BMI Webinar: Globalization’s challenges – Where do we go from here?
May 27, 2021
Opening Remarks:
Dr. Boris Mints, President of BMI
“I am glad to welcome the participants of our meeting, distinguished speakers, and all those who joined us at this hour. Today we are holding the first session aimed at forming a modern global agenda. The Covid-19 pandemic has exposed fundamental problems in governance systems, both at the national and international levels. The inability of government institutions to adequately respond to modern global challenges became evident. In our opinion, one of the main reasons for this crisis of governance is the lack of adequacy of the existing global agenda to combat modern challenges. There is a need for a scientifically based assessment of global challenges and, on this basis, the formation of priorities for the development of civilization. I see our task in forming an appropriate agenda based on a deep professional discussion and evaluation. At the same time, I am convinced that if we base the said agenda on the priority of universal values, on comprehension that humanity must be united in its goals, only then can we find the right answers to the modern global challenges that are coming at us, preserving human civilization.”
Prof. Ariel Porat, TAU President
Globalization poses many challenges to global architecture. Before the pandemic, Tel-Aviv University had a strategic goal to advance its globalization; every year, about 2,000 international students study at the university, and the goal is to double this number, having more students participate in Ph.D., Masters, and bachelor programs. However, it is not just about students; TAU also focuses on bringing visiting professors to be part of the TAU community. The university is very eager to attract faculty from top schools around the world to be part of our community. There are several visiting professors at the university, but there is a need to encourage and sponsor more scholars so that more non-Israeli professors can join the faculty. There are many ongoing teaching and research collaborations between TAU and other universities; for example, a dual BA program is offered with Columbia University, and there is a successful program between Berkeley University and the TAU Faculty of Law. It would be ideal if all faculties collaborated in this manner. There is also an upcoming collaboration between TAU, Columbia University, and UAE University on research and teaching related to anti-aging. Some of the leading universities in the United States attempt to establish foreign campuses. TAU is unable to do this at the moment. However, establishing mini-wings and initiatives is essential. TAU is on the road to establishing several multidisciplinary centers in the fields of AI and Data Science, pandemic prevention, and climate change.
Economic Institutions in the 21st century
Prof. Manuel Trajtenberg, Head, INSS
Incentives and institutional change: Reforming the legislative process in the Knesset
There were a series of significant challenges to the world order between nations and superpowers and within them. The world is still fighting the Covid-19 pandemic, luckily not in Israel. The pandemic had exacerbated the challenges built in the global infrastructure. The challenges are everywhere, but mainly political and economic problems were brought to the surface. Institutional pillars of democracy are in trouble with the rise of polarization, populism, and fake news.
In Israel, there is a possibility of fifth parliamentary elections, reflecting high societal polarization. The world has witnessed a loss of restraint to the abuse of power, where limits were trespassed and red lined were crossed. The traditional parties are shrinking, and those who do not shrink are entirely transformed, such as the Republican and Democratic parties in the U.S. At the same time, the world sees the erosion of democratic mechanisms in Turkey and Russia.
In terms of economic growth, there is a growing sense of disappointment: over time, economic growth creates friction and cleavages, a significant rise in inequality, and disenchantment with globalization. Globalization had led to an increase in transactions and the transfer of goods and services in the past 20-30 years. However, it also showed the fragility of institutions, thus making an urgent need to re-think institutions of governance as both the economic and political arenas are not doing well under the current trends. The need to re-think institutions comes around once in a generation, so it will not be the first time this has happened in history.
Exemplifying the general idea that should be applied more generally, the Knesset (the Israeli Parliament) will be shown as an example. In politics and economics, institutions and actors within those institutions respond only to incentives, whereas incentives determine governance rules. At the Knesset, the political system is not functioning well; there is a protracted political crisis, and no one sees its end. The Knesset is regarded as an institution that should alleviate the crisis, but it is doing the opposite; recent statistics indicate that only 30% of the Israeli population thinks well of the Knesset. In the public view, the Knesset has contributed to polarization and political instability. The current legislation system provides the wrong incentives to political actors, as Israel does not have a constitution and relies solely on a few Basic laws, while other bills may be approved by a simple majority.
