i y Aso by Daa Roar 4 Globalization | \ Paradox =f fv Has Gt ation Gone Too Fart Democracy and the Future of the World Economy Dani RodrikThe Political Trilemma of the World Economy 119904 {plnalmose perpetual criss since the seventies, the country reeled [under hyperinfiaton and a crushing debt burden. Incomes had shrunk 25 percent fram their levels a decade earlier and private -entina couldnt have been ina worse economic mes. investment had come to virtual andi. Prices were rising at unprecedented rates, even by Argentina's demanding standards. In March 1099, inflation climbed 10 more than 20,000 percent (on an somualized bas), sowing chaos and confusion, Struggling to cope, Buenos Aires’ workdoveary residents took refuge in gallows brumor. With prices soaring bythe minute, thes tad themselves, at least isha become cheaper to takes cab than bus With the cab you paid at the end ofthe rde instead ofthe beginning! Can You Save an Economy by Tying It to ‘the Mast af Globalization? Domingo Cavallo thought he knew the real problem. For too Jong, Argentinas governments had changed the rules ofthe game whenever it sted them. Too much governmental discretion had sulted ina complete lose of confidence in Argentine pelicy mak ‘The Politica Tritemma of the World Economy ts ers. The private sector had responded by withholding its invest: ment and fleeing the domestic currency, To restore credibility with domestic and foreign investors, the government needed to commit itself to a clear set of rule. In particula, strict monetary Giscipline was required to prevent governments from printing ‘money ae wil! ‘Cavallo, an economist with a PRD from Harvard, was foreign ‘minister in the administration of President Carlos Menem. He would get the chance 1 execute his plan wen Menem put him in charge allo’ strategy was the Convertiility Law, which legally anchored the economy in Febraary 1901. The linchpin of ‘he Argentine currency to the US, dollar at 1 peso per dollar and prohibited res aw effectively forced Argentinas central bank to operate by gold Sandard rules. Henceforth the domestic money supply could be increased and interest ate lowered only i doliars were flowing, into de ecomomy. dollars were moving the otber way, he money supply would have to be eut and interest rates raised. No more around with monetary policy, In addition, Cavallo accelerated the privatization, deregula- tion, and opening up of the Argentine economy. He believed open rictions on foreign payments. The Converiility economy rules and deep integration would reinforce business com Sdence by precuding discretionary interventions and the hijack- ing of poli by special interests, With policy on automatic plo, Jnvestors would have ite fear hat the rules woul be changed on them. By the early 1990, Argentina's recordin trade liberaiza ‘on, ax reform, privatizason, and financial reform wassecond to none in Latin America Cavallo envisioned globalisation as both a hates dan engine for Argentina's economy. Globalization provided not jst slisciptine nd an effective shortett credibility in economic pot ies. Ir would also unleash powerful forces to propel the economy forward, With lack of confidence and other transaction costs out ‘of the way, foreign capital would low into the country, allowingdomestic investment torte and the economy to take of Imports abroad in turn would force domestic producers to become ‘more competi and productive, Deep integration with the word ‘economy Would sole Argentina's short-and long-term problems "This was the Washington Consensus taken toan extreme, andi turned outto be rightabout the shor term, but not the long ter. CCavallo'sstrategy worked wonders on the binding constraint ofthe ‘moment. The Convertibiliry Law eliminated hyperinflation and restored price stability practically overnight. generated crib ity and confidence leat fora while—and ld to large capital inflows. Envestment, exports, and incomes al rose rapidly. As we saw in chapter Six, Argentina became a poster child for mult tateral organizations and globalization enthusiasts in the mi 1900s, even though policies like the Conversbilty La had leary ‘at been para the Washington Consensis, Gavalo became the toast ofthe international financial community. By the end ofthe decade, the Argentine nightmaze had returned with avengeance. Adverse developments in the work economy set the stage for an abrupt reversal in investors’ views on Argentina ‘The Asian financial ess hit the country hard