Is the growing availability of all this expert economic commentary a good thing? Well, on the one hand, it's very interesting to be able to read what some of the profession's leading thinkers are making of contemporary issues.  On the other hand, given the amount of disagreement that's sometimes on view, it also lends itself rather unfortunately to one of the stereotypes about economists: that for every economist, there exists an equal and opposite economist. 

See what I did just then...?

Photo by Flickr user This Year's Love, used under a Creative Commons license.

According to the report’s Table 2.14, the FIRB approved A$26.6 billion of Chinese investment in 2008-09, or about 16 per cent of total approvals by value. That puts China second only to the US, which accounted for A$39.6 billion of approvals (24 per cent of the total). 

Note that, of that Chinese total, virtually all of it (some A$26.3 billion) was in the mineral exploration and development sector. China accounted for 29 per cent of total approvals by value in this sector, well ahead of the second-placed US (with A$19.8 billion or 22 per cent of approvals). Mind you, this result was dominated by one proposed deal, worth A$19.8 billion, which on its own accounted for almost three-quarters of total approved Chinese investment.

A second view on the apparent attractiveness of Australian resources to Chinese investors comes from an Ernst and Young report (large pdf) on mergers and acquisitions in the global mining and metals sector last year. According to the report, China accounted for US$16.1 billion or 27 per cent of the value of all transactions in 2009. 

Over the past ten years, Chinese entities are estimated to have completed some 369 deals worth over US$50 billion, of which nearly 80 per cent took place in 2008 and 2009. And as the following chart shows, a rather large chunk of this money headed for Australia:

Here’s a table from the same report looking at the top 10 Chinese outbound deals last year: in six of the ten cases, Australia was the target country. 

A final perspective on how Australia compares with other countries as a destination for Chinese OFDI comes from The Heritage Foundation’s China Global Investment Tracker. This covers Chinese outward non-bond investment from 2005 to June 2010 for transactions larger than US$100 million. According to Heritage’s database, Australia has been the single most preferred destination for Chinese non-bond investment over this period:  

All of which suggests that, when it comes to OFDI, China ♥ Australia.  Or, more precisely, China ♥ Australian resources.

While this was useful information, it suffered from several drawbacks as a measure of the overall restrictiveness of Australia's FDI regime in the context of the China debate. First, as the producers of the index themselves emphasised, its design features mean that it does not take into account some important factors:

• It only scores overt regulatory restrictions on FDI and ignores other important aspects of the regulatory framework, such as the nature of corporate governance and other institutional and informal restrictions. 
• It excludes other policies that indirectly impinge on FDI, including economic and social regulation. 
• It relies on countries being transparent in reporting their restrictions. 
• It does not adjust for the actual enforcement of restrictions.

Second, the index excluded most of the so-called primary sectors of the economy, including mining. Mining, of course, was precisely the sector where most of the China action was taking place.

Third, and perhaps partly as a result of the first point, some of the rankings in the index just looked a bit peculiar. So, for example, the rating of Japan and Korea as substantially less restrictive to FDI than Australia seemed surprising.

The good news is that the OECD has now updated the index in a way that takes care of the second point and provides a bit more comfort on the third. (The first set of shortcomings remains, and in addition, the new version of the index no longer attempts to take into account the effects of rules on state ownership and state monopolies.)

The new index now covers 48 economies (including all of the G20) and covers all primary sectors, including mining. The chart below shows that Australia continues to run one of the more restrictive FDI regimes of the countries covered by the measure, with a level of restrictiveness still above both the OECD average and the overall average (although its now a little below the non-OECD average). However, the restrictiveness of Australia's FDI regime is now below that of Canada and New Zealand, and also is also below Japan and Korea: 

What about mining? Here the OECD gives Australia a score of 0.1. That is less than the OECD, non-OECD, and overall average. It's also below the scores given to Canada and New Zealand.

How has the level of FDI restrictiveness changed over time?  The changes to the index methodology render invalid a straight comparison between the old and new index values for Australia. However, the OECD has recalculated the 2006 numbers using the new methodology, and on this basis, Australia's regime is judged to have become more liberal over recent years:

Photo by Flickr user mag3737, used under a Creative Commons license.

