Incompatible? On economic globalisation and national democracy

Economic globalisation has come under attack - Brexit, the election of Trump, and the rise of populist nationalist parties across Europe are clear rejections of it. The popularity of the Leave campaign’s slogan ‘Take Back Control’ and the US’s America First policy are reflections of the broader sentiment that economic globalisation, through international trade deals and unions, has led to a loss of sovereignty, resulting in an erosion of national democracy.


Boris takes back control (Source: Cyprus Mail)

While some in the West believe that economic globalisation has compromised their best interests to the benefit of those in less developed countries; other critics of economic globalisation argue that free trade and the imposition of liberal economic ideas have lead to a loss of sovereignty in less developed countries. So, is economic globalisation incompatible with national democracy?


First, some definitions. I'll be using the term 'national democracy' in two ways - one relating to the degree of sovereignty a state has over its own affairs, and the other being the spread of democratic values and principles. The use of 'economic globalisation’ will refer to the interdependence of world economies due to increased world trade, whether this is due to lower tariffs, trade deals or economic and international institutions.


I believe that economic globalisation and national democracy are not mutually exclusive; in fact, the two are complementary. However, countries of different incomes and levels of development will be impacted in various ways; so I'll touch on the impact of economic globalisation on the two forms of ‘national democracy’ of both developed and developing countries. (Bear with me on the history!)




Sovereignty of developed countries - a look at the EU and Brexit


Although national democracy and sovereignty are not inherently the same, the two are closely linked. If sovereignty means a country’s ability to make its own decisions within its own borders without external interference, then a loss of sovereignty hinders national democracy, following our first definition.


Treaty of Rome, 1957 - creation of EEC (European Economic Community) (Source: BBC)


The European Economic Community (aka Common Market) was set up in 1957 after WW2, following the Treaty of Rome. It was designed to integrate the economies of European countries, based on the belief that economic interdependence between countries would not only generate more wealth, but would also maintain peace.


In 1993, the Maastricht Treaty established the EU. This resulted in further integration, through subsuming the European Communities - EEC, ECSC (European Coal and Steel Community) and Euratom (European Atomic Energy Community).


The EU differs from the EEC as it resulted in more political integration, through the two other "pillars" embedded into the EU - a common foreign and security policy, and police and judicial cooperation in criminal matters. Moreover, certain elements of the Maastricht Treaty which aimed to promote further economic integration inevitably resulted in a degree of loss sovereignty for its member countries. For example, it set a timeline for the adoption of the Euro, and the Social Chapter dictated common social policy objectives (e.g. maternity leave, equal working conditions). (Note: John Major, Prime Minister of the UK during the time, opted out of both of these.)


Fast forward to 2008. Following the Credit Crunch, countries such as Greece received bailouts from the EU in 2010. However, this also meant that Greece had to follow the EU’s austerity policy, which included the demand for it to preserve a 3.5% budget surplus for a decade starting from 2018, resulting in more cuts in government spending. This is an example of economic globalisation by the EU, and how debtor countries could experience a loss of sovereignty as the EU directs the economic approach of such countries.


(Source: Reuters)


More general examples of economic globalisation through the EU include the establishment of the Euro as a common currency, and the single market. As a result, other policies aside from economic ones are determined by the EU, rather than by the state’s own parliament. For example, standardisation and intra-EU migration policies are decided by the EU. The underlying notion that membership of the EU resulted into a loss of parliamentary sovereignty and compromised the UK’s national democracy was a main argument of the Leave campaign, hence the slogan ‘Take Back Control’.


While it is true that certain policies are determined by the EU - such as trade and migration policies - to ensure fair competition and opportunities; the UK retains much of its sovereignty and national democracy, as the EU has not translated into a full political union. The UK, as well as other EU member states, are still able to hold its own democratic elections; parliamentary sovereignty is still strong, as states are still able to determine their own health, education, monetary and defence policies.