by educing ational money managers appetite for emerging markets, barthe real Killer wasthe Brazilian devaluation in early 1998, The deval tion reduced the vaiue of the Brazilian currency by 40 percent agains the dolla, allowing Braiian exporters to charge much lower dollar prices on foreign maskets. Since BraiL is Argentina's chief global competitor, Brazils cos advantage left he Angentin can peso looking decidedly overvalued. Doubs about. tility to service its external debt multiplied, confidence collapsed, fd before too long Aryeuina’scredisworthinec Bad aid belne some Aftican countries ‘Cavallo relations with Menem had souredin the meansimeand tae had eft office in 1996, President Fernando de la Ra, who Uc ceeded Menem, invited Cavallo back the government i March $2001 in an effort to shore up confidence. Cavallos new efforts ‘The Political Trifemma of the World Economy wr proved ineffective. When his inital tnkering withthe trade and cy tegime produced meager results, he was forced to resort to ausery policies and sharp fiscal cuhacks in an economy where ‘one worker out of five was already out of a job. He launched a “zero-defct” plan in July and enforced it with cus in government salaries and pensions of up t 18 percent. The financial panic ‘went from bad to worse, Fearing that the peso would be deval ued, domestic depositors rushed to pull their money out of banks, wich in ten forced the government to fit cash withdrawals "The Biscal cuts and the restrition on bank withdrawals sparked mass protests Unions called fr nationwide strikes, rioting eavel- ‘oped tnajor cities, and looting spread. Just before Christmas, Cavallo and de la Ra reigned in rap succession Starved of funds, the Argentinean government was eventually forced 10 ficere domestic ak acount, default on its foreign debt, reim ose capital controls, and devalue the peso, Incomes shrunk by 12 percent in 2002, the worst drop in decades. The experiment wich byperglobalizacion had ended in colossal failure. ‘What went wrong? The short answer is that domestic polis got in the way of hyperglobalzation, The painful domestic eco nomic adjustments requited by deep integration id not sit well with domestic constituencies, and polities ultimately emerged ‘The Inevitable Clash Between Politics and Hyperglobalization ‘The economic story behind Argentina's economic collapse is fairy straightforward in hindsight, Argentina's policy makers nad succeeded in remaving one binding constraint—monetary rmismanagerent-—but eventually ran into another-—an uncox petitive currency. Had the government abandoned the Convert ibility Law or reformed icin favor of more flexible exchange rae, say in 1996, the confidence criss that engulfed the country lter0 ‘The Globalization Paradox right have been averted, But Argentina’ policy makers were 100 ‘wedded to the Convertibilsy Lav. They ha sold eo their public asthe central plank oftheir growth strategy, making it virally impossible to ep back. Pragmatism would have served the coun- tay beer than ideological igi. ‘But chee sa deeper poliieal lesion in Argentine’ experience, ‘one thats fundamental zo the nature of globalization. The cour- tay had bumped agsins one of the contral truths of the global economy: National democracy and deep globalization are Incom- patible. Democratic polities cats a long shadow on financial ‘markets and makes it impoeibe for nation to integrate deeply ith the word economy. Britain had learned this lesson in 198] wnen i was forced to get off gold Keynes had enshrined it in the exon Woods regime. Argentina overlooked it The uure of Argentinas poitiallesderswas ukimacely amar tert of wil but of abil. Their commitment tothe Convertibil ity Law and to inancil market confidence could not have been doubted. Cavallo knew there wat ltl alternative to playing the game by financial markets’ rules. Under his policies, che Argen- all domestic constuenciespublic employees, pensioners, pro- vincal governments, bank depasitors—s0 as not to skip one cent tine government was willing to abrogate contracts with vir ofits obligations to foreign creditors. ‘Whatscaed Argentina's fate in the eyes of nancial markets was Wo and dela Ra were doing, but what the Argen- tine people were willing to accept. Investors and creditors grew not what Cav increasingly skeptical thatthe Argentine Congres, provinces, and ordinaey people would tolerate austerity policies long discredited in advanced induwtialcountsiat. In che end, the markets were