• Mechanism one is for private domestic demand to substitute for the withdrawal of government demand – presumably because fiscal retrenchment boosts private sector confidence and, via a sharp fall in interest rates, re-activates growth. But in most rich countries, nominal interest rates are already very low, suggesting that any stimulatory impact is unlikely to be particularly large.
• Mechanism two is for external demand to replace domestic demand – that is, for an increase in exports to offset the withdrawal of government demand. But in a world where most developed economies are following the same policy prescription of belt-tightening, it's not obvious where the external demand will come from.

Maybe it can come from the developing world? After all, economic growth in emerging markets has been relatively resilient compared to the performance of the developed world, and (as a result) the developing world's share of the world economy is continuing to rise. 

Yet there remains a big question over whether the developing world is now big enough to serve as a locomotive for the rest of the world economy. This also leaves the rich world hostage to policy actions in emerging markets (something of an inversion of economic history, where the more typical pattern has been for developing country prospects to be side-swiped by policy shifts in the rich world). This is one reason why markets earlier this week reacted so badly to signs that China's economy has been slowing.

Photo by Flickr user flappingwings, used under a Creative Commons license.

One important reason is the nature of that new global balance of economic power. Specifically, the arrival at the world’s top table of major economic powers which are also developing economies with levels of income per capita significantly below those enjoyed by their advanced country G-20 counterparts. This divide in national living standards is manifested in what I have been describing as a clash between hypocrisy and reciprocity.

Hypocrisy is the charge levelled by the emerging powers against the established ones. So, for example, on trade policy: after decades of lecturing the developing world on the benefits of free trade and liberalisation, the rich world has developed cold feet. 

The Doha round was supposed to be a development round, but one reason for the current stalemate is that rich countries are increasingly reluctant to allow any additional access to their markets to the economic success stories of the developing world. 

On international finance: after years of preaching the gains from free capital flows, developed economies seem to have decided they are uncomfortable being recipients of investment from the developing world, sounding warnings about the dangers posed by Sovereign Wealth Funds and other state-controlled investments. And on climate change: after reaping the benefits of energy-intensive economic growth, the developed world now appears to want to restrict the ability of the developing world to seize the same opportunities. 

All charges which contain at least an element of truth.

For its part, the developed world looks to the new emerging economic powers and their new seats at the top table, and then asks for reciprocity. 

On trade policy, for example, the bargaining dynamic that is at the heart of the WTO process means that rich countries now expect at least the big developing economies to be active participants, and not free-riders. On capital flows, the talk is of level playing fields and equal treatment. And on climate change, any credible agreement requires commitments from the largest future emitters as well as the largest past ones. 

The big developing economies are inclined to meet at least some of these requests with the counter-argument that they are still, after all, developing countries, and therefore cannot be expected to take on the same burdens as the developed world. 

Again, this defence has (more than) an element of truth: to take just one example, the kind of adjustment problems posed by agricultural trade liberalisation look rather different when you still have millions of subsistence farmers. Nevertheless, the reality is that demands for reciprocity are the unavoidable price for these economies’ new status as emerging powers.

Getting global governance to work is one of the major long-term challenges facing the world economy, and resolving the clash between hypocrisy and reciprocity is going to be an important part of that process. Meanwhile, we can look forward to the weekend’s squabbles over fiscal policy and bank taxes.

Photo by Flickr user Downing Street, used under a Creative Commons licence.

Finally, the report also stresses the important links between TOC, political instability, and state failure across the globe (higher res. version of chart can be found in the report itself):

In it, Lewis developed a dual economy model to explain economic take-off in developing economies. In his model, developing economies comprise a capitalist sector and a subsistence sector, and economic development involves the transfer of labour from the latter to the former. Key to the model is the argument that 'an unlimited supply of labour may be said to exist in those countries where population is so large relatively to capital and natural resources, that there are large sectors of the economy where the marginal productivity of labour is negligible, zero, or even negative.'

Under these circumstances, the capitalist sector can tap this supply of under-employed (or surplus) labour from the subsistence sector, and moreover can do so at a constant wage. This allows a rising share of profits in national income. These profits are then re-invested in the capitalist sector, and the large supply of surplus labour means that this increased rate of profit and investment can be sustained, powering the transformation of the economy. 