Between 2015-2019, 6,000 private bills were introduced to the Knesset, while only 4% of which were fully adopted as laws, which is a debasement of the legislation process. The debates in the plenum of the Knesset became nothing short of a circus because there is no other way to get attention. The only way to change this situation is by changing the rules of the game. There is a need to measure the degree of consensus in the Knesset regarding each suggested bill. Each Member of Knesset will receive a grade which reflects the average support or disapproval of the bills they have introduced; this mechanism will indicate which bills are likely to receive support by only a small of the Knesset, thus gradually reducing the submission of “junk bills”, which have a very low probability of being passed. As a result, this grade will encourage MKs to seek approval and persuade other MKs, thereby lead to a more constructive discussion and reduce polarization. In addition, the ranking of low consensus and high consensus will be used to determine the number of votes required to repeal a particular bill. There should also be an additional constraint of setting quorum requirements for proposing bills, as well as limiting the power of the government regarding legislation.
Presently, the separation of powers does not actually exist, which is an aberration in parliamentary democracy. At present, in the Knesset, if you are in the opposition, you do not have a chance to be effective in making policy due to the decision-making structure. As academics, when discussing institutions and their challenges, we must consider them in terms of the rules, incentives, and terms they present.
Dr. Nadine Baudot-Trajtenberg, Former Deputy Governor of the Bank of Israel
Globalization and the free flow of capital: time to reconsider?
How has globalization expanded? It is reaching new maximums every time – based on only one idea, reducing barriers to movement, tariffs, regulation, etc. Barrier reduction has been a global movement that began with trade and goods and has since been extended to tariffs and barriers in the service industry. It is a result of liberalization of the capital market, an important component of globalization. The case of Europe, who had enabled the free flow of human capital, is also a form of reduction of human barriers. Forty years ago, it was much harder for people to move and conduct business, but that has since diminished.
As a result of the reduction in friction of movement and the increase in productivity, many people in the world moved out of extreme poverty. Forty years ago, 47% of the people in the world lived in extreme poverty; in 2019, this percentage had dramatically dropped to around 10%. Eliminating poverty is a very positive element, yet it has created negative externalities, such as climate change and needing to adapt large institutions.
Focusing on the globalization of finances was a great promise and has delivered to an extent, allocating capital and brought forward many challenges that the economic and political institutions must meet. One of the challenges of the globalization of capital flow is tax avoidance and tax evasion. The U.S. and the OECD have increased their efforts to have a unified system to eradicate these phenomena. Another challenge has been financial stability: the conduct of monetary and financial policy, mainly in emerging markets which have experienced the liberalization of the financial market. Since John Maynard Keynes, the interaction between the financial and real economies has been at the center of macroeconomics. There can be no doubt that the financial economy has a significant impact on the real economy. In our minds, financial markets are considered to be dynamic and able to adjust quickly, but the real economy – whether it be the labor or product markets – does not adjust so quickly. Market interaction is not in sync, resulting in timing inconsistencies and making it difficult for real markets to align, and make financial conditions appropriate for the real economy. Here, the dominance of the U.S. as the hegemon has been massive, as most of the financial flows come and go and the dominance of the dollar is very significant. Of course, it is a huge economy, much more important looking at financial markets. The U.S. economy may be third in terms of global GDP, but its stock market is approximately 60% of the global stock market. Monetary policies in the U.S. are important for the whole world, so everyone is interested in what the chairperson of the Federal Reserve will do. Of course, the Monetary Policy is geared towards the U.S. economy, but it has a massive impact on financial markets worldwide and monetary policy.
The global return rate on investment is forcing us to take an increasing amount of risk, which has been quite detrimental. Macroeconomics examines how financial markets interact with other markets, as well as how politics plays a role. For instance, the housing market is one of the most important markets, and is always slow to react, since it is impossible to increase supply quickly when demand rises. With regard to housing as a financial asset and a service, prices in the past 20 years, despite the drop during the housing crisis, have grown by 50% in the U.S., 100% in the U.K., 70% in Israel, and 168% in Canada. As a result of rapid large money flows and the role of the Central Bank, housing prices are rising globally. We are experiencing an increasing housing crisis, both in emerging market economies and advanced economies – should there be restrictions on these markets, increasing friction? In some instances, it should be reintroduced, in others not so much, however interfering with the capital market for housing and introducing policies to allow people to get affordable housing are crucial to eradicating poverty. Changing this situation will require the adoption of physical and monetary policies, reducing friction in the capital market for housing, and creating policies for affordable housing.
