Let developing nations rule

Dani Rodrik

28 January 2009

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There is just possibly a silver lining for developing nations in the present crisis, and it is that they may well emerge collectively with a much bigger say in the institutions that govern economic globalisation. Once the dust settles, China, India, Brazil, South Korea, and a handful of other “emerging” nations will be able to exercise greater influence in the way that multilateral economic institutions are run. And they will be in a better position to push for reforms that reflect their interests.

This will be the result of two related forces.

The first is that the US and Europe will come out weakened from their financial crises, both as economic actors and as upholders of the policy and intellectual orthodoxy. They will be unwilling or unable to provide the kind of leadership that sustained multilateralism in the decades that followed the Second World War. Developing nations will have to step up to fill in the gap.

The second is that the relative weight and importance of developing nations in the global economy will have risen even more. Many of the leading financial institutions of the West those that have not been nationalisedas well some important industrial enterprises will remain at the mercy of capital from China or the Gulf states. In trade, the present round of global trade negotiations has already demonstrated that if rich nations want developing nations to play ball, they will need to let them shape the rules of the game.

Interests and priorities of developing nations  

To make the best of this outcome, developing nations will have to have a good sense of their interests and priorities.

This site is devoted to a discussion about what those interests and priorities are.

To get the debate going, here is what I think developing nations should push for.

First on the agenda must be new rules that make financial crises less likely and their consequences less severe. Left to their own devices, global financial markets provide too much credit at too cheap a price in good times, while they deliver too little credit at bad times. The only effective response is counter-cyclical capital-account management. This means discouraging foreign borrowing in good times, and preventing capital flight in bad. Instead of frowning on capital controls and pushing for financial openness, the IMF should be in the business of actively helping countries implement such policies. It should also enlarge its emergency credit lines to act more as a lender of last resort to developing nations hit by financial whiplash.

Second, the crisis is an opportunity for achieving greater transparency on all fronts, including banking practices in the advanced countries that facilitate tax evasion in the developing nations. Wealthy citizens in the developing world evade more than a hundred billion of US dollars worth of taxes in their home countries each year thanks to bank accounts they maintain in Zurich, Miami, London, and elsewhere. Governments of these nations should ask for and be given information on their nationals’ accounts.     

Third, developing nations should also push for a Tobin taxa tax on global foreign currency transactions. Set at a small enough level – say 0.25% – such a tax would have little adverse effect on the global economy while raising considerable amount of revenue. At worst the efficiency costs would be minor; at best the tax would discourage excessive short-term speculation. The revenues collectedwhich would easily amount to hundreds of billions of US dollars annuallycould be spent on global public goods such as development assistance, vaccines for tropical diseases, and the greening of technologies in use in the developing world.

The administrative difficulties in implementing a Tobin tax are not insurmountable, as long as all major advanced countries go along. It would then be possible to get offshore financial centres to cooperate by threatening to isolate them on the international stage.              

Fourth, in trade, developing nations should push to enshrine the notion of “policy space” in the constitution of the WTO. The goal would be to ensure that developing countries can employ the kind of trade and industrial policies needed to restructure and diversify their economies and set the stage for economic growth. All countries that have successfully globalised have used such policies, many of which are currently not allowed under WTO rules (e.g. subsidies, domestic-content rules, reverse engineering of patented products). Policy space is also needed to ensure that important social and political ends – such as food security – are compatible with the rules of international trade. Developing nations should argue that recognizing these economic and political realities makes the global trade regime not weaker and more susceptible to protectionism, but healthier and more sustainable.  

New developing countries’ responsibilities

But with greater say comes also greater responsibility. Developing nations cannot just make demands and expect them to be granted, but not compromise in return. So they will need to be more understanding and responsive to legitimate concerns in rich countries and be more willing to pay for some of the global public goods.

Capital-exporting developing nations should be willing to accept greater transparency in the operation of sovereign wealth funds and pledge not to use them for political purposes. The largest developing nationssuch as China, India, and Russiawill need to shoulder some of the burden of reducing greenhouse gas emissions.

Similarly, developing nations will need to understand that policy space is a two-way street. In countries like the US where the middle class has reaped few of the benefits of globalisation in the last quarter century, trade policy will be under severe pressure to provide some redress. President-elect Obama made the plight of the middle class a central plank of his successful campaign. His chief economic advisor Larry Summers has also been vocal of late on globalisation’s adverse impact on workers.

It will not do much for good for developing countries to raise the spectre of protectionism each time such concerns are voiced. The political and economic reality demands a more nuanced and cooperative approach. They should say no to trade protectionism straight and simple. But they should be willing to negotiate with advanced nations on avoiding regulatory races to the bottom in such areas as labour standards or tax competition. This is in their long-term self interest. Without buy-in from the middle classes of the advanced nations, it will be very difficult to maintain a global trade regime as open as the one we have had in recent years.

Editors' note: This column is a Lead Commentary on Vox's Global Crisis Debate page; see further discussion on Vox’s “Global Crisis Debate”.

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Topics:  Global governance

Tags:  development, globalisation, emerging countries, global crisis debate, tobin tax

Ford Foundation Professor of International Political Economy, Harvard University, and CEPR Research Fellow.

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