Eventually, a turning point arrives when the supply of surplus labour is exhausted, at which point wages start to rise, the rate of profit falls, and the rate of investment slows. (For a short review of the subsequent development of the Lewis model see this paper by Gary Fields.)

Given the significant role in Chinese economic development played by a large supply of cheap labour due to both rural-urban migration and favourable demographics, it's no surprise that the idea of applying the Lewis model to China receives lots of attention. Similarly, debate as to whether China is about to run out of cheap labour have been around since at least 2004.  

One forecast that received a lot of attention a few years back was some 2006 work by CASS which predicted that China was heading for a Lewisian turning point. This study argued that the supply of surplus rural labour was being depleted, that China would face significant labour shortages and sharply rising wages by 2009 or 2010, and that this would constrain China's development options. 

This prognosis received a fair amount of attention in 2007, some of it cautiously sceptical. The onset of the GFC and subsequent reports of extremely heavy job losses among China's migrant community then pushed the discussion off the agenda. Recent weeks, with their reports of rising wages and evidence of a shift in bargaining power towards workers mean that the debate is back, although once again there is also plenty of scepticism over whether the turning point has actually arrived.

What would it mean if it has? Some of the commentary to date has tended to focus on the potential implications for international supply chains and on the relocation of footloose manufacturing to economies where labour costs are lower. Other pieces have asked whether it could signal an end to cheap Chinese imports and a rise in the China Price (although some China analysts argue that the share of labour costs for many of China's exports is so low that any impact of even quite large pay rises will be very modest).

A more general point is that higher wage growth – and any consequent shift towards a higher wage share in China's national income – would be an important step forward both for China's own development and for the much-discussed objective of global re-balancing. With regard to the latter, after a couple of months while the world has been distracted by the problems in Greece and the Euro-area, a recent surge in Chinese exports means that the future of the RMB is another debate making a return.

Photo by Flickr user benoitflorencon, used under a Creative Commons license. 

Under the Gold Standard, countries running balance of payments deficits (and so leaking gold) had to adjust by reducing domestic costs and prices – especially wages. This required both (downwardly) flexible wages and either a pliable or a muzzled labour force. The spread of trade unionism, unemployment benefits and minimum wages undermined the first of these, while unionism and the extension of the franchise helped reverse the second. 

The attempt to return to old orthodoxies was a disaster. Indeed, in the inter-war period, it was those countries that abandoned the Gold Standard that tended to recover earlier. (Earlier this year, Paul de Grauwe had a piece in the FT noting the parallels between this experience and contemporary circumstances.) To make matters worse, the countries that stuck with the Gold Standard ended up turning relatively more to protectionist measures as an alternative way of restoring competitiveness. 

A modern example of a country attempting to don the Golden Straitjacket is Argentina, which on 1 April 1991 adopted the Convertibility Plan. The story of Argentina's experiment is set out in a good book by Paul Blustein.

Argentina had been plagued by a modern history of fiscal and monetary profligacy and hence suffered from persistently high inflation. The Convertibility Plan, which committed Argentina's central bank to freely exchange pesos for dollars at a rate of 1:1, was intended to provide a solution by imposing tough limits on the central bank's freedom of action: Argentine policymakers, like Odysseus, set about tying themselves to the mast of monetary rectitude in order to avoid the siren song of inflationary finance. 

Argentina's implementation of convertibility involved an explicitly high degree of lock-in by policymakers: for example, the dollar was allowed to circulate alongside the peso, producing a partially dollarised economy in which a rising share of loans were denominated in dollars, which in turn meant that any attempt to break the dollar-peso peg would have a calamitous impact on the country's banking system and many of its households. The pain of any alternative path was supposed to be so high that lock-in – and hence government credibility – was assured.

