Developing Global Institutions: Lessons to Be Learned from Regional Integration Experiences

Article excerpt

The global economy, we are told, will not only allow the free movement of goods, but services and financial and real capital as well. The flow of information and capital has allowed firms to locate the production of components of final products at various locations around the globe while controlling production from their headquarters. Ultimately, we might experience the free movement of people as well.

Kenichi Ohame [1990, 193] wrote that "we have to accept that national borders have little to do any longer with real flows of industrial activity." According to Ohame, information and knowledge, rather than military power, are the source of economic strength. This transformation will reduce the regulatory authority of national governments, but it is unclear how much authority will be transferred to global institutions and how much will remain with the multinational firm free from public regulation [Ohame 1990, 182-185]. Because Ohame implies that public regulatory authority will be diminished in the borderless economy, the success of this transformation process depends on multinational firms behaving like model global citizens [Ohame 1990, 211].

Perhaps, fortunately, the trip to the borderless world has been delayed by the global financial crisis of the late 1990s. This delay has allowed some who are not convinced that we are ready for a seamless system of international transfer of real or financial capital to question the arguments of the advocates of globalism. An avid free-trader, Jagdish Bhagwati [1998, 8] has written recently that "only an untutored economist will argue that, therefore, free trade in widgets and life insurance policies is the same as free capital mobility." He offers three arguments against free movement of capital as finance. First, the gains from capital movements have not been as carefully measured as the gains from trade have. "The overwhelming majority of trade economists judge the gains from free trade to be significant, coming down somewhere between Paul Krugman's view that they are too small to be taken seriously and Jeffrey Sach's view that they are huge and cannot be ignored" [Bhagwati 1998, 10]. Armed with these measurements that allow us to conclude that free trade probably does no overall harm to the global economy, Bhagwati reasons that we should expect at least as much from the advocates of capital mobility. Second, capital flows are subject to wide swings in expectations that can create financial panics that, in turn, can harm the real economy. Finally, there are those who will tie strings to aid measures to halt such panics. An example is the "Sanders-Frank Amendment, which seeks to attach labor standards conditions to any increase in bailout funds" [Bhagwati 1998, 9]. Ohame would apparently avoid the need for such governance because multinational companies would be good global citizens [Ohame 1990, 82-100].

Bhagwati's second two concerns regarding the efficacy of the global capital markets are especially relevant to the objective of this article. His concern about possible panics suggests that acceptable institutions are needed to provide a security of expectations for economic actors. Bhagwati's concern about conditions tied to aid packages suggests that labor practices involved in producing traded goods and real capital movements are related. How does one measure the overall benefits from trade when some of the trade is a consequence of reduced labor standards? The growth in trade in goods under different national environmental and labor regulatory regimes, alongside free movements of productive capital, has caused many to worry about the conditions of production around the globe. The question has been asked repeatedly, will there be a race to reduce production standards to win the contest for trade?

Borders and Institutions

The consequences for production and distribution of national and international pecuniary institutions are what need to be examined. …