How Far Will International Economic Integration Go.doc

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29 Mar 2012
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How Far Will International Economic Integration Go?
- Dani Rodik
Discusses in terms of international economic integration rather than globalization
How Much More Integration Could There Be?
- International economic integration remains remarkably limited
- Exchanges across national jurisdictions are subject to transaction costs
- These transaction costs arise from various sources; contract enforcement
o When one of the parties withdraws from a written contract, local courts
may be unwilling and international courts unable to enforce a contract
signed between residents of two different countries
- National sovereignty interferes; much room for opportunistic behavior
- International law severely limited in providing protection
Important implications for how far international economic integration will go
- If the reach of jurisdictional boundaries limits the depth of markets, does it not
follow that sovereignty imposes serious constraints on international economic
integration?
- Can markets become international while politics remain local?
- What would politics look like in a world in which international markets had
nothing to fear from the narrower scope of political jurisdictions?
Caught in an International Trilemma
- There is an implied claim that we can only have two of three things
- “The impossible trinity” or “open economy trilemma”
o Countries cannot simultaneously maintain independent monetary policies,
fixed exchange rates and an open capital account
- The political trilemma of the world economy
o International economic integration
o The nation-state (national sovereignty)
o Mass politics (democracy)
- Hypothetical perfectly integrated world economy
o National jurisdictions do not interfere with arbitrage in markets for good,
services or capital
o Transaction costs and tax differentials would be minor; convergence in
commodity prices and factors returns would be almost complete
- The most obvious way to reach such a world is by instituting federalism on a
global scale; it would align jurisdictions with the market; remove “border effects”
- National governments would not necessarily disappear, but their powers would be
severely limited by supranational authorities e.g. the U.S. and possibly the EU in
the future
- An alternative is to maintain the nation-state system, but to ensure that national
jurisdictions and the differences among them do not get in the way of
economic transactions
- Nation-states would wish to appear attractive to international markets
o National jurisdictions would be geared towards facilitating international
commerce and capital mobility
- Many commentators seem to believe that we are already there
- Governments today actively compete with each other by pursuing policies that
they believe will earn them market confidence and attract trade and capital
inflows: tight money, small government, low taxes flexible labor legislation,
deregulation, privatization an openness all around
- These policies comprise the Golden Straitjacket; Thomas Friedman
o Two things happen; your economy grows and your politics shrinks
o It narrows the political and economic policy choices of those in power to
relatively tight parameters
o Once adapted, there is never any major deviation from the core rules
- The essential point is this; once the rules of the game are set by the requirements
of the global economy, the ability of mobilized popular groups to access and
influence national economic policy making has to be restricted.
- Contrast with global federalism; politics need not and would not shrink, it would
rather relocate to the global level e.g. US state vs. federal level politics
- Third option; the Bretton Woods compromise
- If we sacrifice the objective of complete economic integration
- Countries could do what they wanted as long as they removed a number of border
restrictions on trade and generally did not discriminate among their trade partners
- Abandoned in the 1980s;
o Improvement in communication and transportation technologies
o Transfer from domestic politics to international trade discussions
o Shift in attitudes in favor of openness
- Left somewhere in between the three nodes of the augmented trilemma
Where Next?
- Presently nowhere near complete integration
- This will require either expansion of jurisdictions or shrinkage of politics
- Rodik supports global federalism
- Combination of traditional forms of governance with regulatory institutions
spanning multiple jurisdictions and accountable to perhaps multiple types of
representative bodies