Initially, it worked. Convertibility helped bring down inflation at a rapid rate, Argentina enjoyed something of an economic boom, and the plan even managed to survive an early test in the shape of the 1994/95 Tequila crisis, with Argentina prepared to jack up interest rates and taxes in a display of commitment that won praise from financial markets. The IMF, which until then had been somewhat sceptical, was also impressed, and in the following years Argentina was to become, in Nancy Birdsall's memorable phrase, the 'spoiled child of the Washington Consensus'. Capital markets also bought the story, and Argentina benefited from significant capital inflows.

Unfortunately, Argentina's fiscal policy, labour markets and domestic politics proved incompatible with the Convertibility Plan in the long run. So when the economy had to deal with a series of shocks — first the Asian financial meltdown, then the Russian crisis, and finally Brazil's devaluation in early 1999 — it all ended in tears. Argentina found itself mired in recession, and the political and economic costs of the convertibility regime became too high to bear. 

Eventually, after several changes of president and large-scale public protests, the end came on 6 January 2002. At which point, of course, all of the lock-in that had been cited as ensuring that Argentina could never afford to abandon convertibility meant that, when convertibility was abandoned, the economic and social fallout was particularly nasty.

Which brings us back to Greece and the latest crisis. Several observers have already noted that there are a range of possible Argentine lessons that can be applied to Greece. One of these is the dangers of a loss of policy flexibility. 

In the case of Greece, the decision to join the euro was motivated in part by similar considerations to Argentina's decision to adopt Convertibility, although clearly a range of other important influences relating to the future of the European project were also at work. And like Argentina at the start of the Convertibility Plan, Greece initially benefited from donning the euro version of the Golden Straitjacket. One key difference was that the degree of Greece's lock-in to the euro was (and is) much greater than Argentina's to the Convertibility Plan, and hence the costs of exit would be even greater. 

Yet, as in the case of Argentina, Greek politicians have been unable to deliver the kinds of policies in other areas (primarily fiscal policy, in this case) that would make the commitment to the existing macro-economic regime fully credible. With the backing of €750 billion of European and IMF money, policymakers in Athens are making a belated attempt to deliver on the fiscal front. But the domestic politics of this – the risk of a prolonged period of austerity and sub-par growth – look poisonous.
 
The experience of both the Gold Standard and Argentina suggests that political pressures and large shocks can render the most beautifully tailored golden straitjacket terminally uncomfortable. That's a good reason for feeling rather sceptical about the chances of Greece delivering on the latest adjustment package. 

Granted, that's not quite the same as saying that governments have no chance when it comes to delivering the kind of austerity that Greece now requires: some recent research by Alberto Alesina, Dorian Carloni and Giampaolo Lecci suggests that the kind of fiscal adjustment now required in Europe has been politically feasible and politically survivable in the past. But it does highlight the immense difficulties involved.

Photo by Flickr user leguan001, used under a Creative Commons license.

A second option is to forfeit full economic integration to allow space for variation in national policies: in the diagram this is represented by the post-World War II Bretton Woods compromise, which, through the use of capital controls, tried to maintain national markets for capital. 

The third solution seeks to combine the nation state and full economic integration by donning Friedman's Golden Straitjacket at the expense of democratic choice. Here, economic policy-making is taken out of the political sphere, which is one way of thinking about independent central banks and independent fiscal agencies. (In practice, of course, the dividing line need not be so clear: central banks still need to factor political accountability into their decision-making.)

In the initial JEP paper, Rodrik bets that, in the long term, the world economy will be one of global federalism. But en route he thinks two other scenarios are possible: a 'backlash' scenario, under which governments resort to protectionism, or an alternative under which 'an ongoing series of financial crises will leave national electorates sufficiently shell-shocked that they willingly, if unhappily, don the Golden Straitjacket for the long run.' 

Initially, the GFC seemed to raise the prospect of the first of these but, to date anyway, the recourse to protectionism has been muted. Calls for governments to don fiscal straitjackets suggest that we might instead see some version of the second scenario. 

This too would be surprising, however, since one message from the GFC is that the solution of 'leave it to the market and to the technocrats' has also proved deeply problematic: outside of a few cases like Australia, the developed world's independent central banks haven't exactly covered themselves with glory in recent years, while the reputation of large parts of the financial sector has been badly tarnished.

