The Growing Legitimacy Crisis of Global Capitalism
An Interview with Professor Rawi Abdelal
There are many verdicts on the state of globalization. Debate is extensive and unresolved. Who is winning? Who is losing? Most importantly, can it endure? Harvard Business School Professor Rawi Abdelal spoke with the Compact Quarterly about the need for the benefits, costs and risks of market integration to be distributed more fairly if the “project of global capitalism” is to be sustained. According to Abdelal, “We’ve seen globalization before, and it failed. It failed in part because there was an increasing legitimacy crisis for it within national societies. And, I think that failure took the business community largely by surprise.” He argues that, in fact, there is a pressing need for business to help "articulate a vision" for fairer globalization, pointing out that business could do more to ask for policy changes that are more likely to sustain societies’ commitments to market openness.
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Professor Rawi Abdelal
| Rawi Abdelal is a professor at Harvard Business School in the Business, Government, and International Economy Unit. His primary expertise is international political economy, and he is a faculty associate of Harvard's Davis Center for Russian and Eurasian Studies and Weatherhead Center for International Affairs. Professor Abdelal's first book, National Purpose in the World Economy, won the 2002 Shulman Prize as the outstanding book on the international relations of eastern Europe and the former Soviet Union. He recently completed his second book, Capital Rules, which explains the evolution of the social norms and legal rules of the international financial system.
Compact Quarterly (CQ): There are many verdicts on the state of globalization – growth and prosperity at one end of the spectrum, inequality and losses on the other. Where does the reality lie?
Rawi Abdelal (RA): The reality is complicated. The case for free trade often gets made in a way that I find almost intellectually dishonest. The argument is: “Countries realize a net gain from opening up their markets. Therefore, because every country in principle benefits on net, then they should embrace free trade.” And that’s almost certainly true. But it’s also true that the larger the gains from trade, the more dislocation will occur within national economies because benefits occur when people shift from sector to sector according to competitive advantage. If there are gains then there must be costs.
There is a reality to the distributional consequences of globalization. If the effects of market integration were trivial, then one might not see large losers. But the case in favor of market integration – that the benefits are huge because we move to more productive sectors and specialize in the things we’re best at, which may or may not be true – has to come with the recognition that, at least in the short-term, there will be people who bear costs.
And so, the case for trade is also a case for having a well-functioning social safety net – a system for distributing more evenly the gains and costs across societies.
The problem is that there are many societies that have just not been very good at managing those short-term costs, or even having an agenda for making sure that those distributional consequences and costs of market integration remain short-term.
CQ: So, it is not surprising that we are experiencing a continued backlash against globalization around the world?
RA: Certainly, you can find people in developed, emerging and developing markets who individually have not benefited nearly as much as those who were better placed to participate in integrating markets and those with positions more insulated from related pressures. One of the things we’ve seen across many societies in the past 15 to 20 years is rising income inequality. And those on the losing side of globalization are making their disappointments known more and more.
It’s incumbent upon policy makers to try to make sure that those people who aren’t benefiting as much, or aren’t benefiting at all, view the process of integrating markets as more legitimate. Closer policy attention must be paid to the way in which the gains and the costs from free trade should be distributed, in terms of sharing the burden.
CQ: What explains growing protectionist sentiments in countries that have largely been advocates of an open market system?
RA: Developed markets, traditionally known as “the West”, have been encouraging the rest of the world to open up to globalization – to open up the market forces and participate more fully in global capitalism. And as they have – as China, India and other parts of the world have been growing extremely quickly and making their presence felt in the global economy – a natural, yet ironic, anxiety has emerged. As emerging markets are catching up and calling into question the West’s central place in the world economy, there is anxiety.
The paradox is that this is what we asked developing countries to do: “Open up, this is going to be good for you.” And many now emerging markets have grown tremendously and made enormous strides. It’s too bad that at this very moment, concerns about our place in the world economy are preventing many in developed economies from celebrating the fact that so many people around the world have increased their standards of living by doing the very things that we asked them to do.
CQ: Is it realistic that today’s fairly advanced level of global market integration could retreat significantly?
RA: The most important thing to acknowledge is that we need a theory of capitalism that recognizes the importance of societal legitimacy.
In my view, there’s nothing permanent or inexorable about this process of market integration. There is nothing natural about organizing our societies so that markets play such a central role; that is an invention. That is a choice that has been unmade in the past, just as it has been made in the past.
The last great era of globalization, roughly 1870 to 1914, collapsed for a variety of reasons. It collapsed because the world took its citizens to war and into financial chaos. More broadly, it collapsed because societies ceased to believe systematically that they benefited more than they lost. And in part, for these very distributional questions, as democracy came into the world, the legitimacy of a system in which market integration mostly benefited the elites was just not sustainable.
CQ: Can public sentiment turn back the openness that has been so robust in recent decades?
RA: Capitalism has to be legitimate in the eyes of the people who are choosing it. If it ceases to be legitimate in their eyes, and we have democratic processes to determine the kinds of policies we have, then it is inevitable that globalization will come under pressure. And so, when national societies decide to go in a different direction, it could easily be unraveled.
