Capitulos Special Edition 1996 SELA 7

Capítulos

Special Edition 1996

Risks and Opportunities of Globalization

SELA Permanent Secretariat

The following article was extracted from the Document ŤChange and continuity in the international globalization process: end-of-the-century scenariosť in which it appears as the second chapter. The SELA Permanent Secretariat presented this document to the XXII Latin American Council at its most recent meeting in Montevideo from 22 to 24 October 1995.

I. Characteristics of the globalization process

1. Market role
Globalization, seen as a markt phenomenon, is fundamentally spurred by technical progress and particularly, by the capacity it has to reduce the cost of mobilizing goods, services, money, individuals, and information.
This shrinking of Ťeconomic distancesť has made possible the taking advantage of arbitrage opportunities present in the markets for goods, services and factors, diminishing (although not eliminating) the importance of geography and the effectiveness of political blocs.
In its current stage, the Ťglobalizationť is equally characterized by enterprises' enhanced capacity to fragment, geographically-speaking, their productive processes. This, in turn, has resulted in sustained growth of trade (especially of manufacturing) and international investment (chart 1).
For some authors, Ťglobalizationť is a phenomenon that includes everything because in reality they liken it to the Nation-State's gradual disappearance.¹ Other authors continue to consider there is a function to be fulfilled by national policies, limited now to promoting the construction of a Ťcompetitive Stateť. According to this vision, limits on the effectiveness of public policy are determined by their Ťeffective capacity to promote a climate for investment, relatively favorable for transnational capitalť².
Opponents of the first view place their emphasis on specifications in institutional policies and national regulations as dominating characteristics of an international system still based on the survival of the Nation-State³.
These differences are not trivial due to the different policy implications of each one. Part of what makes the Ťglobalizationť view so terribly attractive is the simplicity it projects: the market rules and hence, the reasonable course of action is to adapt, in the Darwinian sense, all the while seeking Ťcompetitivenessť. This vision, however, seems to be more a regulatory recommendation in regards to the Ťdesirableť world than a description, even stylized, of reality.
The attractiveness of the other two visions is that they include both heterogeneity and national specifications as conditions that shape the contemporary international scenario. But what is the relative weight of diversity when faced with the phenomenon known as Ťglobalizationť? There are two decisive factors in this sense: the kind of transactions involved (the characteristics of the market) and the characteristics of the Nation-State on which said transactions have their effect (chart 2).
The convenience of an analysis of specific ways in which the process of Ťglobalizationť affects market functioning and the effectiveness of public policies is evident even in the area of market financing, where the break-down of geographical and political barriers has advanced in a more remarkable fashion.
Even when the restricting of government capacity, in terms of being able to develop independent monetary and fiscal policies, is evident, an empirical review shows that different national authorities are able to enjoy certain margins for action and different levels of autonomy that continue to exist.
Cohen (1996) emphasizes that the rules (macroeconomic) set by financial market integration are fewer than it seems for at least three reasons: first, fiscal and monetary policies have a limited long-term impact on the true variables of the economy, even in circumstances in which the mobility of capital is imperfect.
Secondly, capital mobility is far from being perfect. This has been clearly demonstrated through empirical research on the potential substitution capacity present among different national assets⁴.
And, the third reason is, keeping within certain parameters, that authorities must still face trade-offs between having political autonomy and the ensuing level of exchange instability. Unless authorities have an absolute preference for exchange rate stability, it is generally possible to preserve a certain degree of autonomy in managing macroeconomic policies in exchange for a specified rage of exchange volatility.
As a result, even in areas directly affected by the vast process of financial globalization, the national authorities preserve degrees of autonomy. This autonomy, however, is not evenly distributed: some national States ( and their public authorities) have greater access to it than others. The relevant issue from the point of view of policies is not whether the globalization process is restrictive (there is no doubt about that); the question is which elements explain the national differences and what, precisely, is the nature of the trade-off to be dealt with by each of the public authorities.
The degree of independence (and reputation) of the monetary authority; the structural characteristics of the relationship between the banking and industrial areas; the external account situation, coupled with other traits, such as the economy's size and openness, are variables that influence the political autonomy of national authorities.⁵
