The Third Pillar

by Raghuram Rajan

  Through the Trade Related Intellectual Property Rights Agreement (TRIPS) negotiated under the auspices of the World Trade Organization in 1994, developed countries have pushed stronger intellectual-property protections on all other countries. TRIPS specifies long periods of protection even in areas where intellectual property rights protection is controversial. Rich pharmaceutical companies in developed countries lobbied their governments to effectively create more lucrative property rights for them in the poorest countries, arguing this was essential to enhance innovation. Developing countries acquiesced for fear of being excluded from trade. Such agreements coerce poorer countries into accepting an intellectual property rights regime that is far stricter than one they themselves, fearing a slowing of domestic innovation and growth, might enact.

  TRIPS creates a uniformity of regime across the world that limits competition between jurisdictions. It may be that long duration intellectual property rights protection makes sense once countries reach a certain level of development, but not before. It may be that protection never makes sense. We may have chilled innovation in a number of countries to protect existing intellectual property in rich countries. We will never know, for we have shut out the possibility of regulatory experimentation and trampled on the right of countries to choose.

  To summarize, there are tremendous benefits to some cross-border flows, especially trade. Undoubtedly, we have to support the losers from trade in each country better, which most countries do not do well. An important source of dissatisfaction with the plethora of international agreements, though, is that they try to do too much, and much of that activity is hidden away from democratic oversight. While small poor countries get the worst deal from the intrusive agreements that are crafted, the interests of the broader population in developed countries are also not necessarily well represented. In order to make globalization more sustainable, we ought to do our best to keep cross-border trade open everywhere by lowering tariffs, but be far less intrusive on the shape the markets take in each country. We should aim for fewer international agreements, and more democratic inputs over policy governing cross-border flows, even as we puzzle over how to deal with newer flows like data and information.

  INTERNATIONAL RESPONSIBILITIES

  Thus far, we have focused on how countries should treat flows. Consider now country policies. What among a country’s policies does the international community have a legitimate interest in? How might it try and shape those policies?

  Economist Dani Rodrik of Harvard University suggests economic policies fall into four broad buckets when seen from the perspective of cross-border flows.9 Some policies have purely domestic effects. They may help or hurt the country but for the most part do not translate into flows elsewhere. For instance, raising taxes on the rich so as to cut taxes for the middle class will largely have domestic consequences, with only the rare billionaire deciding to up stakes and become a citizen of Monaco. Our emphasis on the need to preserve sovereignty would shield such policies from international influence, unless they are so bad that the country and its people risk becoming an international burden. The proper channel for transmitting international advice even in these dire cases should be through multilateral institutions that are seen as impartial, transparent, and fairly governed. We will come back to this shortly.

  Then there are policies, such as raising tariffs on imports, which typically have adverse effects on the rest of the world, but also have serious adverse effects on the country imposing the tariffs. The jobs protected by steel tariffs typically are outweighed by the jobs lost everywhere else.10 Rodrik calls these policies “beggar thyself” policies because they are driven by domestic special interests or constituencies but hurt the national interest also. We have already argued that both countries and the international community have an interest in treaties that keep tariffs everywhere low, and in creating an international adjudication mechanism that can declare nontariff barriers that have primarily a protectionist intent illegitimate. There should be little room for such “beggar thyself” policies.

  Consider next policies that became known as “beggar thy neighbor” policies during the Great Depression. For example, when a country intervenes directly in exchange markets or through unconventional monetary policies to keep its exchange rate undervalued, or when it subsidizes an exporting sector heavily, it tends to make the country’s exports hypercompetitive, driving down profits in competing countries. This leads to factory closures and unemployment in those countries. A country may engage in such behavior because it believes it will gain a permanent and profitable presence in production when factories elsewhere close, or because it fears the domestic political costs of slow growth and high unemployment. Regardless, the country’s growth comes at the expense of everyone else. Indeed, if others retaliate, as they did during the Great Depression, everyone is worse off.

  In the fourth bucket are policies that affect the well-being of all countries by altering commonly held resources, collective resources, or the environment. Overfishing on the high seas affects catches everywhere. The reluctance to vaccinate all children domestically allows the scourge of polio to reemerge, threatening children around the world once again. Refugees could also be seen as altering the global “commons.” Much like carbon emissions, policies affecting the global commons are felt everywhere.

  Rodrik’s classification of policies has little place for idealism, but the world periodically rediscovers it. As we have seen, the United States helped rebuild Europe after World War II with Marshall Plan funds. Good Samaritan policies such as grants for reconstruction, or other forms of humanitarian aid, can benefit recipients tremendously, but they result from democratic deliberations within countries. Apart from highlighting the benefits of such policies and coordinating efforts across coalitions of willing countries, there is little role for the world.