Prof. Anat Admati, Stanford Graduate School of Business
Capitalism, Laws, and the Need for Trustworthy Institutions
The interests in global change are centered on law and politics. People define capitalism in different forms: some define it focusing on production, others say it is the opposite of socialism, and still others emphasize the free markets and competition. A significant part of Neocapitalism refers to the idea that government and markets are in conflict, when the decision-making institutions are both private and public. In the 21st century, the role of global financial markets is more significant than ever before, the power of international corporations’ increases, and there are multiple narratives of how governments and corporations interact.
States create corporations, which are both economic and political entities. Corporations tend to shop for contracts when it comes to enforcement, since their home governments grant global corporations’ significant powers, which is why many global corporations are based in the US. The diagnosis of what was wrong with capitalism suggests that it creates a crisis for political institutions, as it is practiced on the ground. Power has been transferred from governments to the private sector. We have reached a situation where systemic deception results in the incapacity to balance power between people, institutions, and economic players that should adhere to laws. There is too much corporate freedom and too little citizen’s power in democracies, and until we diagnose this issue – it will be challenging to address it. Trust is a critical element of institutions, and it is decreasing. Therefore, the goal is to identify facts and diagnose the problem, followed by fixing democratic institutions and the markets.
Is Democracy Sustainable? The Future of the Democratic Institutions
Prof. Itai Sened, Dean, the Gershon H. Gordon Faculty of Social Sciences, and Head of BMI
Political Institutions and the Rise of the New Right
The future of Western democracies is a cause for concern. According to research conducted by Dr. Karen Umansky, a recent BMI Fellow and a Postdoctoral fellow at the University of Potsdam, the main issue we should look at is the importance of stable political institutions. Political scientists look at political institutions and wonder why they are more stable than they appear to be. The median voter theorem can offer a partial explanation: the voters converge more or less to the center. This theorem is valid for both two-party systems and multi-party systems, pertaining that parties try to get a majority by making a political tie. This is true in the U.S., UK, and many other countries.
Centripetal powers are countered by very powerful forces which destabilize modern democracies: from Israel through Italy and on to other countries. There are niche parties, which are not regarded as risking the stability of the political system as such, but are no longer as straightforward as they used to be. Karen Umasky’s research, entitled “Legitimate Enemies”, illustrates a new development in many European countries: choosing an enemy, followed by a process of exacerbating polarization and extremism throughout the political system. These enemies can include immigrants, the EU, government officials, and new or old regimes. For instance, in Austria between 2013-2017, OVP and the FPO parties ravaged the scene of Austrian Politics. In 2013 we saw that the convergence is sitting between SPO and OVP. In 2017 we saw a set of feasible outcomes under new elections is a much larger set, and it is very much anti-immigration with FPO entering the scene (a nationalist, anti-immigrant party). The party entered the scene in 2013, and no one paid attention to it; in 2017, they moved closer to getting more voters, which increased the instability and the number of feasible outcomes. The same happened regarding the EU issue, when it became the significant issue of the 2017 campaign. A previous equilibrium existed when the uncovered set was precisely the median between SPO and OVP, mounting a vast anti-EU campaign by FPO.
The same analysis is applicable to Brexit, where the median was between Labor and Conservative parties. Then, UKIP created the Brexit havoc: in 2015, they barely got a Parliamentary seat, but afterward, they have facilitated the Conservatives’ decision to leave the EU. As a result of a tiny party causing a tiny move in an otherwise stable parliamentary system, the UK will never be the same, as it managed just enough to shift the equilibrium to allow Brexit.
In Germany, on the other hand, the situation is very different. The AfD party used immigrants as a legitimate enemy, a similar tactic to the one used in the UK. However, unlike the UK, the outcome did not change much. Why did that happen? Perhaps, at least partly, this is due to the stable leadership of Angela Merkel. It is imperative to understand how to deal with the instability of political institutions. Up until the 1990s, the chaos theorem was a mathematical theorem, which did not apply to the political sphere, but now it does, which is a factor that should be considered. Multidimensionality of the political space became real as tiny parties realize they can influence even with a small share of the electorate. We need to figure out how we counter these destabilizing centrifugal forces that threaten the very essence of Liberal Democracies and are likely to keep doing it in the foreseeable future.