Another example of the survival of national specificities may be gleaned from the microeconomic environment or in sectoral policies. In effect, Garret and Lange (1991) emphatically assure that even in those instances where national macroeconomic policy autonomy has been severely reduced, one continues to see differentiated competition policies that rely on Ťsupplyť policy instruments. Elements, such as the level of presence of transnational capital or local institutional specifications, contribute to the continued presence of these differences.
Summing up, globalization, as a market phenomenon, has made a strong mark on market functioning and on national public policy effectiveness. Nevertheless, authorities continue to have varying degrees of autonomy, as observed in the different policy trade-offs.
Indeed, the scope of this autonomy has been significantly reduced and it varies from country to country. The analysis of the factors that explain this variable (including the role played by path dependency dynamics) is more useful than simply reiterating the global trends of general validity.
2. Policy role
Globalization is not the only market-driven phenomenon. Policies (i.e.: the removal of obstacles separating these and the harmonization of dissimilar national institutions) also play an important role. Frequently, harmonization or the sweeping away of regulations responds to market pressures. But sometimes it is also true that policy decisions promote and accelerate market integration and, consequently, sets Ťglobalizationť further into motion.
At policy level, Ťglobalizationť refers to the pressure exerted in bringing about the convergence of diverse national practices and institutions. The basis of this lies in the existence of spillovers and Ťpsychological externalitiesť or Ťpolitical shortcomingsť.⁶
The first occur every time decisions or events that belong to the national economic sphere have an influence on others (a typical example of this is macroeconomic interdependence). The Ťpsychological externalitiesť or Ťpolitical shortcomingsť occur when a diversity of practices and the resulting institutions of the national state organization are questioned by actors whose power and influence is such that they can set their own preferences or values as Ťsuperiorť or Ťuniversalť. Issues in respect of which human rights or environmental practices have been introduced are clear cases of this.
At the policy level, the globalization process has found a place on the agenda focusing on Ťfar-reaching integrationť. Paradoxically, it arose prompted by the reduction of border barriers during the past fifty years (Ťsuperficial integrationť).
Accomplishments made via national policy and international negotiation during the post-war era to reduce border obstacles for the movement of goods and property and, in a varying degree, for services and tangible and intangible forms of capital (financing, tchnology or control of assets) has put emphasis on non-border obstacles of the Ťfar-reaching integrationť agenda (especially, though not exclusively, among industrialized countries).⁷ This agenda is not only more complex than the traditional border agenda, but also the recommendations for regulations on how to direct it are subject to more extensive debate.
The Ťfar-reaching integrationť agenda (expression at the level of policies of the Ťglobalizationť process) covers a wide variety of issues and on the limit, includes virtually all the policies and non-border national practices. From the viewpoint of developing countries, Haggard (1995) includes in this agenda the following topics:
-extension of international rules for the area of trade to the area of investment, ensuring national treatment and market access (including the service portion) for international investors;
-treatment of national regulatory regimes that have discriminating effects or Ťunbalance the rules of the gameť, such as differences in intellectual property protection, national standards and regional or generic (financial, industrial, technological, competition, environmental, labor, etc.) policies; and
-treatment of the Ťfriction systemť derived from differences in corporate and industrial structures and national policies.
This Ťfar-reaching integrationť agenda touches on two related problems. The first is to pinpoint the reach and give instrumental value to the concept of Ťleveling the rules of the gameť. The second is to discern costs and benefits associated with the reduction in diversity.
The idea of Ťleveling the rules of the gameť is an attractive image, but is dangerous as a general policy objective. In broad terms, it seems reasonable to sustain that those practices and institutions that give an Ťunjustifiedť competitive advantage to one part should be Ťleveledť. But this affirmation avoids the problem: Where should the limit be placed between a Ťjustifiedť advantage and an Ťunjustifiedť one? What type of national practices are the function of legitimate preferences and which are in the interest of obtaining advantages in international competition?
The discernment of the costs and benefits of reducing diversity is equally complex. First of all, in order to weigh costs and benefits, should Ťcosmopolitanť or Ťnationalť criteria be employed?