right. When globalization collides with domestie polis, the smart money bets on politic, Remarkably, deep integration cannot sustain itself even when i requirements and goals are fully internalize by a country’s political leadership, For Cavallo, Menem, and de la Ria, global TPC ECT We WARN EXMRCN Lisl ination was nots constraint to be respected willl twas their uldmate objective. Vet they could not keep domestic poiial pres ig theie strategy. The lesson for other countries {is sobering. If hyperplobaliztion could not be mage to work in Argentina might it ever work in other settings? Tnhisode to globalization, ThLesus and he Of Ti Tor Fried man famouly deseribed how the “electronic herd and speculators who can move billions of dollars around the globe in aa fnstant—forced all nations to don a "Golden Seraigjacket” This defining garment of globalization, he explained, stitched together the fixed rules to which all counties must submit ree trade, fre capital markets, fee enterprise and small govern- ment. "If your country has not been fied for one,” he wrote, it ‘ill soon” When you putit on, he continued, two things happen: *your econotny grows, and your polities shrink” Since globaliza- sion (which to Friedman meant deep integration) dees not permit nations t deviate fom the rules, domestic polities isreduced toa lace between Cake and Pepsl. All other favors, especially local cones, are banished * Fried”man was wrong to presume that deep integration rales prodice rapid economic gronth, as we have already seen. He was also wrong to treat his Golden Straijaket as an established real ity. Few countries’ leaders put on the Golden Stratjcket more ‘willingly than Argentinas (who then also duew the keys away for ood measure). As the unaling of the Argentine experiment show, in a democracy, domestic polities win out eventually. The only exceptions are small ations that are already part ofa lager polideal grouping sich asthe European Union; we wil look at the cate of Latvia in the next chapter When push comes to shove, democracy sarge of the Golden Straijaket. ‘Nevertheless, Friedman's central insight remains vali. There tsa fundamental tension between hyperglobalizasion and demo- cratic pois, Hyperglabalization dasrequire shrinking domestic politics and insulating technocrats fom the demands of popular sare from annals ‘nancies1 The Gobsteation Paredor groups Friedman ered wien he overstated the economic bea~ fits of hyperglobalizaton and underestimated the power of pol tics He therefore overestimated the longrun feasibility, as well as desirability, of deep integration When Hyperglobalization Impinges on Democratic Choices \Weeberih our democracy and national sovereignty and yet we dpvonetidespcementaer anther an wet fe cpt a0 whe rar ede of ching, This unable nd inoerent ate tatiana recipe tor dinner: Argentina he 100s ge a {iitandesrene eample Hower one doer othe wtkeina Tay gree deeoping country rege by seca expt Set cxperince he tension onan aot aly bas, The dash ‘Coreen atnasion and dmenic nal rangement ra core fate of he ol economy, Consider fo ilar af oe satan gesin the way of matonal democr. Labor standards. Every advanced econarny has detailed reguls tions that cover employment practices. These regulations dictate who can work, dhe ainimam wage, the maximum hours of work, the nature of working conditions, what the employer can ask the vwotker todo, and how easily the worker can be fied. They guar Antee the workers freedom ¢o form unions to represent his or her Interests and set che rules under which collective bargaining can take place overpay and benefits, From a classical liberal sandpoint, most of these regulasions sake te sens. They interfere with dividuals sigh to enter into contracts of his or her choosing, Ifyou ae willing to work for "0 hours aweek below the minimum wage under unsafe condi- tions and allow dhe employer to ditzais you at wll, why should the sta prevent you from accepting suc terms? Similarly, fou thinkitisa good thing for your fourteen-yearold daughter t0 get ‘The Political Trilemma of the World Economy ast «fulltime job i a factory, why should the government tll you ‘otherwise? According to clasical liberal doctrine, people ate the best judge ily members), and voluntary contacts, entered frely, must leave both parties beter ff “Labor maskets were once governed by this doctrine Since the 1980s, however, US. legislation and the courts have recognized, that what may be good for an individual