If people are going vote against market openness because they don’t feel like their concerns are being taken into account, that’s where we really have to do our hard work. It’s not enough to argue about whether this thinking is right or wrong, it is more important to recognize that these concerns exist. In order to make sure that countries move towards cooperation which is in everybody’s benefit, we must better articulate the reasons why market integration is valuable and do things to help people see the process as attractive.
This is where international leadership in creating a multilateral system of governance is also so important. What we face today is a governance challenge at the level of the global system. There isn’t a way to ensure that international cooperation will persist – that’s an ephemeral outcome of international politics and domestic politics.
And, unfortunately, there has been a worrying retreat from multilateralism around the world. I think one of the disasters in recent years has been a retreat from the traditional embrace of purposeful international leadership and legitimizing multilateral governance as a way to make sure that globalization is seen as legitimate in the eyes of policy makers and citizens.
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GLOBAL
INVESTMENT
SYMPOSIUM
Pathways to Prosperity
New York
Harvard Club
24 September 2008
Hosted by:
International Economic Alliance
| CQ: What role does business play in bringing more social legitimacy to global capitalism?
RA: In my view, there’s no constituency more in favor of globalization, in favor of market integration, than the business community. Business clearly is in the position to benefit most from these opportunities. What worries me is that there are still people in the business community who don’t recognize that the legitimacy of the entire project of global capitalism is as much their responsibility to manage as more narrow day-to-day business decisions.
We have a governance challenge at the global level, and do not seem to be on our way to constituting governance solutions that ensure that global capitalism is seen as legitimate, which is a necessity for it to be sustained. This is exactly where the Global Compact comes in.
The business community, through business leaders and the firms they run, must participate in the legitimating process. This means acting responsibly with regard to human rights and other aspects of business responsibility. It also means helping to articulate a vision for the sustainability of the global capitalism movement that allows it to be seen by people as attractive and not just the bearer of costs and risks.
This is as much a responsibility of business leaders as policy makers. Policy makers shape the environment within which business leaders are able to pursue opportunities. There is a dual responsibility to articulate a vision for this process.
CQ: In what ways can business help “articulate a vision” for fairer globalization?
RA: There needs to be more recognition that corporate responsibility is not just related to corporate practices that are business practices. It relates also to corporate practices that have to do with business-government relations – the kinds of policies that businesses ask governments to enact, and in some societies actually lobby for governments to enact.
I would argue that the business community could do more to ask for policy changes that are more likely to sustain national societies’ commitments to openness – essentially, corporations asking governments to take steps on behalf of the project of sustaining global capitalism.
And those things that companies might ask governments to do could well be not the usual things that corporations – at least in the United States – traditionally lobby for: more welfare state provisions, income redistribution, a tax system that’s seen as more fair and progressive. This would be something that easily could be very effective.
CQ: How realistic is it that enough businesses around the world will take steps such as asking government to improve social safety nets in order to ensure that global capitalism is legitimated by society?
RA: All we know is this: we’ve seen globalization before, and it failed. It failed in part because there was an increasing legitimacy crisis for it within national societies. And, I think that failure took the business community largely by surprise. At the time, the business community did not see it as part of their responsibility to make sure that global capitalism was legitimate in the eyes of national societies.
We know as an empirical fact that globalization is not permanent. That it can fail because it becomes illegitimate and that last time around the business community didn’t do enough. And we don’t know whether this era is permanent. It certainly seems to be in a sense of crisis for a number of reasons, partly in terms of governance and the absence of effective mechanisms to share risks, costs and benefits within lots of national societies.
The business community is increasingly recognizing that it has a role to play in making sure that global capitalism is seen as legitimate. I would imagine, indeed, that part of the reason we’ve seen a real renaissance of corporate responsibility is because those very leaders know just how important it is. And it becomes clearer day by day that the legitimacy of global capitalism is in decline in the eyes of the people who are voting on policy makers who will then affect their operations. This can be a powerful motivation for action by business to affect change in the current course of market integration.
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Spotlight on: Anti-corruption
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The Global Compact's ten principles in the areas of human rights, labour, the environment and anti-corruption enjoy universal consensus and are derived from:
• The Universal Declaration of Human Rights
• The International Labour Organization's Declaration on Fundamental Principles and Rights at Work
• The Rio Declaration on Environment and Development
• The United Nations Convention against Corruption
View the 10 Principles
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About the Compact Quarterly
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The Compact Quarterly endeavors to provide Global Compact participants, stakeholders and observers with a range of thought-provoking articles, interviews and updates on topics related to the initiative, as well as to corporate responsibility in general. Produced by the Global Compact Office, the Compact Quarterly is published four times a year in electronic form. A printed compendium of the Compact Quarterly is produced at the end of each calendar year.
Readers are encouraged to contact Carrie Hall, Editor, at hallc@un.org with comments and suggestions, as well as to express interest in contributing to future issues of the Compact Quarterly.
Editor's Note
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