Second, how do you evaluate the usefulness of agents or States with substantial differences in their income and productivity levels? For example, what price will citizens of a low-income country be willing to pay (expressed in a slower pace of economic growth) in order to reduce their aggression towards the environment? Should citizens of developed countries have to pay for the accumulated damage on the environment or should the Ťclean slateť criteria be applied?
These issues are extremely contentious and ultimately, have to do with the struggle for power and influence over the international system. These issues abound in the contemporary international agenda- just as they have at other moments in history. This illustrates the mandate and reach of the recently created World Trade Organization. What this entails is that countries of Latin America and the Caribbean will be required to manage not only the tensions derived from a globalization process as a market phenomenon, but also those generated by initiatives that deepen Ťglobalizationť as a policy phenomenon. Drawing the line between one and the other is not always easy.
3. The opportunities for Ťglobalizationť
The costs and tensions that the globalization process inflicts on national economies are well known. The most apparent are the limitations on the effectiveness of national policies and the conflict which is presented by the break that exists between the government structures (of a predominantly national base) and the Ťglobal
Enero 8, 1997_ture of certain trends and economic interactions. However, the Ťglobalizationť process also offers new opportunities for national economies.
On one side, the Ťglobalizationť process presents an opportunity to upgrade market access conditions that were previously more fragmented. The flows of information, technology and portfolio capital have increased most in terms of their mobility, and therefore, they make up the markets where access conditions have also had the most improvement for economies with relatively less endogenous generation capacity. However, conditions for taking advantage of these opportunities are heterogeneously distributed among countries. One central aspect therefore, resides in the identification of attributes that enhance the capacity and allow the reversal of negative aspects inherited from past behavior (path dependency).
An example of what is mentioned here is presented by a typical trait of the recent process of globalization, and that is the improvement in the capacity of the participants to fragment the productive process in scattered geographical locations.
The noticeable reduction of transportation and communication costs has facilitated the division of the productive process, allowing participation by a larger number of geographical locations according to the advantages that each one contributes to the value-added chain. This fact has broadened the opportunities so that individual economies can participate more actively in the international production networks administered by large multinational companies. This process has been accompanied by a boom in foreign direct investment boom (chart 1) and from the proliferation of new forms of association with no holdings between participants. As Oman (1994) states, however, the possibility of participating in these production networks depends on the effectiveness with which the receiving economy responds to the demands of macroeconomic stability, availability of infrastructure, qualification and adaptability of the workers, which are traits intrinsic to the new pattern of production organization.⁸
The Ťglobalizationť process also creates new opportunities in that it increases competition, sets the foundations on which to build new corporate and societal alliances and contributes to the break-up of established oligopolies. If these oligopolies barred the way to modernization, developed a rent-seeking behavior, and Ťexploitedť the rest of the community, new coalitions can generate results that are more favorable than the status quo. Similarly, under certain circumstances, globalization may allow for an improvement in the quality of domestic policies by increasing the cost of enforcing policies that cannot be sustained.
These opportunities, however, are only potential. There is no a priori guarantee that the new coalition will generate results superior to those of the pre-existing one. In this sense, Armijo's analysis (1996) of the differential impact of distinct types of capital income on economic growth, on governments in power, and on democracy (chart 3) is enlightening. Although his conclusions can be questioned, his examples illustrate the diversity of possible results.
Much in this same manner, even when globalization makes the implementation of policies that cannot be sustained very costly for the middle and long term, it is not certain that the new policies will be superior to those that would be applied in a context of greater autarchy . The simplistic version of this issue can be found in the following statement made by an influential international publication: Ť to the degree that the global capital market is efficient, the greater the possibility that it will generate a positive retribution of the healthy economic policies and that it will escape from errorsť (The Economist, 1995).
However, in actuality an obvious ambiguity exists regarding what Ťwrongful policiesť and Ťcorrect policiesť are, especially when their objective is not specified. In other words, is a Ťcorrect policyť the one that promotes growth or the one that keeps enthusiasm of the nationl and foreign investors? Can the same policy do both things simultaneously?

