Part of the uneasiness about globalization stems from the fact that national policies are increasingly strongly influenced by policies elsewhere. Liberalization and integration have affected the autonomy of national policy-making in a variety of ways. First, trade liberalization and the demands of global capital markets and financial institutions have to varying extents constrained the deployment of monetary and fiscal policy options for social purposes, including employment and equity objectives. The interdependence of interest and exchange rates has led to a strong pressure towards a convergence of monetary policy in the direction of controlling inflation and of fiscal policy towards fiscal restraint from which it becomes difficult for any country to deviate without risking adverse investor confidence. Conversely, macroeconomic imbalances tend to get amplified in a liberalized environment.
Second, the liberalization of trade and finance is steadily changing the traditional idea of countries as distinct economic entities connected mainly by trade towards an environment in which companies and financial markets can increasingly make production, marketing and investment decisions relatively free of national constraints. The promise of direct foreign investment and the threat of its withdrawal have significant leverage on the policy options of Governments.
Third, economic developments in one part of the world effect, in greater or lesser degree, other parts of the world. Decisions in bigger economies clearly impact more on smaller economies. But crises in emerging markets or economies in transition or other developing countries can also affect and force economic decisions in the bigger economies. As international responses to the Asian crisis show, much of the art of economic policy-making today depends on how national policies are dovetailed to global or international developments. In such situations, the danger that countries may attempt to protect themselves from contagion by adopting measures that are harmful to the global economy underlines the need for cooperation and coordination in economic policy-making at the global level.
Fourth, the progressive reduction of tariffs as a result of trade liberalization has removed a major source of revenue that developing countries depended on for social expenditures.
Finally, globalization is also associated with changes in the level, pattern and targets of taxation. The increased mobility of capital and high-income groups has presaged a shift of taxation from relatively mobile factors to relatively immobile ones. In effect, this has meant a relative shift in taxation away from corporations to personal income, from higher incomes to lower and middle incomes, from profits to wages and from direct taxes to consumption (e.g., value added tax), in short from capital to labour. There is a near-universal trend towards lower taxation on higher incomes that implies a distancing from the redistributive function of taxation. Between 1986 and 1998, 67 of 69 countries for which information on tax systems was available witnessed a decline in the maximum tax rate on higher incomes. Tax breaks and other hidden subsidies intended to retain or attract new investments have also worked in favour of the corporate sector.