The Leave side also campaigned that the £350 million that the UK contributed to the EU every week could be spent on the NHS instead. This points to how people felt a sense of lost parliamentary control over the UK’s national spending, as the UK is required to contribute £8.8 billion to the EU budget annually. However, this is only 1.2% of the UK’s total expenditure, meaning that Parliament still retains more than 98% control over the national budget, discounting the monetary benefits the UK receives from the EU such as subsidies. While there is a certain level of lost sovereignty, the vast majority of domestic decisions are still held exclusively by member states, thus proving that economic globalisation is compatible with national democracy.


European Parliament


In fact, the EU itself has a structure which can help balance economic globalisation with national democracy. For example, all policies by the EU are debated by the European Parliament, which comprises of MEPs from member states roughly proportionate to its population. Member states are not necessarily obliged to follow every decision that is made - for example, the UK remains outside of the Euro, and decided against joining the Schengen zone - depending on the opinion of the public. In fact, as each member state’s best interests are conveyed by its respective MEPs during the passing of laws or signing of treaties, national democracy is in fact enhanced, as member states can influence the decisions of the wider organisation, rather than it being dictated. Membership in the EU has also allowed the UK to shape international policies so as to combat pressing issues such as tax evasion. This has become a significant problem as individuals and multinational corporations (MNCs) are able to store money offshore due to increased economic globalisation, making it difficult for individual countries to deal with this issue on their own; therefore, only joint effort between EU countries can solve cross-border tax issues.




Sovereignty of developing countries - IMF and World Bank conditions, the imposition of neoliberalism and MNCs


On the other hand, the national democracies of developing nations, have often been incompatible with economic globalisation, due to a loss of sovereignty.


Bretton Woods Conference, 1944 (Source: Britannica.com)


International financial institutions such as the International Monetary Fund (IMF) and the World Bank, were created during the Bretton Woods Conference in 1944. The IMF aims to promote international monetary cooperation by providing capacity building support and policy advice, to help countries maintain strong economies; while the World Bank hopes to reduce poverty and promote economic development.


Both institutions were set up to help countries grow economically following the Second World War, but have now shifted their focus to developing countries. Support often comes in the form of loans, with strict macroeconomic conditions that are applied. This means that the state loses both political and economic autonomy, and may not fulfil the needs of its citizens. Many of these conditionalities corresponded with the ideology of neoliberalism (similar to laissez-faire), which came to prominence in the 1980s. For example monetary and fiscal austerity, which results in higher interest rates and lower government spending; and structural adjustment programmes, which force developing countries to adopt free-market policies, such as heavy deregulation and privatisation. Some have argued that countries must give their consent before such policies are applied, meaning that they have agreed to such conditions; however, the reality is that there are few alternatives, and that they will be penalised heavily if such conditionalities are not followed.



Moreover, the structure of the IMF means that developed creditor countries often have a much larger voting power compared to developing debtor countries. This allows developed countries to dictate and approve the conditionalities of loans, and directly influence both the political and economic structure of debtor countries. For example, China, Germany, Japan, the US and the UK already made up 38.11% of votes, with the US alone gaining 16.52%. This shows how the sovereignty of developing countries will be compromised in the long-term, or until substantial economic growth is achieved, suggesting that economic globalisation is incompatible with national democracy in this sense.


Countries can also exert influence through increasing foreign direct investments (FDI) in less developed countries. Many European, American and Chinese firms are increasing their investments in African countries; for example, Egypt received more a record $14.5 billion in FDI, and China created over 14,000 jobs in 2015. As such investments fuel economic growth, this gives more developed countries who provide such nations with more FDI power on the world stage. An example of this is a study by AidData, which found that countries who voted in line with China in the UN General Assembly received more money than those who did not. This means that some African nations may sacrifice their sovereignty on the world stage, in exchange for receiving economic benefits.


East India House, London (Source: Britannica.com)


Another strong feature of economic globalisation is the rise of multinational corporations (MNCs), which can also compromise the sovereignty of developing countries. Perhaps the most famous example of this is the East India Company (formed in 1600), which exploited trade in Southeast Asia and India. After the firm united with a rival to form The United Company, it managed to influence Indian policy, as votes were bought by the purchase of shares.


