,

there remain enormous efficiency gains to be had from reducing the considerable obstacles that

continue to inhibit transnational economic integration.

Some scholars have questioned both the empirical and the causal claims of convergence.

State behaviors with respect to fiscal, monetary, tax, regulatory and labor policies remain quite

30 Pankaj Ghemawat, World 3.0: Global Prosperity and How to Achieve It, Cambridge, Ma.:

Harvard Business Review Press, 2011.

diverse and show little evidence of converging around a single standardized model. For example,

the most successful developing economies of recent decades – those of East Asia – have not

followed neo-liberal prescriptions, but have instead featured strong states which actively direct

the accumulation and allocation of capital toward national development goals. These hybrid

systems that combine market mechanisms with state ownership and regulation have generated

rapid growth in China and other East Asian countries and thus pose a major challenge to neo-

liberal thinking about the proper relationship between state and society.

Nor is there compelling evidence that investors have strong and fixed preferences for

particular policy mixes. Some studies find that capital is likely to flee economies where loose

fiscal and monetary policies raise the risks of inflation. But the size of government (as opposed

to whether revenues and expenditures are in rough alignment) does not appear to dissuade

investment. Nor does investment behavior appear strongly correlated with government policies

with respect to labor, the environment or government support for targeted industrial sectors.31

Indeed, fears among some globalization critics that capital mobility would lead to a “race to

the bottom” as corporations and investors sought havens from taxation, strong labor movements

and strict environmental regulations appear to be exaggerated.32 While some kinds of labor-

intensive or polluting industries may gravitate toward investment sites that offer these sorts of

advantages, there exist other industries where firms are attracted by the lure of healthy, skilled

workforces, ample infrastructure, public support for research, development and education and

close proximity to high income consumers. In such cases, corporations may be willing to tolerate

31 Layna Mosely, Global Capital and National Governments, Cambridge University

Press, 2003.

32 Daniel Drezner, “Globalization and Policy Convergence,” International Studies

Review, vol. 3, no. 2, 2001.

high tax rates and strong protections for labor and the environment. Indeed, those countries most

open to the global economy also tend to have larger public sectors.33

Another criticism of neo-liberal prescriptions has to do with financial globalization. During

the 1980s and 1990s, the IMF and rich country governments encouraged developing countries to

deregulate their financial sectors and open their economies to international financial flows.

While many countries in Latin America and East Asia did so, the results were not as expected.

Destabilizing flows of short-term investment capital led to asset bubbles and inflation, eventually

triggering financial crises even in those countries that otherwise pursued cautious fiscal and

monetary policies. The Asian financial meltdown of 1997-98 produced a severe, if temporary,

economic downturn across much of the region, eventually spreading to Russia, Brazil and

Argentina. China, which retained controls on international capital flows, was spared the

economic pain experienced by its neighbors. Roughly a decade later, financial deregulation was

blamed by many observers for the massive banking crisis that hit the United States in 2008-09,

followed soon by the Euro crisis.

Although certainly not vanquished, the neo-liberal vision of market-led globalization has

lost ground over the past decade in the debate over the future of globalization. Neo-liberals such

as Friedman exaggerate the depth of globalization and the degree to which world economic

integration compels governments to converge upon a single, standardized recipe for growth and

development. Indeed, as the fastest growing economy of the past three decades, China offers a

sharp counterpoint to the Washington Consensus as that country has managed to combine market

incentives with continuing state dominance over the Chinese economy. Finally, the financial

crises of the late nineties and since 2008 have offered reminders that markets do not police

33 Dani Rodrik, “Why Do More Open Economies Have Bigger Governments?” Journal

of Political Economy, vol. 106, no. 5, 1998.

themselves, but work best within a framework of regulation and governance that considers the

broader public good.

If global markets require some form of oversight and regulation, then which institutions –

national governments or global organizations – are better suited to set relevant rules and norms?

It is to this question that we now turn.

State-led Governance

Economist Dani Rodrik has offered perhaps the most comprehensive critique of what he

labels “hyper-globalization” – the pursuit of wholesale global integration as an end in itself.

