We are constantly reminded about the increasingly globalizing world.  Initially associated mainly with free trade, globalization has expanded to include many other economic, political, and social and cultural aspects of everyday life far beyond reducing tariffs and providing access to goods. 

News takes seconds to spread around the world.  Cell phones change the way prices are communicated and goods are delivered to markets in the most remote parts of Africa, Asia, and Latin America.  Companies from emerging economies are setting the rules of doing business.  Not only goods, but also services are created and supplied globally.  Business scandals and failures previously considered to be local, now echo half-way around the globe.  It seems logical to conclude that the world is converging – or getting increasingly flat – as Thomas Friedman pointed out several years ago.  Or is it?

The new Global Regulatory Cooperation (GRC) Project, launched recently by the U.S. Chamber of Commerce, takes a closer look at the reduction of trade barriers and the accompanying emergence of in-country barriers (ICBs) that hurt competitiveness and stunt economic growth.

The increase in ICBs means that despite the seemingly unstoppable flattening out of the world, inconsistencies, often quite serious, remain.  It’s hard to ignore the fact that while emerging markets desperately seek integration with the global marketplace, there still exists a large movement against globalization, trade, and foreign investment.  Opponents argue that trade does not benefit their countries; instead, they say, it hurts small business and consumers.  Some view foreign investment as a means of satisfying the narrow interests of insiders.  Others call for a “smarter” approach to foreign investment, whereby investors are severely restricted in what they can do.  Unfortunately, sometimes, such statements do have merit.

A Peruvian economist by the name of Hernando de Soto provides a good answer as to why this can happen.  In his work, de Soto has focused on the informal sector – entrepreneurs and companies doing business, creating goods, and providing services all outside of the formal economic structures.  They are not always registered or able to get a loan.  They don’t have the means to enter into contracts and enforce them though the legal system.  They are often the driving force of economies but are not captured in any official economic statistics.

Existing in the informal sector, those businesses often lack access to the benefits that trade and globalization broadly can bring about.  They have limited opportunities to compete locally, regionally, and globally.  They engage in survival entrepreneurship, not small business development.  And the main reason that they and their consumers don’t benefit from globalization is what puts them in the informal sector in the first place – bad regulations and weak institutions. 

The informal sector is only part of the answer – there are other issues at play.  They are all part of a dangerous trend, where, regardless of the macroeconomic impact of trade and investment, people feel that the train of prosperity is passing them by.  Some countries have lowered trade barriers, but their poor may have not seen the promised lower prices and a greater selection of goods.  Others have welcomed foreign investment, yet infrastructure remains in ruins.  The perceptions are hard to ignore.  According to a Gallup Survey released during this year’s World Economic Forum meeting, only 40% of the respondents believe that future generations will live in greater prosperity. 

What has been the response to such pressures?  Rather than trying to reform and open up the system, to ensure that the benefits actually reach all levels of society, many governments are implementing more and more regulatory measures to ensure that domestic interests are not hurt by global trade and investment.  The reasoning for increased regulation differ, driven by anything from national security and genuine consumer safety concerns to populist electoral promises.

A decade ago, these issues did not seem very important.  With the march of democracy around the world, opening up of markets, and the growth in foreign investment, few worried about who actually benefited from growth and development.  But nationalizations in Bolivia and Venezuela, a new focus on protecting strategic economic sectors in Russia, greater regulatory control in China, and rather slow economic growth among the poor in developed economies are putting these issues back on the global agenda.

The fact that regulation is on the rise is troubling.  Deborah Solomon, in a July 6, 2007 Wall Street Journal article, suggests that despite continued growth in investment, an array of regulatory barriers being erected around the world are presenting new challenges to the business community – from both developed and developing countries.

While tariffs and quotas may be on the decline, the new regulations often offset the benefits.  The US Chamber’s GRC project outlines several key areas where legal and regulatory-type trade protection measures are re-emerging.

In the area of intellectual property, some governments arbitrarily use policy mechanisms to discard IPRs and obtain technologies at low or no cost.  Selective enforcement of anti-trust laws presents another set of challenges, especially when competition policies differ significantly between countries.  The proliferation of local standards and regulations, which force companies to increase compliance costs, also discourages investment.  Finally, procurement rules that favor domestic companies drive away investment and result in the waste of public funds.

In all, according to some experts, the trend of deregulation may have come to an end, and we are now witnessing an increasing number of countries creating new barriers to investment.   Many emerging markets that were desperately seeking investment five or ten years ago are beginning to restrict foreign ownership.  Even developed countries are joining the trend.  And the complex array of issues and reasons for putting more regulation in place makes it even harder to deal with. 

So, what can be done?  Advocating for regulatory convergence, although tempting, may not be the best of all available solutions.  At the end of the day, it may not be possible to completely harmonize the different regulatory regimes and we must avoid converging to bad regulations.  Instead, policymakers and business communities around the world should focus on the principles upon which new regulations are developed.

A principles-based approach to regulation, similar to the one adopted by the OECD in the area of corporate governance, would advocate for transparent, fair, and inclusive processes, while allowing countries to develop their own regulations to address their own needs.  By establishing standards for transparent dialogue between the private sector and policymakers, such an approach can help to ensure that new regulations do not undermine a country’s competitiveness and create opportunities for poverty reduction and job creation.