worker may not be good ara whole \ orm of decent work, a prospective employee with Kile bargain- ing power may be forced to accept conditions that violate those ores. By accepting such a contract, dhe employee also makes it hnarder for other workers to aciewe higher labor standards. Thus seruployers must be prohibited from offering odious contracts even ifsome workers are willing to accept them, Certain forms of com- petition have to be ruled out. You may be willing to work for 70 thelr oven interests (and the interests oftheir fam for work out regulations that enforce societal hours a week below the minimum wage. But my employer cannot take advantage of your willingness to work under these conditions and offer my job 0 ou. Consider how international trade affects this understanding Thanks to ovtiourcing, my employer can now do what he prev: ‘ously could not, Domestic shor lawe sil prohibit him from hiring you in my place and putting me to work under conditions that violate thoe laws. Bus thio longer matters He ean now replace sme with a worker in Indonesia or Guatemala who will work will: ingly under those ame substandard conditions or wore. To com ‘miss, this is no just legal tis a manifestation ofthe gains from trade. Yet the consequences for me and my job donot depend on the ciizenship of the worker bidding down my Iabor standards, Why do national regulations protect me fom downward competi- tion in employment practices from a domestic worker but not 2 foreign one? Why should we allow international markets to erode domestic abor regulations through the back door when we donot allow domestic maskets todo the same?oa he Gbaiaion Paradox “The inconsistency is further highlighted by considering whether society would condone allowing those Indonesian and Guate- ‘malans to be employed at homes guest workers under the same Tabor standards they face in their mative couatres, Even most free traders would objec to such a practice. There shouldbe a single set of labor workers regardless of the passport they cary. But why? Outsoure- ing jobs through trade has exactly the same consequences, forall concerned, as allowing sigrant workers to toll under a lower set of standards iow significant are these ives in the real world? Less than many labor advocates claim, but more than free traders are willing to admit. Wage levels ate determined first and foremost by labor productivcy Differences in productivity account for between 800 ‘90 percent ofthe variation in wages around the world. This puts a Significant damper oa the potential of outsourcing to undermine sndards ina county, they will sy, applied to all cmployment practices in the advanced countries. An employer's {heat to ontzource my job to someone who earns half my wage jose much danger to me when tht foreign worker also thas half iy producti ‘But 80 t0 80 percent isnot 100 perceat. The politcal and social ‘nstiucions that frame labor maskees exert some independent iahaence on labor eartings, quite teparate from the powerful eels of productivity, Labor regulations, unionization levels land more broadly the plitial rights exercised by workers shape the bargains between workers and their employers and determine hho dhe econonnie value created by firms i shared between them, These arrangements can move wage levels up or down in any country by 40 percent or more® Ks here erat ouswusting, oF the threat thereof, can playa role. Moring jobs to where workers joy fewer rights or threatening to do so—con bebeneficial to oes n temloyers. Within units, ean be used asa lever for extracting ‘Concessions on wages and employment practices from domestic The Politica Tellernma ofthe Werlé Economy 2 ‘There aren'teasy solutions to these conundrums. An employ feeedom to choose where he wants to operate isa competing value that surely deserves attention, The interests of the Guatemalan or Indonesian workers may collide withthe interests of domestic ‘workers, We cannot however pretend that outsourcing does not create srk difficulties for domestic labor standard Corporate tax cempetition. The international mobility of firms and of capital also restricts a nation’s abil to choose the tax struc- tre that best reftects ts needs and preferences. In particular, this mobility puts downward pressure on corporate tax ratesand shifts ‘the tax butden from capital, which is internation labor, which is much less, “The logic i obvious and figures regularly inthe arguments of ly motile, t0 tore who push for