Why Globalization Works
Terry J. Fitzgerald
- Senior Economist and Vice President
Published September 1, 2006 | September 2006 issue
By Martin Wolf
Yale University Press
You know the old jokes about how economists never agree with one another.
If all economists in the world were laid end to end, they still wouldn't reach a conclusion.
The First Law of Economists: For every economist there exists an equal and opposite economist. The Second Law of Economists: They are both wrong.
And so on.
While these loathsome jokes (your reviewer is an economist) may contain a tiny kernel of truth, there is, in fact, wide consensus among economists on many topics. One clear point of agreement is that open economic markets are, broadly speaking, a powerful force for increasing living standards in rich and poor countries alike.
And yet policies to promote open markets—such as lowering barriers to international trade—are continually on the defensive, maligned by politicians and viewed with great suspicion by the public. The Doha round of trade liberalization talks is in serious crisis. Regional trade agreements, such as the Free Trade Area of the Americas, are also facing a great deal of resistance. Politicians from both political parties in the United States frequently propose protectionist measures. Protesters are highly visible at every major meeting of the World Trade Organization.
So why is there such a huge disconnect between economists on one side, and the public and policymakers on the other? There are several reasons, not the least being the role of special interest groups in politics and the public's understandable fear of uncertainty and change. But the primary fault may lie with economists after all, who have failed to effectively articulate the essential role that open markets play in improving standards of living.
Another book on globalization?
Cue Martin Wolf, associate editor and chief economics commentator at the Financial Times. Wolf is a trained economist who worked at the World Bank during the 1970s and was director of studies at the London-based Trade Policy Research Centre before joining the Financial Times in 1987. His book, Why Globalization Works, provides an excellent summary of economists' fundamental case for open markets, and for the global economic integration that results.
Globalization is an almost meaninglessly vague term (and thus ripe for all sorts of misuse). Wolf defines it as the "integration of economic activities, via markets" (p. 19). This global-market-oriented integration reflects two overarching factors. First, technologically, the dramatic decline in transportation and communication costs has greatly expanded potential market interactions across countries. Second, government policies largely determine the freedom and efficiency with which markets function, or do not function, across national borders. Policy considerations are, of course, the focus of the debate.
But alas, you say, did the world really need another book on globalization? Yes, and here's why. Many other books on the subject have been more diatribe than enlightenment, and much of the public remains uninformed on important, basic facts regarding economic growth, trade and globalization. Without broad public support, politicians are more receptive to special interest pressures, leading to policies that benefit the few but are costly to the nation as a whole.
Why Globalization Works fills this void, providing the most articulate and well-reasoned case for globalization that I have seen in the popular press. It is, as the title announces, intended to be persuasive. But the primary, and best, section of the book addresses a broad range of criticisms of globalization with clear, careful and readable summaries of current economic research and relevant data. These are admirably balanced and comprehensive, allowing non-economists the chance to independently assess the validity of the arguments. Moreover, Wolf finds that the critics are not always wrong, and rich capitalist countries are not fault-free.
Framing the debate
Wolf begins by framing the globalization debate in a broad historic and philosophic context, with capitalism and liberty on one side and various collectivist and alternative ideologies on the other. At stake are economic prosperity, democracy and personal freedom. Here's Wolf:
The intellectual clash between liberal capitalism and its opponents is the chief theme of this book (p. 4).
The enemies of globalization are opponents of the market economy. That is the heart of the debate (p. 40).
Wolf also quotes Vaclav Havel, the author, playwright, political activist and former Czech president:
Though my heart may be left of centre, I have always known that the only economic system that works is a market economy. This is the only natural economy, the only kind that makes sense, the only one that leads to prosperity, because it is the only one that reflects the nature of life itself (p. 40).
Throughout the book, Wolf invokes the adjective "liberal" in referring to globalization, the world economy and democracy. He uses the term in the classical sense, emphasizing liberty and economic freedom.
Making the case
The book covers a great deal of ground in making its sweeping case for liberal globalization, but there are three essential points: Liberal markets are a powerful, and moral, force for raising standards of living; liberal democracy is the only form of government that generates prosperity and stability; and governments play an essential role in obtaining the benefits of economic integration.
On markets, Wolf opens by citing historian William McNeil's description of the transition, about a thousand years ago, from predominantly "command" systems of resource management to "trade and market regulated behavior." He notes that the growth in population, output and income per person during this time has no parallel in history. This is especially true since 1820, when the industrial revolution ("Promethean growth" as Wolf calls it) began transforming lives in dramatic ways.