II. International scenarios

1. Market and Intervention Forms: Scenarios of Lawrence, Bressand and Ito
ŤGlobalizationť is a vigorous process full of contradictions. The most important is the growing disparity between political structures based on the nation State and the increasingly global character of the interactions and courses that link different national economies. The consequential reduction of Ťautonomyť challenges the very notion of political sovereignty. However, this last principle continues to be one of the fundamental organizational elements of public action.
This key conflict favors the emergence of diverse scenarios for turn-of-the-century international economy.
In their work, which will certainly have great influence on policy debate, Lawrence, Bressand and Ito (1996) identify three long-term stylized scenarios for international economy. Their objective is not to point fingers at the future shape of international economy, but instead, identify possible main lines of evolution and the tensions that derive from each.
Based on this debate, the authors built a fourth scenario of normative style that, according to their vision, will allow overcoming the main deficiencies of the three preceding ones.
The four scenarios that we mentioned are illustrated in Graph 1⁹. Throughout each axis, the intensity with which the market operates (the Ťinvisible handť) and the public instances in the area of international economic relations (the Ťvisible handť) are represented . The intensity of the Ťvisible handť operation goes from one extreme of Ťbenign negligenceť (where authorities are essentially insignificant) to another of Ťcollective supervisionť (where the efforts to intervene, presumably cooperative, were maximized).
The presence of the market, on the other hand, oscillates between a minimum where administrative type interventions predominate (protectionism)) and a maximum where competition is used even as a means to evaluate industrial efficiency (Ťmutual acknowledgmentť)¹⁰. In this reduced framework, four scenarios can be placed according to the combination that each does of the market and the regulations.
The most basic scenario is the one of the Ťworld without frontiersť, where the importance of the market is combined with a posture of Ťbenign negligenceť on behalf of the public authorities (with little or no international coordination).
A supposed requisite for this scenario is trust in the ability to overcome emerging tensions of global order of some of the markets and transactions and the predominantly national basis on which political power rests and governs. This presumes the existence of governments with a great capacity to arbitrate amidst different domestic interests and strong enough to impose a liberalization agenda on its members.
The scenario of a Ťworld without frontiersť also supposes the existence of heightened confidence in the ability of the market to promote convergence and homogenizing dynamics because these provide the only guarantee that the process could progress without confronting insurmountable political obstacles. Also, the presence of external issues and spills should be inconspicuous enough so as to not place irresistible demands for coordination. Given the requirements and assumptions, the Ťworld without frontiersť seems more like an expression of desires (or n ideological projection) than a scenario with clear perspectives of occurrence. Or as stated by the authors, a scenario that Ťcan only exist in carefully defined and limited areasť.
The second scenario given the name of Ťfragmentationť, combines low intensities of market and of international public coordination. This scenario mirrors the classic Inter-State conflict where diversity is maintained through isolation.
This scenario does not necessarily imply a fallback in the Ťsuperficial integrationť that has already been achieved , but instead the use of certain instruments (such as anti-dumping rights, which now reach the fields of labor and environmental practices) in the isolation and preservation of segments of the national economy from interaction with the rest of the world.
In this scenario, the opportunities opened by globalization will be lost to fragmentation, besides aggravating the political and eventually military conflict.
The third scenario called Ťimperial harmonizationť by the authors, combines a low market intensity with a considerable degree of collective supervision.
This scenario assumes the convergence of practices and institutions within groups of countries with a well-established hegemonic relationship or basic interests or structures in common. For the great majority of the countries, this scenario implies convergence towards a relatively more powerful or Ťsuccessfulť national economy. But as the experience of the European Union shows, not even among countries that have no great differences between them does the convergence process have linear characteristics or is it exempt from difficulty and conflict.
2. Implications and probabilities
At an exclusively analytical level, each of the scenarios designed by Lawrence, Bressand, and Ito would have very different implications for the Latin American and Caribbean countries, or for the countries of other regions in general.
As previously pointed out, the scenario generated by a Ťworld without bordersť is highly unlikely from a practical standpoint but nevertheless continues to be a highly influential normative argument for policy formulation.
However, the translation of this scenario in terms of domestic policy is comparable to the existence of strong governments with a large capacity for internal arbitration. This could result in an authoritarian bias for internal political regimes.