lower taxes on business, Senator John McCain invoked it proainendly in hi pre-lection debate with Barack ‘Obama when he compared America’s corporate tax rate of $5 percent to Ireland's 11 percent. “Now, you're a business person, and you can locate any place in the worl,” MeCain noted, then obviously “you go tothe country where i's 11 percent tax versus 35 percent” MeCain goths number for Irland wrong: the Iish corporate taxrae is 12.5 percent, not Il percent butnote that he accepted (and cherished) the consteaintimposed by globalization. Ttenabled hit to forifyhis argument for lower axes by appealing (o their inevitability, courtesy of globalization. There has been a remarkable reduction im coxporate taxes around the world since the early 1980s. The average fr the mem ber countries ofthe OFCD countries, exchuding the United States, has fallen from around 50 percent in 1981 fo 30 percent 2000, In the United States, the statutory tax on capital has come down, from 0 percents0 59 percent over the same period" Competition aniong governments fo increasingly mobile global firms—what ‘economists call "international tax competion" —has played a role in tis global shift. The arguments of McCain and countless other‘The Giotalization Paradox conservative poitcans who have used globalization to advance their agendas provide still more evidence ofthis oe. "Adetaledeconornle suey on OECD tax policies finds that when other countries reduce ther erage statutory corporate tax rate by percentage point the home county fllows by reducing its x rte by 0.7 percentage points. You either stand your ground and risk seeing your corporations depart for lower tax jurisdictions, ‘or you respond in kind, Interestingly, the same sty finds that international tax competion takes place enly among countries that have removed their capital controls. When such controls are in pace, capital and profits cannot move as easly across national borders and there it no downward presse on capital taxes. The removal of capital controls appears to be the main factor driving the redusion in corporate tax rates since the 1808 "The problem has become a big enough headache for tax agen “ies that efforts are under way within the OECD and European Union «0 identify and roll hack instances of so-called “harmful ‘ax competition To date, thee actiities have only focused on tax havens in a number of microsates ranging from Andorra to Vanuata, The real challenge iso safeguard the integrity ofeach nation’s corporate tax segime in a world where enterprises and their capital ae fotlone, This challenge remains unadiessed. Health end safety standards Mose people would subscribe to the principle that nations ought to Be free to determine their own standards with reepect to public health and safey, What happens when these nandards diverge across countries, either by design for because of differences in thei application? How should goods land scricer be teated when they crete hesndarins jurisdic tions with varying standards? ‘WTO jurisprudence on this question continues to evolve. The WTO allows ouneres to enact regulations on public health and safery grounds that may run against their general obligations under the trade ries, Bur these regulations need co be applied The Palfical Tilernina oF the World Economg. us ina way that does not overly dserkminate against imports and must not smack of disgulsed protectionism. The WTO's Agree ‘ment on Sanitary and Phytosanitary (SPS) Measures recognizes the right of nations to apply measures that protect human, ani- tal, or plant life or health, bt these measures mast conform to {nernationalseandards or be based on “scientie principe Ia Practice, disputes in these areas hang on the interpretation of sroup of judges in Geneva about what is reasonable or practical Inthe absence of bright lines tha demarcate national sovereignty from international obligations, the judges often claim too much on behalf ofthe trade regime. In 1990, for example, a GATT panel ruled against Thailand’ ‘ban on imported cigarettes, Thailand had impoted the ban as pt ofa campaign to reduce smoking, but continued to allow the sle of domestic cigaretes. The Thai government argued that Imported cigarettes were more addictive and were mote likey to ‘be consumed by young people and by women on account of their cfecve advertising. The GATT panel was unmoved, It reasoned ‘thatthe Thai government could have attained its public heath ‘objectives at less cost to trade by pursuing