The Role of Government
The Role of Government

As with many issues pertaining to globalization, concerns and hopes about international investment revolve in many ways around what governments may do. This means both what governments may do to regulate foreign investment, perhaps to make it less volatile, as well as actions government may take simply to get out of the way of the market, clearing the existing barriers to capital. In addition, the role of government refers not only to individual nations, but to international institutions such as the WTO and the IMF, which serve functions relating to global governance.

Some of the steps these institutions of governance can take to help influence the choices made by international investors include:

  • The creation of new infrastructure and other facilities to attract foreign investment. As described earlier, an array of services can help promote foreign investment in a country, ranging from basic services such as the provision of electricity and clean water, to fair and effective dispute resolution systems.
  • The ability of governments to prevent or reduce financial crises also has a great impact on the growth of capital flows. Steps to address these crises include strengthening banking supervision, requiring more transparency in international financial transactions, reducing the risk of moral hazard, and ensuring adequate supervision and regulation of financial markets. The majority view among economists is that financial sector reform must precede capital account liberalization. Other steps have been suggested to help limit the volume of volatile short-term capital such as small taxes on foreign exchange transactions. One prominent advocate of this idea was Nobel Prize winning economist James Tobin. Although many countries have imposed limits or taxes on capital outflows, another creative way to address volatility was applied by Chile, which imposed a small transaction fee on capital inflows. This measure served to limit the amount of short-term investment, but did not create a risk of deep concern to investors, namely, of having trouble getting their money out of the country at some point in the future.
  • Working with developing country governments in particular to help establish more stringent labor and environmental standards to prevent either one from being exploited.
  • Protecting domestic infant-industries only long enough to allow them to become competitive internationally. This step remains controversial, but some economists have pointed out that a number of developing countries—indeed many of the countries that have recorded the highest long-term growth rates—have done so after resorting to some protection of sectors of domestic industry.

As you can see from this list of policy options, people from almost the entire spectrum of beliefs about globalization have prescriptions for government policy, even those who advise that governments need only act to remove market-distorting tariff and regulatory barriers. And this list is by no means comprehensive.

Ongoing events are leading an increasing number of analysts of globalization to suggest that we explore the challenges and opportunities of globalization more fully, to better understand its consequences and learn how to maximize its potential benefits while mitigating its disruptions.

Economic events such as the East Asian financial crisis and more recent incidents such as the collapse of the Argentinian economy in late 2001 have made many economists argue for improved market mechanisms, such as regulatory measures and oversight. The fact that different countries encountering similar problems have received different prescriptions from the international community has also led many to argue for a more firmly established set of ground rules.

Coordination between governments will be crucial for dealing with the global financial and economic crisis of 2007-2009.  According to UNCTAD, “the challenge is to restore the credibility and stability of the international and financial system, to provide stimulus to economic growth in order to prevent the risk of a spiraling depression, to renew a pragmatic commitment to an open economy, potentially put at risk by rising protectionist tensions, and to encourage investment and innovation” (United Nations Conference on Trade and Development, 2009).


In addition, political events such as the large protests in 1999 at the Seattle WTO meeting or in 2001 at the G8 meeting in Genoa, Italy, have led some political leaders to conclude that certain kinds of market interventions or regulations are necessary to assist those who are endangered by globalization, simply to sustain political support for continued liberalization.

Joseph Stiglitz, formerly chief economist of the World Bank and Nobel Prize winner for economics in 2001, has characterized the globalization of international finance as suffering from “global governance without global government.” He notes that the nationalization of the U.S. economy, which began 150 years ago and was analogous in many ways to the process of globalization, was accompanied by a significant expansion in government oversight and regulation, to help temper crises and provide accountability.

One surefire prediction about the globalization debate is that much of the discussion will continue to revolve around appropriate government policies.



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