Rodrik argues that hyper-globalization requires the sacrifice of either democracy, as under

market-led globalization in which free-flowing capital exercises veto-power over government

choices, or national autonomy, as under institution-led globalization in which supranational

institutions set global rules to which individual states much conform.34

Rather than surrender choices over the character and direction of economic development to

markets or global institutions, Rodrik advocates a “thin globalization” that removes those

protectionist barriers which mainly serve narrow interests, while nevertheless preserving the

capacity of states to regulate cross-border flows of capital and labor, to pursue varied

development strategies, including different levels of state intervention in markets, and to set

different standards of regulation with regard to health, safety, the environment and consumer

rights. According to Rodrik, a more modest path of globalization mediated by strong and capable

states would avoid the imposition of a singular economic model while enhancing both

democracy and national autonomy. In his words: “Democracies have a right to protect their

34 Dani Rodrik, The Globalization Paradox, W.W. Norton & Company, 2011.

social arrangements, and when this right clashes with the requirements of the global economy, it

is the latter that should give away.”35

This argument rests upon historical precedent. The liberal economic order of 1870-1914

arguably represented the first era of hyper-globalization. Although successful in its time, this

European-centered effort to build an international economy based upon the principles of laissez

faire proved unsustainable, giving way to imperialism, two worlds wars, protectionism, class

conflict, the rise of communism and fascism and the Great Depression. The great social theorist

Karl Polanyi attributed this descent of European society into war and barbarism to “the measures

which society adopted in order not to be, in its turn, annihilated by the action of the self-

regulating market....the conflict between the market and the elementary requirements of an

organized social life provided the [nineteenth] century with its dynamics and produced the

typical strains and stresses which ultimately destroyed that society.”36

- The post-World War II international order embodied hard-won lessons from the

earlier failure of laissez faire liberalism. Liberals of the post-World War II era had no intention,

of course, of abandoning the market or international economic exchange. They did, however,

seek to circumscribe the social space in which markets, both domestic and international, operated

and to embed the market in a social compact among the state, capital and labor. Capitalism had

to be tamed to render it compatible with social peace and international stability. John Gerard

35 Dani Rodrik, The Globalization Paradox, W.W. Norton & Company, 2011, xix.

36 Karl Polanyi, The Great Transformation:The Political and Economic Origins of Our Time,

New York: Farrar and Rinehart, 1944, 249.

Ruggie has referred to these arrangements as “embedded liberalism,” in contrast with the

“disembedded” or supposedly self-regulating markets of the late nineteenth century.37

- Domestically, the post-war order was built upon social democracy within the

advanced industrial democracies, which entailed Keynesian macroeconomic management, the

creation of the welfare state, progressive taxation, public ownership of key industries, regulation

of big business and recognition of labor unions and collective bargaining. Internationally,

commitments to multilateralism and the gradual lowering of trade barriers were coupled with

mechanisms designed to insure against the transmission of negative economic shocks from one

nation to another, including exchange controls, protection for strategic and politically sensitive

sectors, restrictions on international capital flows and safeguards against import surges that

threatened established national producers. These arrangements created the basis for a substantial

degree of class peace, social stability, economic growth and the consolidation of liberal

democracy in the advanced industrial world.

- The post-war order depended, however, on the maintenance of some degree of

national economic autonomy, particularly in terms of financial flows. The economist John

Maynard Keynes argued that social democracy was compatible with free trade, but not with the

uncontrolled flow of capital across national borders, which undermined state control over a

country’s macroeconomic fundamentals.38 Yet large corporations and banks chafed at the

restrictions on their freedom to invest abroad. When the economic troubles of the 1970s hit,

37 John G. Ruggie, “International Regimes, Transactions and Change: Embedded Liberalism in

the Postwar Economic Order,” in Stephen Krasner (ed.), International Regimes, Ithica: Cornell

University Press, 1983.

business argued that it was time to unleash capital from the confines of the national market and

loosen the regulatory grip of states. As previously mentioned, these appeals found a receptive

audience with the elections of Ronald Reagan and Margaret Thatcher, thus ushering in an era of

neo-liberalism.