akernative polices “The government might ave resorted to restrictions on adverts ing, labeling requirements, or content requirements, al of which could be applied in a non-dixcriminatory manner. ‘The GATT panel was surly correct about the impact ofthe ‘Thai ban on trade. But in reaching their decisions, the panelists seconds guessed the government about whats feasible and practi cal, As the legal scholars Michael Trebilcock and Robert Howse putt “the Panel simply ignored the possbity thatthe alternative measures might iol high regulatory and compliance ents or ‘might be impracticable to implement effectively in a developing country* The hormone beef case from chapter Four also rates dificult issues. In this instance, the Buropean Union ban on beef reared ‘on certain growth hormones was not discriminatory; it applied toThe Gobatiation Paradox imported and domestic beef alike, It was also obvious that there was no protectionist motive behind the ban, which was pushed by ‘Consumer lobbies and interests in Europe alarmed bythe potential heath threats. Nonetheless, the WTO Panel and appellate body ‘both ruled against the European Union, arguing thatthe ban vo- lated the requirement the SPS Agreement that policies be based ‘on “cient evidence’ There was indeed scant postive evidence to date that growth hormones posed any health deat, Instead the Buropesn Union had applied a broader principle not expicty ‘cavered by the WTO, dhe ‘precautionary prinipl,"which permits greater caution in the presence of scentificuncertainey* ‘The precautionary principle reverses the burden of proof Instead of aking, "Is there reasonable evidence that growth hor ones or GMOs have adverse effects?" it requires policy mak fre to ak, “Are we reasonably ure that they do not?" In many insite areas of scientific knowledge the answer fo both ques ‘dons cas be no. The precautionary principle makes sens in cases where adverse effects can be lage and irreversible, As the Euro pean Commission argued (unsuccessful), policy here cannot be tae pelyon the basis of sience. Politics, which aggregates society’ ik preferences, must play the determinative rote, The [WTO judges did acknowledge a nation’s right co app is own risk standards, burroled thatthe European Union's invocation of the precautionary principle did nt say che criterion of setensfic ‘ridence? Tosteal of simply ascertaining whether the scence was taken into account, the rules ofthe SPS Agreement forced them to vse an international standard on ha scien evidence should be processed, ifthe European Union, with sts sophisticated policy usin could not convince the WTO that it should have leeway im deter ning ts own standards, we can onty imagine the difficuties that developing nations face, For poor nations, een more than rich tones, the rules imply single standard ‘Ukimately, the question i whether a democracy is allowed t0 he Political Trilemma of the World Economy aT determine cw rules—and make its own mistakes. The Bro ‘pean Union regulations on bee fand, ina similar casein 2006, on biowec) did not national discipline designed to promote trade even more probs lematc. As Twill argue late, international rules ean and should requite certain procedural safeguards for domestic regulatory proceedings (such as transparency, broad representation, and sci- enti iapus) in accord with democratic practices. The trouble ‘ccurs when international ibunals contradict domestic proceed: {ngs on sulsiontie matters (n the beet case, how to trade off eco omic benefits against wncertain ealth risks). In this trade rules deariy trumped democratic decision making within scriminateageinstimpors, which makes inter ‘the European Union, “Regulatory tekings” There are thousands of bilateral investment ‘cates (BITS) and bundseds of bilateral or regional trade agree- ments (RTAS) currently in force. Governments us them fo pro= snd what the WTO and other raukilaceral arrangements permit. A Key objec ‘mote trade and favetment links n way th tive sto provide a higher level of security co foreign investors by undertaking stronger external commitments ‘BIT. and RTAS usualy allow foreign investors wo sue host gor cenments in an international cribunal for damages when new ‘domestic regulations have adverse eects on the investor profs The dea i thatthe change in government regulations amounts to expcopration (it reduces the benefits that were initially granted to the investors under the BEF oF RTA), and therefore requires, compensation. Tht similar to the US. doctrine of “regulatory takings” which however bas never been accepted legal practice svithin the United States, The treaties include a general excep~ tion to allow governments to pursue polices in the interests of the public ood, but since these eases ae judged in international court, diferent sandards ean apply. Foreign investors may end up receiving rights that domestic iavestors do not have!