Rodrik has recently applied his model to the Greek crisis. He suggests that the global financial crisis hit Europe when it was part-way through the process of replacing the nation state with federalism (in this case regional federalism, not global). The question for the Europeans is whether they push on with their project, or retreat to one of the other two solutions to the trilemma. 

As I've noted before, in the past the response has been to forge ahead, and there are signs that this might be the response this time. But as I also pointed out, domestic voters may be running out of patience. In particular, the cost of bailing out Greece means that Germans and German politicians seem to be losing some of their enthusiasm for the project.

* This is a variant on the original open economy trilemma (often called the impossible trinity), which states that policymakers can only opt for a maximum of two out of the three following choices: a fixed exchange rate, an independent monetary policy, and free capital mobility. For a quick summary, see this short article by Paul Krugman.

A potentially important problem with this solution is that fiscal rules are only as good as the government that implements them. This makes them at best an imperfect response to the credibility problem: the Fund reckons that the GFC has seen about one quarter of those economies with rules either modify them or put them into abeyance.

This shortcoming has led some economists to advocate a move to independent fiscal agencies. There is an obvious analogy here with the solution to monetary policy credibility offered by central bank independence, although the usual idea is that these fiscal bodies would discipline governments via increased transparency (naming and shaming), rather than by having their hands directly on the levers of policy in the way that central bankers set short-term interest rates. 

The new UK coalition Government has set off down this route with its announcement of a new Office of Budget Responsibility (OBR), although sceptics have already noted that the OBR's North American counterpart, the Congressional Budget Office, has had strictly limited success in disciplining US fiscal policy.

Adopting an independent fiscal agency, like opting for an independent central bank, can be seen as an example of what Thomas Friedman has described as donning the Golden Straitjacket: that is, following the relatively narrowly circumscribed set of policies deemed necessary to secure the approval of the financial markets, or, as Freidman describes them, the electronic herd. 

According to Friedman, to fit into the Golden Straitjacket a country must, among other things, set about 'maintaining as close to a balanced budget as possible, if not a surplus.' Friedman goes on:

As your country puts on the Golden Straitjacket, two things tend to happen: your economy grows and your politics shrinks...the Golden Straitjacket narrows the political and economic policy choices of those in power to relatively tight parameters.

In other words, governments can try to gain credibility by effectively reducing their degree of control over the levers of economic policy. Fiscal rules and independent fiscal authorities are ways that governments can try to do this with respect to fiscal policy.

In a follow-up post, I'll look at a model that seeks to explain this choice in the context of the changing nature of the global economy.

Political scientists rather than economists seem to have made most of the early running on this. In a large literature on the subject, they have tended to focus on the relationship between bilateral trade interdependence and military conflict. So, for example, one important early contribution from John Oneal, Bruce Russet and co-authors uses this approach to find empirical support for the hypothesis of a commercial peace. 

On the other side of the debate, Katherine Barbieri's work has suggested that things are not quite so straightforward: instead of a negative relationship between bilateral trade interdependence and military conflict, Barbieri finds a positive one. Oneal and Russet have found that this result is sensitive to the way trade interdependence is measured.

Taken overall, surveys of this literature tend to find that the majority of studies support the idea of a negative relationship between bilateral trade and conflict, a result supported by some recent work.

Economists look to be relative newcomers to this debate. One interesting and relatively recent contribution comes from Philippe Martin, Thierry Mayer and Mathias Thoenig (summarised here). Their work confirms the proposition that a given pair of countries with more bilateral trade has a lower probability of bilateral war. 

But they also report a more surprising finding: countries more open to global trade have a higher probability of war. They explain this result by arguing that, while the probability of war is lower for countries that trade more bilaterally because of the opportunity costs associated with lost trade, greater multilateral openness has the opposite effect because, by reducing the level of bilateral dependence, it reduces the opportunity cost of any given conflict. 

They argue that multilateral trade openness therefore affects the nature of war: it increases the probability of local wars but deters global conflicts, a prediction which they argue fits well with the stylised fact that military conflicts have become more localised over time:

The same authors have built on these results to suggest that free trade agreements are good for peace.