- The political effect of this development, according to Ruggie, has been to disrupt

the social pact that lay at the core of the social democratic order in Europe and North America.39

The balance among the state, labor and capital has shifted decidedly in favor of the latter. With

capital controls and other sorts of restrictions lifted, capital has become internationally mobile to

a greater degree than ever before. The same is not true of labor, whose movement across national

borders remains heavily regulated, or of states, which remain territorial entities. The unilateral

capacity of capital to exit the national economy produces an asymmetry. As capital is a key

ingredient of economic growth, business can pit workers and states in different countries against

one another in a bidding war for investment. As a result, labor movements everywhere have lost

clout and the ability of states to regulate capital in the public interest has been compromised.40

38 Once the Second World War was concluded, Keynes feared that: “Loose funds may

sweep round the world disorganizing all steady business.” To obviate this possibility,

Keynes felt that: “Nothing is more certain than that movements of capital funds must be

regulated; - which in itself will involve far-reaching departures from laissez-faire

arrangements.” Cited in D.E. Moggridge, Maynard Keynes: An Economist’s Biography,

London: Routledge, 1992, 673).

39 John G. Ruggie, “Trade, Protectionism and the Future of Welfare Capitalism,” Journal

of International Affairs, Summer, 1994.

40 David Andrews, “Capital Mobility and State Autonomy: Toward a Structural Theory of

International Monetary Relations,” International Studies Quarterly, June, 1994.

Building upon the work of Ruggie and others, Rodrik argues for a return to the state-led

globalization path of the post-World War II era, which focused on the liberalization of trade

rather than finance, allowing states to better balance the power of capital. International

institutions and rules should not inhibit developing countries from experimenting with varied

economic models.41 The international economic order should be designed in such a way as to

strengthen, rather than weaken, national autonomy and the ability of citizens to express choices

over economic policy through democratic institutions.

The path of state-led globalization does not entail a return to protectionism, but it does

prioritize diversity, democracy and national autonomy over the efficiency gains to be had

through unencumbered markets. It would also require the weakening of international economic

institutions. Advocates of institution-led globalization argue that this vision underestimates both

the dangers of renewed protectionist pressures at the national level and the pitfalls of fragmented

governance in a world that has already achieved high levels of international independence. We

now examine the argument for strengthened global regulation of the international economy.

Institution-led Governance

Advocates of institution-led governance – whom we will refer to as globalists - support a

robust set of rules, norms and institutions for managing the global economy. They agree that

markets can only function fairly and effectively if embedded within a framework of law and

regulation. But they also believe globalization has undermined the effectiveness of regulation

that is limited to the nation-state level. Neither markets nor individual nation-states acting alone

can provide the global public goods, such as an effective response to climate change, that are

41 On the argument for diversity rather than standardization in models of

development, see Dani Rodrik, One Economics, Many Recipes: Globalization,

Institutions and Economic Growth, Princeton University Press, 2008.

required to maintain a stable and growing international economy. A global economy thus

necessitates global governance.

Few globalists foresee the emergence of a single world government or the passing away

of the nation-state. Instead, this vision would entail the strengthening of an array of global and

regional institutions as states voluntarily agree to common sets of rule, norms and procedures for

managing the global economy and gradually transfer certain powers and resources to

international institutions. The result would be a “multi-level polity” through which sovereignty is

shared and dispersed across governing institutions of varying functional and geographic scope.

The most important example of transnational governance is the European Union (EU),

which encompasses twenty seven countries. The scope of the EU extends far beyond the removal

of border controls on the movement of goods, services, people and money among member states.

In varying degrees, the EU coordinates national policies with respect to areas such as trade,

finance, energy, agriculture, immigration, infrastructure development, investment, research and

development, foreign aid and even foreign policy. The EU has a president, a parliament, a Court

of Justice and a bureaucracy based in Brussels. National governments delegate some powers to

EU institutions, share governance in other areas and retain national control over still other issues.

The EU has expanded in membership over the years and has generally succeeded in promoting

peace, prosperity, democracy and global influence among its member states.

Despite the successes of the EU, no other group of states has sought to emulate the degree

of transnational governance represented by Europe’s example. Nor has the EU itself been

uniformly successful. Critics argue that the gradual shift in decision-making powers from the

national to the supranational levels of governance has produced a democratic deficit, in which

European citizens feel that distant technocrats, rather than local political parties and politicians,

are increasingly empowered to make choices that impact upon their own lives.

Moreover, the recent European financial crisis may have revealed weaknesses in the half-

way house of shared national and supranational governance in which Europe finds itself.