™wt The Gobaliaton Paradox Such eases have been prominent under the Nosth American Free Trade Agreement or NAFTA of 1992, particulastyin the area of environmental regulation. Foreign investors have won dam- ages agains the Canadian and Mexican governments in several instances. In 1997, a US. firm challenged a Mexican municipal- fin’ refusal to grant construction permitfor ataxic waste facility and was awarded §15 6 milion in damages. The same year a US. chemical company challenged a Canadian ban on a gasoline ada tive and received $18 million in a seulement” ‘Perhaps the most worrying cate to date involves a suit brought agains: the South Alrican government in 2007 by three Kalian mining companies, The companies charge that South Africas affirmative action program, called Black Economic Empower ‘ment, violates the ight provided them under existing bilateral _lnestment treaties The program aims t9 reverse South Africa's Tong history of racial discrimination and is an integral clementin the country's democratic transition. Ie requires that ining com panies alter their employment practices and sll a minority share toblack partners. The Italian companies have asked for $350 mil- ion in return for what dey astert is an expropriation of thelr South African operstions’"Iftheywin, they will have achieved an ‘outcome beyond the reach of ay domestic investors Industral policies in deoloping nations. Probably the most signif cant external constraint that developing nations face asa conse quence of hyperglobalization are the restrictions on industrial policies that make it harder fr countries in Latin Ameria, Africa, and elsewhere to emulate the development strategies that East ‘Asian countries have employed to such good ettect. Unlike GATT, which ke snd all industrial polices, the WTO imposes several restrictions. Export subsidies are now illegal forall but the poorest nations, A. poor nations essentially fre o use any denying developing nations the benefiof export processing ones ‘The PoiticalTrilemma ofthe World Economy c he type that Mauritius, China, and many Southeast Asian nations have used! Policies that requie firms to use more local inputs (so-called “domestic content requirements!) are also ile gal even though such policies helped China and India develop into world-class auto parts suppliers. Patent and copyright laws ost now comply with minimum international standards, ul ing out the kind of industrial imation that was cracal to both South Korea and Taiwan's industrial strategies during the 1960s ‘and 1970s (and indeed to many of todays ich countries in earlier periods). Countries that are not members ofthe WTO are often hit with more restrictive demands as part oftheir negotiations to join the organization ‘The WTO's Agreement on Intellectual Property Rights (TRIPS) eserves special mention, This agreement signiicancly impairs the ability of developing nations to reverse-engineer and copy the advanced technologies used in rich countries As the Columbia economist and experton technology policy Richard Neon notes, copying foreign techaclogy has ong been one ofthe most impor ‘ant drivers economic eateh-yp" TRIPS has raised considerable concern because i estrcts accesso estentisl medicines and has adverse effects on public health Is detrimental effects on techno- {oc capabilites in developing nations have yet to seceve smn- lar attention, though they may be of equal significance. Regional or bilateral wade agreements typically extend the external constraints Beyond those found in the WTO. These ‘agreements are in effet a means forthe United States and the European Union to “export their own regulatory approaches" to developing nations Often they encompass measures which the United States and he Easupan Union have tied to get adopted inthe WTO or other multilateral forums, but ave file. In pate ticular in its fre trade agreements with developing countries, the ‘United Stats aggressively pushes for restrictions on their govern= mens’ ability to manage capital flows and shape patent regulaue The Glaatzntion