  In contrast, the outside world has an important role to play in influencing domestic policies that affect the global commons. Unlike the attempt to harmonize regulations, which are largely unnecessary, the world has an interest, indeed a duty to future generations, to reduce carbon emissions or overfishing on the high seas. It also has a humanitarian duty to absorb refugees. Binding international agreements are extremely important, but any effort to reach such agreements will be plagued by the asymmetric power, expertise, and information between countries, as well as the absence of democratic engagement from within countries. Perhaps when agreements are complicated with uncertain costs of compliance, they should start with “best efforts” pledges, with country-specific binding targets nailed down over time as domestic constituencies for commitment strengthen. In this light, the “best-efforts” Paris Agreement on climate change in 2015 seemed more sensible than the Kyoto Protocol in 1997, which tried to impose binding targets. Paris has a chance of success if countries debate their responsibilities domestically, and embed their democratically arrived consensus eventually in international commitments. Hopefully, the US withdrawal from the Paris Agreement will not be permanent, and simply reflects the need for greater domestic consensus.

  The most difficult bucket of policies to address are those that have positive domestic effects but adverse international effects—the “beggar thy neighbor” policies. For instance, most central banks have domestic mandates—typically, they are required to keep inflation at around 2 percent. In normal times, central banks achieve this target through conventional monetary policy—raising or lowering interest rates—which has few sustained adverse external effects. In bad times, when their economies are mired in deflationary conditions, central banks may undertake actions, including unconventional monetary policies, which have the primary effect of depreciating the country’s exchange rate and drawing demand from other countries. Today, nothing prevents a central bank from doing this, and it can be a source of misunderstanding and friction between countries. For instance, as I write this, there is considerable ire in Washington that Japanese monetary efforts in rece
nt years have been primarily transmitted through a depreciated yen. Washington believes Tokyo is playing unfair by stealing growth from other countries, including the United States. Concerns about currency manipulation are part of the reason why Washington has recently slapped tariffs on Japanese aluminum and steel.

  The reality is that with the world becoming more interconnected, more hitherto domestic policies will have international effects. While no country has a duty to undertake policies that help the world more than it helps the country, it does have a responsibility to avoid policies that do significant harm to others. No country will agree to place its central bank’s policies under international supervision. It is also hard to imagine that policies can be coordinated among central banks so as to reduce such sources of tension. The Federal Reserve will set US monetary policy based on how it sees US conditions, while the Bank of Japan will do its best for Japan. Coordination will only cause confusion on what each central bank is trying to do.

  Nevertheless, there is a possible improvement on the status quo, drawing on the idea that good fences make good neighbors. Countries could agree to a set of rules that will circumscribe what their central banks can do, eschewing policies that have serious or sustained adverse effects for everyone else.11 Policies that have zero or positive effects outside the country should be given a free pass—conventional monetary policy will fall in this category. Policies that primarily have adverse external effects should be prohibited—sustained efforts to keep the domestic exchange rate depreciated would fall in this category. Finally, there would be a gray zone of policies that have large positive domestic effects and small negative external effects. These could be allowed temporarily. A considerable amount of work will have to go into identifying and negotiating rules. Unlike other global negotiations where the asymmetric capabilities among negotiators typically bias the outcomes, this would involve the largest central banks and finance ministries in the world, who all have strong capabilities.

  A critical requirement in agreements of this kind on rules of the game, though, is for an impartial arbitrator to weigh in on difficult cases. Such an arbitrator should be able to enforce its decisions. Can any of the multilateral institutions play this role? Let us turn to that next.

  MULTILATERAL INSTITUTIONS AND GLOBAL GOVERNANCE

  As we saw earlier in the book, the victors in World War II, led by the United States, designed the postwar architecture that would govern international economic and political relations between countries. They naturally gave themselves extra powers, whether it was a permanent seat on the United Nations Security Council, veto powers over decisions in that Council, or large voting quotas at the International Monetary Fund. Even among the victors, the United States was supreme—for example, it alone, because of its large quota, enjoys a veto over important decisions by the International Monetary Fund.

  The system worked reasonably well, so long as the United States felt confident of itself economically and militarily, for it could afford to be benevolent and not use the system too much to further its own interests. When the Soviet Union collapsed in 1991, the United States became the sole economic and military hegemon in the world. For a while, the structure of postwar institutions and the actual structure of power mirrored each other once again. While multilateral institutions like the United Nations General Assembly or the International Monetary Fund occasionally criticized the United States, in part to assert their independence, on important matters it was clear that the United States was the court of last resort.