Financial integration around a common currency among the seventeen EU states that have

adopted the Euro exposed the entire group to the financial mismanagement of its weakest

members. Yet the still limited authority of the European Central Bank, the lack of strong EU

controls over national fiscal policies and the reluctance of the stronger countries of the Eurozone

to bail out weaker members have hampered the ability of Europeans political and financial elites

to respond quickly and effectively to contain the economic damage from the crisis. Arguably, the

financial problems of Greece, Italy, Spain and Ireland might have been better managed under

either full national financial autonomy or full European governance. Shared authority, on the

other hand, created opportunities for confusion and the buckpassing of responsibility.

While the EU serves as a showcase for both the strengths and weaknesses of transnational

governance, no mainstream globalists have suggested that the world is ready to adopt such far-

reaching institutional reform on a global scale. Rather, there have been a number of more modest

proposals for strengthening the reach and authority of international institutions in the interest of a

fairer, more inclusive and more stable system of global governance. A short-list of proposals that

have received serious consideration include:

- a small tax on international financial transactions designed both to discourage

speculative capital flows and to raise money for fighting world poverty;

- the creation of procedures to manage sovereign bankruptcy – allowing states, like

private firms and individuals, some means for escaping unsustainable debt

obligations in a legal and orderly fashion;

- an agreement governing the rights and responsibilities of foreign direct investors

and pledging states to forego policies that either favor or discriminate against

foreign investors;

- the inclusion of minimum standards for labor and the environment in trade

agreements so at to discourage states from using labor repression or lax pollution

laws as sources of competitive advantage;

- the creation of a binding global cap on greenhouse gas emissions.

These and other global agreements and institutions would exist within and alongside the

already significant set of international organizations that provide a measure of global economic

management. These include the International Monetary Fund, the World Bank, the World Trade

Organization, the Group of 20, the United Nations and its various agencies, the Basel Accords

and many others at both the global and regional levels.

The political challenges of strengthening global governance are considerable. As the

number of independent states has mushroomed from seventy five after World War II to more

than two hundred today and political and economic power has become more dispersed across a

larger number of significant players, the difficulty of reaching consensus around major new

initiative in global governance has also grown. As an example, the Doha Round of trade

negotiations conducted through the World Trade Organization are now entering their eleventh

year, with no prospect of completion in sight.

Moreover, there is the fundamental question of which perspectives and what interests will

be represented through institutions of global governance. As decision-making moves from the

national to the global level, it also shifts further away from the direct control and participation of

average citizens. International organizations are created and controlled by governments, some,

but not all, of whom may be democratic. But even once an elected government makes

commitments through a formal treaty, all succeeding governments are bound by those legal

obligations, even if the preferences of voters in that country may have changed during the

interim.

Moreover, existing international institutions often lack full transparency and subject to the

direct influence, or at least the shared world views, of powerful private actors. Nobel prize

winner Joseph Stiglitz – himself formerly the chief economist of the World bank - has argued

that international institutions such as the International Monetary Fund and the World Bank are

“dominated not just by the wealthiest industrial countries but by commercial and financial

interests in those countries.”42 The principal purposes of existing international economic

institutions to date have been to promote open markets and to strengthen legal protections for

financial and corporate interests as they move beyond their home markets.

Nevertheless, many critics of the existing order who seek a globalization that is fairer, more

democratic, more environmentally sustainable and more inclusive reject Rodrik’s solution of

reasserting the primacy of nation-states on the grounds that globalization has progressed to far to

turn back the clock. Rather than attempting to corral footloose capital back under national

control, globalists would prefer to create a global version of the New Deal by crafting strong

global regulations that can restore some balance among competing classes and nations of varying

42 Joseph Stiglitz, Globalization and Its Discontents, New York: W.W. Norton, 2002, 18.

size, power and levels of development. Only in this way can the benefits of globalization be

retained and global public goods be provided, while still responding to a broader array of

interests and values.

Stiglitz himself has offered guidelines for lessening the democratic deficit that plagues

global governance. These include greater transparency, increased participation by developing

countries in decision-making, increased voice for non-governmental organizations and

mechanisms for greater accountability.43 Without such reforms, institutions of global governance

will suffer from a continued crisis of legitimacy and would seem incapable of assuming a deeper

role in guiding globalization along a path acceptable to the wide array of affected interests.

Conclusion

Globalization is a pervasive reality, even if its novelty and reach have been subject to

excessive hype. International economic integration has altered the context in which national

politics and policy-making are conducted, necessitating increased coordination among states and

reconfiguring political bargains at both the national and transnational levels. The growth of

global networks of production and finance along with increasingly significant layers of

transnational governance make for a more complex and integrated system of political economy.

