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5 April 2017

New Rules to Make Glob­al­iza­tion Work

Dr. Ludger Schuknecht, Chief Economist at the German Finance Ministry

Dr. Ludger Schuknecht, Chief Economist at the German Finance Ministry
Ludger Schuknecht, chief economist at the German Finance Ministry

In the coming days, finance ministers and central-bank governors from around the world will gather in Washington for the spring meetings of the International Monetary Fund and the World Bank. They will discuss the global economy, nervously lament a growing antiglobalization sentiment and call for policy action toward more “inclusive” growth. It’s a well-honed ritual.

To better manage globalization, what we need isn’t more policy activism but a refocus on the importance of rules-based policy making. Good rules allow governments to perform their core jobs better and build confidence for investment and innovation, both at home and internationally.

To most emerging economies, globalization is an unequivocal benefit: higher productivity, better technology and more trade help lift many people and countries out of poverty. Their incomes converge with those of the advanced economies and global income inequality declines.

In the West, globalization has significantly lifted incomes as well. But the drivers of growth, technical progress, trade and migration have made life more difficult and jobs more uncertain for many low-income and low-skilled people. Migration has added to the strains on schools and housing, to the detriment especially of these same low-income groups. Security concerns have also been rising. If your education level is low, if your neighborhood is unsafe, it is more difficult to be competitive, to cope with change, to see opportunity.

Add to that a growing perception that the rules are applied unfairly. While banks were bailed out during the financial crisis, normal people still had to pay taxes. Negative or very low interest rates are seen as having inflated asset prices to the benefit of the rich. “Normal people” feel their savings are taxed even as rising rents and house prices drive them out of the property market. People who have to carry a passport through every border crossing don’t understand how so many illegal border crossings can not only go unpunished but yield generous welfare benefits and an almost certain chance to stay indefinitely.

Frustration about the decline in the international rule of law is similarly widespread, be it about the fiscal rules in the European Union, the global trafficking of people, or strong-arming in international trade and security relations. Yet this isn’t an argument for a bigger welfare state. In many countries, spending on core tasks has been cut because short-term thinking predominates and welfare lobbies are so strong. People want opportunities, not alms. Therefore we need to refocus the debate on the importance of rules-based policy making.

These rules should promote sound public finances to overcome the deficit bias of everyday politics and help provide high-quality public services such as education, a basic social-safety net, internal and external security and a well-functioning administration and justice system. Rules and regulations should rightly limit market failure and externalities, but not stifle initiative. In such an environment, private investment and high-quality job creation flourish. The challenge of rules-based policy making is even greater at the international level.

The post-World War II order, set up under the leadership of the U.S., governs decisions on international trade, the global monetary system and even military intervention. The G-20 coordinates international financial, tax and investment regulation. These rules certainly aren’t perfect and they haven’t prevented all conflicts. But here it is less the international rules themselves than their poor implementation and poor policies at the national level that cause problems.

The European Stability and Growth Pact, for example, is a reasonably flexible framework designed to ensure sound public finances and a stable monetary union across the EU. But in the absence of adequate enforcement mechanisms, some member governments have allowed their debts to run rampant, leading them to knee-jerk cuts that have also eliminated some more-productive items. Trade is another example. International agreements and the rules of the World Trade Organization have so far served us well. They help contain conflict and uncertainty internationally and wasteful lobbying at home. But advanced economies in Europe and the U.S. must help manage the change and create opportunities with good national rules and policies.

Protectionism isn’t the answer. It makes us all poorer and sours relations between countries at a time when global tensions and alternative economic-policy models are on the rise. Should the U.S. turn its back on rules-based multilateralism, it would weaken its trading partners and make things worse in the global economy, with even fewer opportunities to export abroad as a result.

More, not less, rules-based policy making is needed to master globalization and create opportunities for all. In Germany we call this Ordnungspolitik. But good rules, and good governance, will do.

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