Prof. Simon Hix, Harold Laski Professor of Political Science & LSE Pro-Director
Fragmenting Democracy
There are multiple dimensions of the current crisis of Democracy that have been extensively discussed, such as populism, declining trust, media echo chambers, and deconsolidation. The classic issues appear when traditional party systems are crumbling – the number of parties participating in the political system is increasing. Over the last 70 years, the average number of parties in the British parliament has increased from four to six.
One aspect of the increase in the number of parties is polarization, especially in average shares; center-left and mainstream right are losing support for the more radical parties. As a result of the growing fragmentation, electoral volatility has increased. There is no single trend, and voters are scattered in every direction, coming and going and not as linear as some claim.
During our investigation of this topic, several questions need to be addressed, and mostly the question regarding the cause of fragmenting democracies. Current politics is rotating between globalization and nationalism rather than traditional economic left and right. What causes fragmentation? Some argue that the causes are economic, socio-cultural, and institutional inequality. Additionally, it results from the increasing heterogeneity of social groups in the society, because there is far more pluralism among them. Many things are happening simultaneously – media and politics, social preferences, a growing number of issues, and a highly diverse working class that needs to be addressed on all levels.
There is also a question of whether fragmentation is mainly between or within political ‘blocks’? In recent years, the formation of new political trends has taken place at all levels of society, characterized by multidimensionality, resulting in increased chaos and party failure. The voters are no longer tolerant of the party’s failures, and this can be attributed to personalizing politics, changing the media structure, and identifying themselves with particular politicians rather than parties. The rate of social heterogeneity also contributes to fragmentation; for example, in the UK – Labor vs. Conservatives in 1955 attributed to the vast majority of the electorate, but in 2010 no more, only 40%, constituency, this gradually feeds to national heterogeneity, where the new norm in the UK would be minority parties.
Why is fragmentation bad for Democracy? Government formation becomes increasingly tricky, increasing political and policy chaos, as well as a decline of the connection between vote choices and policy outcomes, and declining “clarity of responsibility”. When “all is well”, the hegemon party claims it is its doing, while blaming the minority party for whatever goes wrong. The negative loop that feeds the party system’s crisis leads to broader uncertainty in the political system.
However, fragmentation might not be all bad – a higher rate of political pluralism means more choice for voters. There is the possibility of broad alliances if the volatility within blocks is greater than the volatility between blocks; pre-electoral coalitions lead to greater accountability, and open electoral systems may allow for more pluralism within parties/alliances. Eventually, the instability of the party system does not necessarily lead to an unstable government.
Prof. John Carey, Dartmouth College
How deep is support for American democracy?
Expert and public rating of U.S. democracy between 2017-2021 show that the American public has been stable, and instability only stood out in the last three months of Donald Trump’s presidency. To ensure a stable democracy, it is necessary for electoral losers to accept the results and for political leaders on the losing side to signal that the results are legitimate, and there needs to be confidence that votes were counted as intended by the level of government.
The partisan divide on the national level has increased after the elections; the public is fragmented, yet corresponds to the Trump approval and disapproval graph. Post-election, Democrats have more confidence in the integrity of election results than Republicans. Republican officials are more confident than the general public, but not significantly so. Looking ahead to 2024, we foresee pressure from Republican voters on their legislators to violate democratic norms, and on the other hand, the pressure from Democratic voters on their legislators to play Constitutional hardball.
The relevant norms regarding elections in this context include the state’s political party making voting more difficult for members of the opposition party, local officials refusing to certify election results reflecting recorded vote total, a state legislature approving electoral college other than those designated by the popular vote in the state. Furthermore, Congress refusing to certify the presidential election results that the states have submitted.
In order to avoid such practices or diminish them, Democrats may suggest insisting on the letter of the constitution. Another option is granting statehood for Washington, DC, and Puerto Rico is adopted, in order to change the division of power in both the House of Representatives and the and Senate. Other suggestions include abolishing the Senate filibuster, ending the electoral college (presidency by popular vote), adding seats to the supreme court, Senate refusal to confirm judicial or cabinet nominees, presidential removal on the grounds of ‘unfitness’ and the very hypothetical secession or breakup of the union. The secession results provide a glimpse into how the United States is divided. People were asked the following question: “Would you support or oppose (your state) seceding from the United States to join (a list of states in the new union)?” In February 2021, 29% of Americans reported overall support for secession. Republicans in the old confederacy support this idea the most. However, northeast and pacific democrats are also in favor of this idea.