"Lock-in" is a concept developed by economic historians to describe how economies get tied in to using inefficient technologies. It also applies to institutions as economies and societies can get locked into sub-optimal institutional arrangements. This has relevance for globalization where the arrangements governing trade and the global economy may be sub-optimal, posing problems of how to change them. The economics of lock-in helps understand the problem and suggests how to solve it.
Lock-in arises because a technology that is adopted first may gain a competitive advantage that encourages others to adopt it, even though other technologies are superior and would be chosen if all were at the same starting point. An example of lock-in is narrow gauge railroad that is less efficient than broad gauge on which railcars are more stable and can carry greater loads. Once a stretch of narrow gauge has been laid, there is an incentive for additions to be narrow gauge to fit the existing track. Moreover, the incentive increases as the size of the rail network grows.
Lock-in has enormous relevance for globalization, which has seen the creation of new institutions and patterns of economic activity. Trade agreements have created new rules, fostering new patterns of global production and setting the basis for future trade and investment negotiations. Another example of lock-in is removal of international capital controls that has changed financial flows and would be difficult and costly to restore.
Globalization lock-in matters because today's global economy has been designed with little attention to labor and social issues. This is because the system was largely stitched together in the last quarter of the 20th century, a period of labor weakness and laissez-faire revival. Consequently, arrangements were forged without attention to labor, social, or environmental concerns.
Corporate proponents of the system are trying to deepen the extent of lock-in through "competitive liberalization." This involves negotiating bilateral trade agreements that tie ever more countries into arrangements without standards, and these agreements become the launching point for future regional and multilateral agreements. In this fashion, the bar is cemented ever lower.
The economics of lock-in suggest an escape from this problem. Recalling the example of narrow gauge railroads, the market can produce a gradual escape by cherry-picking the most profitable parts of the existing network, causing it to gradually implode. Thus, parallel wide gauge track may be built on the most profitable segments of the existing narrow gauge network, draining the latter's profitability while promoting the gradual build-up of a wide gauge network.
This provides a metaphor for globalization. The global economy has built a narrow gauge railroad and now needs to find a way to build a broad gauge replacement. That points to several directions, relevant for both the United States and Europe. First, countries should stop building more narrow gauge track, which means no more trade agreements without high quality labor and environmental standards. Additionally, agreements must have exchange rate provisions guarding against currency manipulation and unfair competition based on undervalued exchange rates.
Second, the United States and Europe should start cherry-picking the existing "narrow gauge" trade system and promote "broad gauge" trade agreements. For instance, they could negotiate a US-Europe Trans-Atlantic free trade agreement (TAFTA) that includes proper labor and environmental standards and exchange rate provisions. Similar agreements could be negotiated with Canada, Japan and South Korea. All of these countries would have little difficulty complying with standards, and together they comprise over eighty percent of the global economy. Such a trading bloc would quickly become a "broad gauge" magnet for other countries.
Third, country shareholdings in the IMF and World Bank may be adjusted in the future to reflect the greater contribution of developing countries to the global economy. If this happens, it should be part of a quid pro quo whereby the IMF and World Bank commit to promote labor and environmental standards.
The bottom line is that it is still possible to escape globalization lock-in. The key is replacing corporate-sponsored downward competitive liberalization with progressive upward competitive harmonization. The newfound willingness of the United States to include standards in its Peru and Panama FTAs is a step in the right direction. However, these agreements severely limit workers' rights to sue for enforcement and they also lack provisions against exchange rate manipulation. That leaves plenty of room for improvement in future agreements.
This article republished from www.thomaspalley.com with kind permission.
