Stephen King: Globalisation requires the greater good to be put first

A powerful argument in favour of globalisation is that it raises living standards
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The Independent Online

Few of us can claim to be completely independent. With the exception of the odd hermit, we are social animals. Our social lives are often informal: meeting friends, going out for dinner or popping down to the pub. On other occasions, there's a bit more formality: office relations probably ought to fall into this category (although you can never completely rule out the inappropriate encounter next to - or sometimes on - the photocopier).

But there are other social gatherings which are neither formal nor informal. Clubs and societies fall into this category. We join a club - and leave a club - through a combination of our own freewill and the club's willingness to accept us. Once we're in the club, though, we either abide by the rules, ignore the rules (in which case, we might be thrown out) or try to change the rules.

These clubs take a variety of different forms. At school, perhaps you were a member of your chess club, the netball team or the orchestra. Reaching maturity, you might now be a member of a political party, a trade union, your local drugs gang or, perhaps, Weight Watchers.

In all of these cases, you join the club because you and others share a mutual interest. Your membership provides benefits both for you and, hopefully, for the club itself. Indeed, many clubs actively tout for members, hoping to attract more and more like-minded people (until you end up with, let's say, an over-full swimming pool on a hot day).

The world of economics has its own theory of clubs. James Buchanan, the Nobel laureate, came up with the theory in relation to public choice. There was a good reason for doing so. Economists love the idea of markets - everything works so nicely, at least in theory - but become slightly queasy when they're asked to talk about the economics of defence spending, the police force, the legal system or use of the municipal swimming baths.

These are public goods which only exist because society as a whole, expressed through either its democratic wishes or the coercive decisions of its rulers, deems that they are "good things". Buchanan was interested in working out how much of a public good should be supplied. To do so, he thought about the fees that might be generated from providing the public good through membership of a "club". He argued that the success of a club providing public goods would depend on both its "excludability" - there's no point being a member if non-members get the same benefits - and its "non-rivalry" - your consumption of the good will not impede my consumption of the same thing.

At this point, you might object. You can leave clubs. If, though, you decide you don't want to enjoy the benefits of a police force, you can't so easily opt out (rightly so, because as a "non-member", you'd still benefit). This is an entirely reasonable point which is why Buchanan's theory of clubs is more easily applied to local government. If you don't like what your council is up to, you can either vote for the alternative or, instead, up sticks and go elsewhere.

You only stay in the club so long as the membership fee is worth paying. If you walk out, you end up with Charles Tiebout's contribution to the theory of public choice, namely the idea of "voting with your feet".

These theories of public choice needn't only apply at the local government level. They can also apply at the international level. Most economists argue that some version of free trade is a good thing. They also argue that capital should be able to flow around the world relatively easily. And many are prepared to support the idea of international labour mobility (much to the chagrin of those in this country who are quite keen on the Poles but, for some unfathomable reason, find the Bulgarians and Romanians to be not quite their cup of tea). Put these things together, and you end up with a powerful argument in favour of an international public good.

But like any other public good, this international variant exists only if its members agree on, and abide by, the club rules. This, in turn, creates a number of problems, many of which are being discussed, explicitly or otherwise, at the IMF/ World Bank jamboree that's currently taking place in Singapore.

Economists often assume that we're all happy to be members of a global economic club. The reality, though, is somewhat different. Sometimes we're happy to be part of this global club, but on other occasions we'd rather opt out. Regional economic clubs - whether they take the form of the European Union or the North American Free Trade Association - fit Buchanan's definition rather nicely: the benefits of free trade accrue to all countries in the club, but the club is able to offer some degree of exclusivity. Membership and benefits for some imply non-membership and costs for others.

Confusion arises when the requirements of one club clash with those of another. Think of footballers, for example, who aren't sure whether club or country comes first. With global economic and financial issues, the same sorts of difficulties occur. Should we think of ourselves as British, or European, or members of the industrialised world, or the free world, or as global citizens? We are, of course, all of these, but our positioning in debates will vary depending on the hats we're wearing.

Globalisation alters the nature of existing clubs. One of the most powerful arguments in favour of globalisation is that it raises living standards for the majority and, therefore, reduces inequality. A quick look at the phenomenal growth rates achieved by China and India in recent years surely supports this view.

However, the argument ignores the possible sources of strain both within and between existing clubs. The United States is a club of sorts, but the gap between the haves and have-nots has widened so much in recent years that it's not clear that the club is achieving its goals (is the US population still "United"?). France may be keen to preserve its rural charm because that's part of being in the French "club". By subsiding agriculture, its taxpayers - and European taxpayers more broadly - are maintaining the French way of life at the expense of non-club members in other parts of the world (thereby making non-members increasingly furious).

Our choice of club membership will ultimately determine the future of globalisation. Oddly enough, democratically elected governments threaten globalisation because free trade and free movement of capital do not always sit easily with the rights that we expect from a democracy. The rise of nationalism in the late 19th century, arguably a product of increasingly universal suffrage, demonstrates all-too-clearly that national clubs can have divisive effects on international economic, political and military relations.

To deal with this problem, you need enlightened governments which recognise the need for credible international institutions to impose rules - and police those rules - for the good of the global club as a whole. A reformed International Monetary Fund, with proper representation for emerging markets, is a step in the right direction and seems likely to be confirmed before the Singapore meetings draw to a close. We shouldn't forget, though, that the exigencies of winning votes at home mean that global institutions will too often have their wings clipped to reflect the interests of one or other powerful regional or economic club. Protectionism may be stupid, but the theory of clubs suggests that it's still a sadly plausible outcome.

Stephen King is managing director of economics at HSBC

stephen.king@hsbcib.com

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