The Asian financial crisis barely over, the world economy faces another major eruption. The cause this time is not bankers rushing out of emerging markets, but a crisis of legitimacy that threatens the world's trading regime.
As the riots surrounding the failed World Trade Organisation conference in Seattle demonstrated, a coalition of labour, environmental, and human rights advocates is intent on sabotaging the WTO, the institutional embodiment of global trade. The WTO is also in trouble with developing countries, which feel estranged from rules they feel do not benefit them. The chasm separating these groups from the agenda pursued by US and EU policymakers is growing, destabilising the world economy.
All sides agree that the stability of the international economy is predicated on a system of global rules. What is contested is the nature of these rules. Opponents of trade liberalisation decry the secretiveness and "non-democratic" nature of the WTO, and the influence of corporate interests in rule-making. They see a trading system that favours business over labour, the environment, and consumer safety.
Developing countries complain about restrictive rules applied to their exports and fear that new demands they face over labour and the environment are designed to undermine their competitiveness.
Finding a way out of this crisis requires clear principles for trade rules. Here are the principles on which all ought to agree, and which would allow us to move forward.
Trade is a means to an end, not an end in itself. Advocates of globalisation lecture about the adjustments countries must make in their policies and institutions in order to expand their international trade and become more attractive to investors. This way of thinking about trade confuses means for ends. Trade serves at best as an instrument for achieving goals societies seek.
Developing countries should resist a system that evaluates their needs from the perspective of expanding world trade instead of alleviating poverty.
Reversing our priorities has a powerful implication. Instead of asking what kind of multilateral trading system maximises foreign trade and investment opportunities, we would ask what kind of multilateral system best enables nations to pursue their own values and developmental objectives.
Trade rules must allow for diversity in national institutions and standards. When countries use trade to impose their institutional preferences on others, the result is erosion of trade's legitimacy. Trade rules should seek peaceful co-existence among national practices, not harmonisation.
Non-democratic countries cannot count on the same trade privileges as democratic ones. National standards that deviate from those in trade partners and thereby provide trade advantages are legitimate only to the extent that they are grounded in free choices made by citizens. Take the case of labour and environmental standards. Poor countries argue that they cannot afford the same stringent standards as advanced countries. Tough emission standards or regulations against child labour can backfire if they lead to fewer jobs and greater poverty. A democratic country such as India can argue, legitimately, that its practices are consistent with the wishes of its population.
Countries have the right to protect their own social arrangements and institutions. Opponents of globalisation argue that trade sets off a "race to the bottom", with nations converging towards the lowest levels of environmental, labour, and consumer protections.
Others counter that there is little evidence that trade erodes national standards. One way to cut through this morass is to accept that countries can uphold national standards in these areas, by withholding market access if necessary, when trade undermines domestic practices enjoying broad support.
You do not have the right to impose institutional preferences on others. Using trade restrictions to uphold particular values must be distinguished from using them to impose values.
These are simple guidelines. Sticking to them would enhance the legitimacy of trade and put the world economy on a sounder footing.
Dani Rodrik is professor of international political economy at Harvard's John F. Kennedy School of Government. Copyright: Project Syndicate
