Saturday, September 22, 2012

Will countries increasingly look inward?

A recurring theme is this blog is the domestic policy space available to countries in the multilateral trading system. How much national autonomy do members have to craft their own domestic development agenda? How much are they constrained by the rule based trading system? opinion is divided on the issue and experts tend to argue that the multilateral trading system epitomised by the various multilateral agreements offer enough space for countries to pursue their respective agendas. How much of this domestic agenda is "protectionism" is another debate. Are these developmental agendas non-discriminatory and justifiable? Are countries looking more and more inward to find solutions to pressing economic problems rather than relying on the multilateral system?

Dani Rodrik, a critique of unhindered globalization, has recently written a brilliant piece in Project Syndicate indicating that in the future countries will increasingly look inward in terms of relying on their internal market instead of global, overseas markets. He, thus, implies that the multilateral trading system will lose its significance as countries will trade more internally than externally thus making the domestic policy debate redundant in a sense.

"Countries that rely excessively on world markets and global finance to fuel their economic growth will also be at a disadvantage. A fragile world economy will not be hospitable to large net foreign borrowers (or large net foreign lenders). Countries with large current-account deficits (such as Turkey) will remain hostage to skittish market sentiment. Those with large surpluses (such as China) will be under increasing pressure – including the threat of retaliation – to rein in their “mercantilist” policies.

Domestic demand-led growth will be a more reliable strategy than export-led growth. That means that countries with a large domestic market and a prosperous middle class will have an important advantage."

Forecasting that countries with low levels of public debt, reliance on local markets instead of global markets and strong institutions of democracy would do well in the coming years. India, Brazil and South Africa, according to Dani Rodrik, would fit this bill and will be in a better position to address the challenges of an inequitable global order. Are we going to see a reduced interest in the urge for countries to be part of the globalised economy? Is being integrated or taking advantage of the international supply chains going to reduce? Does the strategy to rely more on internal markets signal a legitimate use of protectionist measures for growth and equity? Recent trends of Argentina indicate that countries are looking at inward looking policies to further economic agendas. Will this be a long lasting trend? How would the WTO system react to this? How would the Dispute Settlement mechanism react to this development? Can it be achieved within the ambit of the multilateral trading system?

I read an interesting UNCTAD paper on finance-driven globalisation that echoed a similar view in the context of globalization in financial investments and countries reaction to it. Titled the "Paradox of Finance-Driven Globalization" it has come to the conclusion that countries that have pursued heterodox, innovative, local policies suited to their national conditions have been able to do better than countries that have followed a "liberalised", uninhibited finance-driven globalization model.
"Without going into detailed country profiles,success stories have been able to adopt creative and heterodox policy innovations tailored to local conditions. Many have established a strong investment–export nexus by managing their outward orientation with strategic policies including high (but temporary) tariff and non-tariff barriers, publicly owned development banks, directed credit, domestic content requirements, and capital controls. In addition, some have used targeted industrial policies to diversify their economies, developing a wider range of more productive activities. Such diversification appears to be closely linked to improving employment conditions and to build resilience against adverse shocks."
It appears that this paper reflects the notion that countries should exercise more domestic policy space in the multilateral trading agenda to pursue national goals. How much of this would violate WTO obligations is another issue.  Would using domestic content requirements or increasing protectionist measures be a permitted measure? Where does one draw the line?

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