Paradox tions, And even though the IMF now exercises greater restrain, its ‘programs with individual developing countries sil contain many Getsiled requiements on rade and industrial polcis* Developing nations have not completly run out of room to pur sue indostrial strategies chat promote nev industries, Determined ‘governments can get around many ofthese cestrctons, but few ‘governments in the developing world are not constantly asking thezseves if this or that proposed poticyis WTO egal The Trilemma How do we manage the tension betwen atonal democracy and foal mareu? We have Ue opons. We cn mt demaoay inte tres of miming neoational anacion con, a rpding the economic and soca whiplash hath bal co con ceasonally produces, We cn i plan in the Dope fling democratic eiinacy a home. Orne cn gate ena, tthe ot of naoal sovereign, Tigers Aen Sopa for reconsrcing the wold exon ‘The mens captres te fundamental pola! emma of he wold ccanany we canot have hypergobalaon deoray Ted nasonal si determination alt once We can have A208 tro out ofthe Ire wan: hyperibaliztion and denocrcy. ound ogre upon the nation sate. Itwe matteep the maton ‘avand wan iyperlbatiaton on, hen we mv oge abs Semoctc. Andie ant combine democracy he maton ttn chen ye ye deep lbazaon, The gue blow dep wipe ark wade of? Consider aypoicca fy gta tented econonyin whic ransactio cos hae Dee i fred nd ool Drders oti ith te cxhang of foods ene of apt Can ation sas extn auch wr? Shiv ie oc excuse on economic Gobind 8 The Bolitical Trilemma of the Worl \ seme \ ire ice tang ‘becoming attractive to international investors and traders. Domes- tic regulations and tax policies would thea be either brought into alignment with international standards, or structured so that they pote the lest amount of hindrance to international economic integration, The only services provided by governments would be those that reinforce the emooth functioning of international markets We ean envisage a world ofthis or, and iti the one Tom Fried ‘man had in mind when he coined the term "Golden Straitjacket” In this worid, governments pursue polices that chy believe will cera them market confidence and ateact rade and capital inflows ‘ight money, small government. lw taxes, flexible labor markets, erepulation, privatization, and openness all around. “Golden Strijacket” evokes the ra of che gold standard before World War 1. Unencumbered by domestic economic and socal obligations, national governments were then free to purse an agenda that focused exchusively on strict monetary rules.cy ‘ne Giobalization Paradox Extematrestrnnts were eves more Blatant under mereastlism and imperialism. We cannot properly speak of nation sates before the nineteenth century, but the global economic system operated along strict Golden Strajecket lines. The rules of the game— ‘open borders, protection of the rights of foreign merchants and investore—were enforced by chartered trading companiesorimpe- ‘ial powers, There was no possibly of deviating from them. ‘We may be far from the clasicl gold standard or chartered trading companies today, but the demands of hypergloblization require a similar eowding out of domestic politic. The signs are familias the insulation of economic policy-making bodies (central Danks, fiscal authorities, regulator and soon}, the disappearance (or privatization) of social insurance, the path for lo corporate taxes, the erosion ofthe social compact between business and labor, and the replacement of domestic developmental goals wth the need to maintain market confidence. Once the rules ofthe game are dictated by the requirements ofthe global economy, domestic groupe access to, and their contol over, national eco- nomic policy making must inevitably become restricted You can have your globalization and yo beep democracy at bay “Must we give up on democracy lobalized workd economy? There is actually a way out. We can 1rnation state too, but only if you we want to strive fora fully grnode/ 2544 8 See fly Garten, "The Cae fr 4 Global Central Bask.” Ye Schoo ci Ntanagement, poate online, September 2,200, at pi/baya news eenta/ CMS) Aties/5858 sh 4 Carmen Renbartand Rennes Rog “Regulation Sho Be ters thous Finns Pigs Noneber 1 2006 (tp ne.om ems £/98872 688 1160700007798 hectic check). ' David Epstein and Shinya O'Halloran, Dagens: A Troms ‘Cou Pos pach Pal Mating Under Spr Pass (Cami td NewYork Camidge Unies Pres 10), 6 Anne-Marie Staghter, Naw Wo One Peiceton and Oxford ncion UnversyPrs, 2000.