  In this environment, any rules in place constrained everyone else except the United States. Its views were dispositive because through a group of like-minded G7 nations—Canada, Japan, and the big Western European powers—it had enough votes to push through any measure, and through its funding, it controlled the purse strings of most multilateral organizations. This was not entirely bad, for the United States had a clear global agenda, where global interests coincided with its domestic interests; it worked toward a more open global system and took responsibility for delivering on that agenda, including ironing out the mini-crises that periodically shook markets.

  There are reasons that this benevolent hegemony will not work as well going forward. The United States’s relative economic superiority has eroded significantly over time. Increasingly, it is likely to be one of the players involved in disputes over monetary policy or trade or investment, and can no longer serve as the disinterested arbiter. Moreover, its political divisions that we discussed earlier in the book are turning it inward, and it is no longer likely to assume responsibility for international solutions or be as generous with its money. The periodic frustration in the United States about being the world’s policeman (and paying the costs thereof) is now combined with the sense that others have caught up and are not paying their share of policing costs. Its populist nationalists seem to be intent on using the United States’s immense economic and military power to extract every advantage from its relationships with allies, eroding the trust and goodwill that the United States had built up since World War II. Yet this kind of behavior makes the United States no different from the rest. Why then, countries ask, should it continue to have a privileged position at the center of global institutions, especially when it elects administrations that seem intent on undermining them?

  Perhaps most important, with China growing rapidly, it is clear that the United States will not remain the largest economy in the world for much longer.12 China wants more recognition and say in multilateral institutions. Indeed, it would be natural for it to want to take the place that the United States carved out for itself postwar. The privileges are many. For instance, in the International Monetary Fund’s founding statutes, Article VIII, Section 1 states that the principal office of the Fund shall be located in the territory of the member having the largest shareholding, which typically goes by economic heft. So, by right, the Fund’s head office should move soon from Washington to Beijing. The view of global economics from the Grand Canal in Beijing will look very different from what it seems from the shores of the Potomac in Washington.

  With privilege, though, comes responsibility and costs. It is hard to see China slipping into the United States’s position as benevolent hegemon smoothly, both because China’s position is very different from that of the United States just after the war, and because the world is very different. No matter how we count and what we count, the world has become multipolar. Economically speaking, we have at least three big blocks, the United States, China, and the European Union. Militarily, we should add Russia. In this multipolar world, our institutions of global governance that have been structured for a unipolar world could get paralyzed if we do not reform them.

  There is a window of opportunity as the structure of global power shifts, in which global institutions can be remade to serve the multipolar world better. These organizations have to become more independent of any single country or block, which requires reexamining shares, votes, and vetoes. Their recruitment and funding has to become more varied. Rather than depend on the will of a benevolent hegemon to resolve conflicts, they have to work out norms of international behavior or rules of the game in the key areas where international spillovers of policies cause frictions. Finally, they have to create impartial structures that can arbitrate disagreement. In other words, international organizations have to become more transparent and democratic.

  All this requires a change in the behavior of countries also. Countries can no longer leave it to the United States to take responsibility for the system working. As they gain more power, large emerging markets have to take more responsibility. Some of these responsibilities will be embedded in the rules that evolve, but rules cannot cover all contingencies. Some responsibilities will be unspecified and vague—a general responsibility to step up and work with others in case of global calamity. This will require some countries to become comfortable with not having undisputed say, while others have to compromise so as to reac
h reasonable solutions. Global citizenship will imply both sovereign rights and international responsibilities.

  There is a window of time in which developed countries legitimately have majority say in multilateral organizations because of their economic heft. They should not waste this time by trying to hang on to power—the world is changing and their relative economic weight will inevitably wane. They cannot become great again—if greatness means relative superiority—but they can share in a greater, better, world. They should use this period to alter the governance structure of these organizations to be more representative, democratic, and inclusive, so that when power actually shifts, they do not become a minority with little say. Democratization now is in their self-interest.

  EUROPE: TO MOVE AHEAD, STAY, OR MOVE BACK?

  Any discussion of integration obviously has to address Europe. It is now obvious that Europe moved faster and further than its people were ready for—certainly, once the costs of economic integration became apparent after the Global Financial Crisis.

  Perhaps Europe’s mistake was to go much beyond a common market in goods and services before solidarity had built up. The optimists want to move forward, integrating more so as to make it even more costly to exit the Union or the Euro, and hoping that European solidarity builds before the next crisis. The pessimists want to roll back past measures so that the extent of integration matches the solidarity that is currently available. The optimists fear that once momentum is lost, the dream of a united Europe will forever remain that. The pessimists don’t want to lose everything that has been gained by overreaching, and forcing more countries to exit.