Policy recommendations

A tension appears when ever-deeper global economic integration is accompanied by insufficient global governance. In a fully closed economy it is within the sovereign government’s powers to shape the country’s economic performance, though strictly within the boundaries of its economy’s own means. Globalization offers many opportunities and the potential for vast mutual gains from interaction. However, globalization also poses daunting challenges and constraints. Openness inevitably involves some loss in national policy space and in scope for deliberate national policies that are well attuned to national conditions and requirements. Global governance needs to ensure a sound balance between national policy space and international policy cooperation as well as overall policy coherence.

As global governance has failed to keep step with accelerated economic globalization, the balance between markets and governments has shifted in favour of the market. Contrary to certain ideological presuppositions, this is not an unquestionably positive development. Markets not only undersupply public goods and fail in the presence of externalities or imperfect information. In reality, markets also rarely meet the ideal form of perfect competition, featuring the absence of market power, from which the famous postulate about the welfare-enhancing powers of the “invisible hand” is derived.

Globally, despite competition being global today in some key industries, a small number of large global corporations–traditionally originating from developed countries–typically dominate in the marketplace. This is also true in the global financial area.

A related asymmetry in economic power exists between larger and smaller countries, with developing countries traditionally falling in the latter category. While the processes of globalization and national policies may mutually codetermine each other, smaller countries are less able to shape globalization trends and global economic governance, while at the same time being more influenced and constrained by the external environment created by globalization.

Both at the global level and within many national economies, globalization has also contributed to a shift in economic power that has increased capital bargaining power at the expense of labour. One of the reasons was that the increased international mobility of products and factors – the core of the whole process – was very uneven, with capital and goods and services having become much more mobile globally than labour. As a result, the threat of delocalization became a powerful argument for wage moderation. In addition, competition among developing countries for foreign direct investment (FDI) can give rise to a race to the bottom through concessions made to transnational corporations, including a relaxation of labour regulations.

All these factors determine whether potential mutual benefits are realized in the first place, and how they are shared, both globally and within nations. Especially in democracies, where governments are accountable to national parliaments and electorates, the loss of national policy space arising with economic integration is a fundamental conflict.

In the past decade, for lack of proper global governance, the unbalanced and hazardous global economic environment encouraged many developing countries to favour defensive macroeconomic policies, featuring the spectacular rise in international reserves (or self-insurance boom). Other possible unilateral responses to overcoming the above conflicts and rectifying the resulting imbalance between markets and government could include re-erecting or raising protective barriers, be it in the form of tariffs or capital controls, for instance. In a globally integrated economy, the international coordination of policies is essential. Global governance reform needs to catch up with globalization – or risk a backlash.

The global crisis and recent upgrading of the status of the Group of 20 (G20) have given fresh impetus to global governance reform and global cooperation. The inclusion of a group of large developing countries in the inner core of global intergovernmental policy coordination at least partly acknowledges the changing balance in the world economy between developed and developing countries. Some developing countries have grown into large economies and have are home to large global corporations.

Despite these highly welcome recent changes in global governance, the concerns of developing countries remain underrepresented globally. Global governance reform needs to progress further so as to properly reflect the shifting balance in the world economy and enable all developing countries to fully participate in and shape globalization, and fully share in the benefits. While the United Nations should remain the primary forum for discussing global issues, the gravest deficiencies in global governance currently exist in international monetary and financial arrangements. In view of the current hazardous global economic environment, safeguarding national policy place remains vital in steering development.

Highlighting the nature and extent of global interdependence and interconnectedness existing today, the global crisis of 2008–2009 and the economic havoc it wreaked continue to define some key economic challenges that policymakers are struggling with in returning their national – but interdependent – economies to sustainable growth. Globalization is at the crossroads: in order to continue in a safe manner, the process needs to be controlled and managed more wisely.

• An inherent tension exists between economic integration and insufficient global governance;
• The balance between markets and governments has shifted in favour of the market;
• In democracies the loss of national policy space arising with economic integration is a fundamental conflict;
• The upgraded status of the G20 has given fresh impetus to global governance reform;
• Inclusion of a group of developing countries in the inner core of global intergovernmental policy coordination acknowledges the reality of a changing balance in the world economy;
• The concerns of developing countries remain underrepresented;
• Safeguarding national policy space remains vital;
• Global governance reform needs to make further progress.