Another recent paper, this time from Jong-Wha Lee and Ju Hyun Pyun (summarised here), also finds that bilateral trade interdependence is associated with a lower probability of conflict. And, in contrast to the surprising findings of Martin, Mayer and Thoenig, they find that global interdependence is good for peace. Lee and Pyun also find that the peace-promoting effects of trade vary depending on the degree of geographical proximity: greater bilateral interdependence seems to produce larger peace-promoting effects for neighbouring countries, while greater global trade openness has a relatively greater positive effect on peace for distant countries.

Summing up, I would judge that, while the evidence for the Pax Mercatoria is not absolutely conclusive, nevertheless its still strongly supportive of the general idea that international integration is good for peace, all else equal.

One last thought. I have concentrated on trade flows, but globalisation, even narrowly defined, encompasses more than the market for goods. While there has been some work on the relationship between conflict and other variables (such as foreign direct investment), this seems to be an area which is still relatively unexplored.

On the one hand, they face a growing chorus of voices calling for serious efforts to deliver fiscal consolidation, and to do so as soon as possible. There is also the implicit threat that if they fail to do so, markets might suddenly stop being sanguine about their debt positions and start bidding up interest rates, á la Greece. On the other hand, these policymakers still have to manage weak and fragile economies that, all else equal, would argue for expansionary, not contractionary, macro policies.  

The sensible policy response would seem to be pretty straightforward: to continue with stimulatory policies for now while simultaneously putting in place a credible and binding program for medium term fiscal retrenchment. This could still work. 

The problem is that it's often quite difficult for governments to make credible commitments in this way. That's one reason for the calls for (premature) adjustment. These calls may well sound perverse: as Martin Wolf puts it, they amount to the proposition, 'If you are unwilling to starve yourself when desperately ill, nobody will believe you would adopt a sensible diet when well.' Nevertheless, the calls are growing louder.

Photo by Flickr user blmurch, used under a Creative Commons license.

Most of this increase in debt – about two-thirds – is the product of the recent collapse in economic activity (and hence government revenues). Fiscal stimulus only accounts for about one-tenth of the rise in debt. 

There is also a further, nasty complication. Age-related spending, especially on health care, is forecast to increase by between 4 and 5 percentage points of GDP over the next two decades, implying additional medium-term pressures on government fiscal accounts.

In its Monitor, the Fund warns that these projected increases in public debt could have several adverse consequences, including a reduced ability to respond to future economic shocks, higher interest rates (the Fund cites new research suggesting that, given the average projected increase in debt ratios in advanced economies, interest rates could increase by almost two percentage points over the medium term, all else equal) and lower potential growth (it also estimates that a 10 percentage point increase in the initial debt-to-GDP ratio is associated with a slowdown of around 0.15 percentage points per year in per capita GDP growth in advanced economies). Both of these last two effects would worsen a country's debt dynamics. 

Finally, the Greek experience shows that very high debt levels can raise questions about a country's willingness to pay, and so precipitate a debt crisis.

All of which suggests sound reasons for policymakers in the developed world to deliver fiscal consolidation over the medium term. But there's a big risk here, which I'll discuss in a follow-up post.

Second, the results on the world's leading power — 55% said it was China. As Fergus Hanson wrote on Monday, 'that in no way reflects IMF data which still puts the European Union and the US well ahead of China, measured in both purchasing power parity and US dollar exchange rate terms.'

As I posted back in February, Australians aren't the only one ones to ignore the GDP numbers and assign China the top spot: confidence and sentiment clearly matter. Another part of what's going on here is the poll is picking up the substantial growth in relative influence that China now has on the Australian economy: remember, last year total bilateral merchandise trade with China was worth about A$78 billion, or more than twice the A$32 billion of trade with the crisis-hit US.

And although the US continues to be a far more important foreign investor in Australia than China, the high-profile debates over Chinese foreign investment have meant that the latter has been a much more visible investor over the past two years. 

Finally, there is the difference between influence on average, and influence at the margin. Yes, the US economy remains much bigger than the Chinese one. But if you take a look at the current drivers of global growth (see left), you get a different picture.

Last, like Fergus, I was struck by the response of younger Australians to the question about Australia's place in the world. One problem with polling is interpreting what underlies the various answers: so a cynic might suggest that the high 'not really part of any region' response just reflects some uncertainties about geography. But there are more intriguing possibilities. 