The scenario of Ťfragmentationť also implies significant costs that would be distributed heterogeneously among the countries of the region. The most evident cost would be the loss of opportunities to exploit the potential advantages of globalization based on improved access to more integrated markets. Moreover, Ťfragmentationť would also probably be linked to an atmosphere of global political instability and conflict having an influential role on the countries of the region. For those countries with a diversified economic relation with the rest of the globe, such a scenario would prove extremely inconvenient, while those countries that have most of their economic links concentrated at the regional basis (especially with the United States), the consequences would be similar to those of the scenario known as Ťimperial harmonizationť.
As already indicated, however, harmonization is not necessarily the most indicated path for all parties; this is all the more so in the case of the standards corresponding to economies with higher relative development.
In the scenario of Ťimperial harmonizationť, it is also possible that for many of the countries, its practice would be the equivalent of Ťfragmentationť.
On the other hand, the authors themselves point out that the probability of occurrence for each of these scenarios is very dissimilar. The Ťworld without bordersť scenario is most unlikely to occur due to the clash with the ongoing existence of natinal bases of the State power and the effectiveness of domestic coalitions to influence government behavior. As in the case of the present period, the inexistence of a hegemonic State has been signalled as one of the factors that promotes fragmentation due to the diminished inclination to provide the public goods needed for the integrated functioning of the international economy.
Furthermore, the fragmentation scenario is a recurring phantom convoked by those that see contradictory trends between the globalization process and the parallel regionalization of the world economy. In fact, periods of high integration in the past have been immediately followed by fragmentation stages that brought down the international economic and political system. Just at it occurs at present, the inexistence of a hegemonic state has been pointed out as a factor that spurs fragmentation due to the lack of willingness to provide the necessary public goods for the integrated functioning of the international economy.
Nevertheless, the probability of having a Ťfragmentationť scenario has become relative as a result of the extension and nature of the globalization process, the role played by some of the private actors in this process (e.g., transnational companies) and the growing perception of the functionality of economic globalization as a mechanism for distension and closeness of inter-State political links. The emergence of influential Ťopinion elitesť with a high profile vis-à-vis the political debate at the global level added a new element that weakens the probability of this scenario occurring.
From an analytical standpoint, the Ťimperial harmonizationť scenario can be considered more plausible, at least in the case of countries with close economic ties with State actors capable of becoming harmonization axes.
The weaknesses detected in each of the depicted scenarios spurred the authors to design a fourth regulatory scenario based on the idea that it is in fact possible to combine an active role for the market with a high dosis of collective monitoring.
This scenario, known as the Ťclub of clubsť is structured on the basis of the existence of multiple regional and functional associations organized under the principles of voluntary membership, subsidies, transparency, and open access to all those accepting the rules (in the case of functional clubs).
According to the authors, the regional or functional groupings should also incorporate the principles of adherence of minimum standards, mutual recognition, only temporary exceptions and effective capacity to implement commitments and decisions. The peculiarity of this scenario would be that all of them would, additionally, count on a sphere for coordination and collective monitoring, precisely the Ťclub of clubsť.
A scenario of this kind favors the role played by parties with lesser relative power in that it grants an important part to political coordination mechanisms. These, by definition, have a more balanced nature than that which would be generated by the simple dynamics of the market or power.
However, in the near future, it is more likely that the trend will head towards the deepening of certain Ťclubsť and less likely to head towards others, more than the coordination of these even through a more inclusive mechanism (the Ťclub of clubsť).
Finally, it is also convenient to note that, for analytical purposes, as regards the Latin American and Caribbean countries (and other developing countries), the four scenarios described by Lawrence, Bressand, and Ito would not necessarily be exclusive. In fact, even the coexistence of a Ťworld without bordersť and Ťimperial harmonizationť is possible for some of the partners selected for determined issues.
In respect of this diverse grouping, some Ťclub of clubsť (such as the WTO) could give rise to hopes of a future with more enhanced international public cooperation.

NOTES

For a vision of this type, for example, see Ohmae (1995).
See Cerny (1995) for the development of the argument concerning the Ťcompetition Stateť.
See, for example, Boyer (1993).
For a discussion, see Henning and Litan (1995).
Cohen (1996) quotes the work by Henning (1994); Goodman and Pauly (1993) and Andrews (1994).
See Lawrence, Bressand, and Ito (1996).
See Khaler (1993).
Oman, moreover, emphasizes the role of geographic proximity (Ťregionalizationť) in the organization of these production networks as a trait generated by the new technological paradigm of flexible production.
This graph was presented by the authors themselves at a seminar held in Mexico City in 1995.
See Kahler (1993) for an excellent discussion on the three forms of managing conflict between diversity and openness (management of trade, harmonization, and mutual acknowledgment).

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