The central debates over globalization revolve on questions of governance. Can and

should markets govern themselves? Or should they be subject to democratic control and

regulation through strong nation-states? Are individual states sufficient managers of economic

systems in light of globalization? Or must we seek to shift greater degrees of authority to global

institutions? While overly simplified, this schema helps to make sense of the many and complex

debates that have swirled around globalization over the past several decades. With this

43 Joseph Stiglitz, Making Globalization Work, W.W. Norton & Company, 2006, 282-284.

conceptual map in mind, we now turn to a more detailed and nuanced account of the historical

evolution of the global economy over the past two centuries.

Annotated Bibliography

Jagdish Bhagwati, In Defense of Globalization, Oxford University Press, 2nd edition, 2007.

Bhagwati takes on globalization’s critics, especially in defending the benefits of open trade.

He is more cautious about the risks of liberalizing finance.

Paul F. Diehl and Brian Frederking (eds.), The Politics of Global Governance: International

Organizations in an Interdependent World, Boulder, Co.: Lynne Rienner Publishers, 4th ed.,

2010.

A balanced collection of essays on global governance.

Thomas Friedman, The Lexus and the Olive Tree, New York: Anchor Books, rev. ed.,

2000.

Thomas Friedman, The World is Flat: A Brief History of the Twenty-first Century, New

York: Farrar, Straus and Giroux, 2005.

Two best-selling tributes to globalization by a leading journalist.

Pankaj Ghemawat, World 3.0: Global Prosperity and How to Achieve It, Cambridge, Ma.:

Harvard Business Review Press, 2011.

Ghemawat argues that the current reach of globalization has been exaggerated. At best, the

world economy is “semi-globalized.” He also contends that the gains from deeper globalization

are considerable, but must be pursued under the umbrella of strengthened regulatory systems.

David Held and Anthony McGrew, Globalization/Anti-Globalization: Beyond the Great

Divide, Polity, 2nd edition, 2007.

The authors argue for a globalization guided by the principles of cosmopolitan social

democracy.

Robert Keohane and Helen Milner (eds.), Internationalization and Domestic Politics,

Cambridge University Press, 1996.

Explores the various ways that international interdependence shapes both domestic politics

and policy-making within nation-states.

Layna Mosley, Global Capital and National Governments, Cambridge University Press,

2003.

Mosley argues that states continue to possess the capacity to pursue distinct national

economic models and to mediate the domestic impacts of globalization. She rejects the idea that

globalization necessitates a “race to the bottom.”

Dani Rodrik, The Globalization Paradox, W.W. Norton & Company, 2011.

Rodrik argues that globalization presents us with a “political trilemma.” National autonomy,

democracy and global free markets are all goods to be valued, but we cannot enjoy all three at

once. Instead, we must trade off any two against the remaining good.

Michael Spence, The Next Convergence: The Future of Economic Growth in a Multispeed

World, Farrar, Straus and Giroux, 2011.

Spence argues that we have entered a period of “catch up,” in which high-speed growth in

the developing world will close the gap between rich and poor countries over the coming

decades. Globalization will facilitate this process of convergence.

Joseph Stiglitz, Globalization and Its Discontents, W.W. Norton & Company, 2003.

A Nobel-prize winning economist, Stiglitz lends his expertise and authority to many popular

critiques of globalization. He argues that in its present guise, globalization is rigged against

workers, less developed countries and the environment.

Joseph Stiglitz, Making Globalization Work, W.W. Norton & Company, 2006.

In this follow-up to his 2003 volume, Stiglitz offers policy prescriptions for reforming the

international rules and institutions that govern globalization. He suggests that a reformed

globalization can produce a fairer and more sustainable global economy.

Daniel Yergin and Joseph Stanislaw, The Commanding Heights: The Battle for the World

Economy, New York: Free Press, rev. ed., 2002.

An historical review of the intellectual and political battles over the proper balance between

state and market power and how the 1980s and 1990s shifted the balance in favor of markets.

Martin Wolf, Why Globalization Works, Yale University Press, 2005.

A journalist for the Financial Times, Wolf marshals a defense of globalization, arguing that

governments, not markets, are responsible for many of the present ills that plague the global

economy.