For a start, the polling confirms that the old debate as to whether Australians see themselves as some kind of European outpost is long over. For older Australians this seems to have been replaced by a greater sense of being part of Asia. But this sometimes appears to be manifested as a kind of nervousness about being 'left out' of the Asian region (hence Canberra's desperate keenness to be involved in any version of the regional architecture that will have it, as well as to invent new bits whenever there's an opportunity). 

I wonder whether the different response of younger Australians to this question might signal that a younger generation has a bit less fear about being 'left out', perhaps a bit more (self-)confidence about Australia's own position, and hence a greater willingness to define Australia in its own terms – maybe in part a product of two decades or so of relative economic and social success?

Naim and others argue that globalisation and its key drivers – technology and deregulation – have provided a major boost to international crime. So, for example, financial market deregulation and innovations in information and communications technology have not only made things smoother for legal international capital flows, they have also helped make life easier for money launderers. 

As another example, technological innovation in the form of Ciclosporin – a drug used to control the body's autoimmune response to an organ transplant – is widely credited with spurring the global trade in kidneys, livers and corneas.

How big are the illicit flows of bad globalisation? Potentially, they could be very large indeed. The UN estimates that the amount of money laundered globally in one year is between US$800 billion and US$2 trillion, for example. It also thinks that the illicit global drugs trade can be valued at more than US$300 billion a year. Havocscope puts the size of the global drugs trade at an even bigger US$393.89 billion and the transnational crime market at US$342.1 billion. 

Combine these kinds of estimates with fears of a global crime wave, the sort of disorder seen this year in Mexico, Jamaica and elsewhere, and mix in some post-9/11 worries about the links between international crime and international terrorism, and you can see why writers like Naim claim that 'Global criminal activities are transforming the international system'. Here's another area where international economics and international security and politics overlap.

There is a problem here, though. Given the nature of these flows, it's actually very difficult to estimate (guesstimate?) just how important they are. As RT Naylor puts it in a critical review (behind a paywall) of Naim's book, 'These are alarming developments...The only problem is to find evidence that any of them is actually true.'

Naylor stresses the lack of hard data available, arguing, for example, that the common claim that laundered money represents between 2% and 5% of world GDP, 'far from being the result of assiduous research...was invented on the spot by an aide to the IMF chief when he desperately needed a figure to give to eager reporters at a press conference'.

Still, despite the very real shortcomings of the data, it is clear that there is a 'bad' version of globalisation. Nils Gilman describes it as 'deviant globalisation'. According to Gilman, 'for every legitimate industry that is out there, there's a deviant counterpart'. 

So, for example, the deviant counterpart to tourism is sex tourism; for the pharmaceutical industry, it's the drugs trade (possibly the 'single most globalised business in the world' except for oil); for waste disposal, it's toxic dumping; for the software industry, it's malware, which includes items like Conficker; and for commodity trade more generally, it's illicit commerce in items ranging from exotic animals, stolen art and protected hardwoods through to human organs and people. 

Finally, Gilman makes a couple of interesting points about this kind of globalisation.

First, that the essence of what's going on here is a kind of 'moral arbitrage'. He argues that in a global economy the practical effect of national taboos and prohibitions is not so much to reduce demand as to reduce supply in particular locations (due to differences in either the application of bans or the degree of enforcement), creating large price gaps and hence the opportunity for arbitrage. This might involve trade that is illegal, but it might also just involve trade that is legal but 'yucky'.

Second, and more provocatively, Gilman suggests that one consequence of deviant globalisation is a substantial flow of money and resources from the developed to the developing world, at a scale that he thinks is 'almost certainly an order of magnitude bigger' than foreign aid flows. 

As an example, he cites the case of Mexico, where it is estimated that the cultivation and trafficking of illegal drugs directly employs 450,000 people, and where the drug industry has revenues estimated to be as high as US$25 billion a year, exceeded only by Mexico’s annual income from manufacturing and oil exports. In this sense, Gilman thinks it can seen a (warped?) form of development. 

Photo by Flickr user kirainet, used under a Creative Commons license.