He then notes that while the benefits of market-oriented economies have not been equally shared, "there is almost no part of the globe where standards of living are not significantly higher than they were two centuries ago" (p. 57). Here Wolf makes an important logical point that is central to many arguments on globalization. Economists most frequently compare economic developments to historical precedent—are things getting better? Globalization critics often compare developments to an idealized, preferred world—are things the best imaginable? Wolf's retort: "Those who condemn the immorality of liberal capitalism do so in comparison with a society of saints that has never existed—and never will" (p. 57).
On democracy, the book discusses the features and implications of a liberal market economy for democracy and international relations. Wolf notes that all advanced market economies share the basic values of liberal democracy, and rarely go to war with each other. He argues, "The collapse of state socialism between 1989 and 1991 has shown that liberal democracy is the only political and economic system capable of generating sustained prosperity and political stability"
And on government, Wolf has an extended discussion on its essential role in globalization. Governments, he argues, must provide the institutional and policy framework that allows market economies to reap the benefits—higher standards of living, stronger democracy and greater freedom—of global economic interaction. The arguments here are standard in economics (governments should provide public goods, address market failures and assist the poor), though with an added emphasis on the tension between the critical importance of government and the limited ("humble") role it should play. Governments must resist the temptation, he says, to intervene in markets too aggressively, as such intervention can diminish the powerful gains from globalization.
Too little globalization?
Before proceeding to the specific criticisms of globalization, the book takes one more interesting turn, arguing that in fact there is too little globalization rather than too much. Wolf describes the rise, fall and resurrection of a liberal global economy during the past century and a half. He notes, as others have, that the years from 1870 to 1913 were perhaps the greatest period of globalization in history, with large declines in barriers to trade and migration. Interestingly, global migration during this period was higher than it is today.
Liberalism then waned from 1913 to 1950 as capitalism came into disfavor (due in large part to the Great Depression), and communism, socialism and fascism gained strength. The book documents the decline in global trade and income growth during these years.
Since 1950, the world has again been liberalizing, with trade and income growth rising vigorously. However, standards of living are not rising everywhere. Here Wolf argues that the poor areas have not been devastated by globalization, but by the lack of it. More specifically, he quotes Peter Lindert and Jeffrey Williamson:
[T]here are no examples of countries that have risen in the ranks of global living standards while being less open to trade and capital in the 1990s than in the 1960s. "There are no anti-global victories to report for the postwar" developing world (p. 82).
Stylistically, Why Globalization Works successfully combines two distinct approaches. In the first half of the book, described above, Wolf uses an argumentative essay style to make his general case for globalization. In the second half, to which I now turn, Wolf employs a more scientific style.
Wolf's review of the major criticisms of globalization is exemplary. Each criticism is taken seriously, and the concerns raised are carefully analyzed while the relevant economic research is highlighted. And although Wolf has a clear, self-announced position (the book's title gives him away), he brings a laudable detachment to his analysis, reporting conflicting findings when they are present, and sometimes agreeing with the critics.
The book divides criticisms into five areas: income inequality, trade, corporations, governments and finance, each dealt with in a separate chapter. Wolf distills the disparate criticisms of the antiglobalization movement into a list of specific claims, which he then analyzes. He succinctly restates the claims and his results in the conclusion to each chapter, which is useful to the reader looking for a quick summary, or one who might occasionally lose the globalization forest for the analytic trees.
The first such chapter begins by listing several claims often heard regarding income inequality and poverty, such as "the ratio of average incomes in the richest countries is rising relative to the poorest" and "the poor are worse off according to a variety of human welfare measures beyond income."
Wolf begins this discussion by presenting data showing that openness to trade is associated with faster economic growth. Countries that substantially increased their trade ratios from 1980 to 1997 experienced significantly higher growth rates than the others. Of course, studies like this do not prove causality—as economists would quickly point out—but Wolf wryly notes, "It is possible to argue that China's dramatic economic growth had nothing to do with its headlong rush into the global market economy. But it would be absurd to do so" (p. 145).
Wolf then turns to a useful discussion on inequality trends, noting that inequality can increase without anyone becoming poorer and can even increase while standards of living rise for everyone. Only extreme egalitarians, he notes, prefer a world in which everyone is equally poor to a world in which some are rich, some are middle-income and some are poor.
On that note, Wolf reports that the critics are indeed correct that the ratio of incomes in the richest countries to those in the poorest is rising. This is hardly surprising, as it follows directly from the observation that the poorest countries are not growing, while the richest are. Yet most evidence suggests that global income inequality has likely decreased, or at worst remained constant, since the 1970s.
How can the rich be getting relatively richer, yet global inequality decline? Here is where Wolf is at his best, carefully explaining the research findings. In this case, part of the answer is straightforward—China and India, relatively poor countries containing roughly 40 percent of the world's population, have experienced substantial economic growth over the past two to three decades.