Although more contemporary firms are unable to exercise that degree of influence due to international law, the power of MNCs remains large; firms such as Wal-Mart employs more employees than the population of Slovenia, and Apple generates more economic output than the GDP of Oman in 2014. Therefore, developing nations may change their policies to attract MNCs, allowing such firms to bypass regulations. For example, Wal-Mart paid $25 million to lawmakers to gain market access overseas, in countries such as India; and in 2012, Wal-Mart de Mexico used bribery to influence zoning decisions and to “outflank rivals”.




Promoting democratic values in developing countries - modernisation theory


Another interpretation of the term ‘national democracy’ is the spread of democratic values and principles; for example, citizens gaining more political autonomy. As economic globalisation often helps countries grow economically, this, in turn, may result in a spread of national democracy, due to modernisation theory. This shows how economic globalisation is not only compatible with national democracy, but is the driving force behind it.


So what is modernisation theory? Essentially, it suggests that economic globalisation and liberalisation will lead to demands for democracy. Economic globalisation facilitates the growth of both developed and developing countries, as lower trade barriers allow for specialisation, meaning that countries can produce goods and services in which they have a comparative advantage, perhaps due to access to certain resources, or the skills required. FDI has also helped to encourage growth in many developing countries, as foreign firms are able to create jobs, boosting employment and thus raising living standards. Economic liberalism through privatisation encourages individuals to think more critically and rationally, causing them to crave for the same freedom they experience economically in politics. Modernisation also results in higher education levels; and as people become richer and more educated, self-expression values become more important. Overtime, this will lead to a change in a society’s political system, as its citizens will demand more autonomy, thus leading to a spread of democracy.


Kim Young Sam (Source: Bloomberg)


An example of this is South Korea. The military coup in 1961 resulted in a dictatorship under General Park Chung-hee and President Chun, resulting in martial law. Through the 1980s, South Korea shifted towards the computer and high-tech industry, which encouraged high levels of economic growth; by 1985, the country reached per capita income of $2457, compared to $158 in 1960. In 1987, General Roh Tae-woo succeeded President Chun following student unrest, who introduced a degree of political liberalisation. By 1993, South Korea Kim Young Sam became president, as the country’s first freely elected civilian president.


However, correlation does not imply causation, and in many cases other factors are at play, making it hard to prove whether economic liberalisation leads to a spread of democracy. Many use China as an example of how modernisation theory may not apply - although China has experienced extraordinary growth and increases in living standards due to economic globalisation and liberalisation under Deng Xiaoping in the 1980s, China remains communist politically. Although more government policies are a reflection of public opinion (for example, Li Keqiang's 'war on pollution in 2013 during the Communist Party's annual congress resulted in amendments to China's Environmental Protection Laws and $360 billion worth of investments in clean energy), this increased receptiveness to societal demands is far from democracy. More cynically, satisfying such demands is just a means of maintaining more control over the country.


Pollution in China (Source: The Telegraph)




Compatible and essential


(Source: The Fringe News)

Despite recent events, I think that economic globalisation is compatible with national democracy. The economic globalisation achieved through trade agreements and the formation of unions has in fact extended sovereignty, as states are able to influence policies that they would not be able to otherwise. While the sovereignty of developing countries may be compromised, it can be resolved if the IMF better tailors its programmes, making it more specific to individual countries; and by reducing the voting power of developed countries. The IMF should aim to work more closely with government officials, so as to balance economic growth with social welfare.


As for the second definition of 'national democracy' - modernisation theory is tricky to prove. Even if we assume that economic globalisation is a direct causation of increased demands for democracy, many countries (perhaps even China) are still undergoing the process of modernisation. Much evidence and data has yet to be collected to prove the theory.


There exists a paradox between economic globalisation and democracy; compromising the sovereignty of developing countries leads to more economic growth, which encourages the spread of democratic ideas. Although it diminishes ‘national democracy’ this could allow developing countries to fully regain their sovereignty, following a period of economic and political stability. Therefore, economic globalisation is not only compatible, but also enhances and is crucial to national democracy in the long-run.



#economicglobalisation #sovereignty #nationaldemocracy

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