What about poverty, isn't that on the rise? Well, no. The book methodically works its way through numerous studies that all point to the same result: Worldwide poverty rates have declined dramatically over the past 50 years, while the number of people living in extreme poverty stopped rising in 1980, and may well have fallen, despite large increases in world population. Wolf provides a graph illustrating these dramatic, and apparently widely unknown, trends (see chart below).
The unavoidable conclusion from the research is that economic growth, rather than redistribution, holds the key for alleviating poverty worldwide. As Nobel Laureate Robert Lucas has written, "The potential for improving the lives of poor people by finding different ways of redistributing current production is nothing compared to the apparently limitless potential of increasing production." (See the Federal Reserve Bank of Minneapolis 2003 Annual Report.)
Of course, income isn't the only thing that matters to the world's poor. How have the poor fared according to other measures of human welfare? Quite well, in fact. These measures all show significant improvements over the past 50 years, according to data reported by Wolf. Life expectancy, literacy, infant mortality rates, hunger and child labor are all moving in the right direction—though the devastating impact of AIDS over the past decade has stalled further gains in some countries.
None of this is to say that poverty and world health are not of continued concern, but Wolf's point is that the trends under liberal globalization are markedly positive. Of course, relative to an idealized world with no poverty, the current situation in parts of the world remains tragic. But globalization is neither the cause of that tragedy nor the barrier to improvement. On the contrary, Wolf argues persuasively, it is the best available solution.
Beyond inequality and poverty
Why Globalization Works delves into other areas that are subject to strong protest from the antiglobalization movement—trade, corporations, governments and finance. These discussions are extensive, and readers could easily skip to their topics of interest without loss of continuity. Following are some highlights.
On trade, Wolf discusses the research on the exploitation of workers, especially children, in poor countries. Research shows that child labor is associated with poverty, not trade, and rising income reduces child labor and improves working standards. Furthermore, in a later discussion of exploitation by corporations, Wolf reports the fairly well-known finding that, in general, transnational companies pay more and treat workers better than local companies.
Wolf reports that the critics have it right on a related issue—that rich countries are hypocritically advocating trade liberalization for developing countries, while at the same time invoking protectionist measures themselves. The enormous subsidies given to agricultural products in Europe and the United States are discussed at length. Wolf refers to these policies as a disgrace and suggests that the antiglobalization movement demonstrate against these harmful subsidies rather than beneficial trade initiatives.
On globalization and the environment, the book reviews research indicating that many pollutants decline above a certain income threshold. This is not true for greenhouse gas emissions, he points out, which require government intervention to address the externalities imposed. Wolf finds little evidence that rich countries are lowering pollution standards or exporting polluting industries to developing countries with low standards, as critics often charge. In fact, standards are rising in rich countries. And finally, he makes the interesting point that trade restrictions can exacerbate pollution, for example, by leading to overuse of agricultural fertilizers and pesticides to grow crops in Switzerland rather than on the fertile plains of Argentina.
Lastly, the International Monetary Fund has come under a great deal of criticism from antiglobalization forces and economists alike. Wolf agrees with many of these criticisms, but believes the IMF still has an important, if substantially modified, role to play in assisting developing countries to engage with world capital markets. He also emphasizes that criticizing international institutions like the World Bank and the IMF is logically separate from criticizing globalization itself.
Are we entering a period of retrenchment on globalization, backing away from a commitment to open markets? It's possible. The derailing of the Doha development round and widespread opposition to trade liberalization policies demonstrate sympathy for pulling back. Furthermore, anxiety about job security and international terrorism are legitimate concerns. But the proper policies for addressing those concerns are retraining programs, unemployment insurance and well-thought-out security measures. Enacting barriers against trade and foreign investment may be in the interest of specific groups, but the evidence presented here shows that nations, and the world as a whole, suffer from these short-sighted policies. Economists estimate that removing all barriers to trade would result in worldwide gains in the range of $250 billion to $2 trillion, with poor countries reaping almost half the benefit.
Why Globalization Works provides an impressive, articulate and comprehensive case for globalization and against its critics. It's not flawless: Many economists would argue with Wolf on specific points, especially in his section on finance, while still agreeing with his overarching globalization arguments. And the book lacks a discussion of outsourcing, a topic of increasing debate these days. Still, it remains, in my view, the best popular treatment of globalization, attuned to a broad audience.
Will it bridge the gap between most economists' view of globalization and the public's perception? Perhaps not. But at the very least, Wolf has helped to redress the lack of effective communication about the economic benefits of open markets and shifted the burden of proof to critics of trade agreements and politicians who promote protectionism.