The countries that have managed globalization on their own, such as those inEast Asia, have, by and large, ensured that they reaped huge benefits and thatthose benefits were equitably shared; they were able substantially to control theterms on which they engaged with the global economy. By contrast, the countriesthat have, by and large, had globalization managed for them by the InternationalMonetary Fund and other international economic institutions have not done sowell. The problem is thus not with globalization but with how it has beenmanaged.
The international financial institutions have pushed a particularideology--market fundamentalism--that is both bad economics and bad politics; itis based on premises concerning how markets work that do not hold even fordeveloped countries, much less for developing countries. The IMF has pushed theseeconomics policies without a broader vision of society or the role of economicswithin society. And it has pushed these policies in ways that have underminedemerging democracies.
More generally, globalization itself has been governed in ways that areundemocratic and have been disadvantageous to developing countries, especiallythe poor within those countries. The Seattle protestors pointed to the absence ofdemocracy and of transparency, the governance of the international economicinstitutions by and for special corporate and financial interests, and theabsence of countervailing democratic checks to ensure that these informal andpublic institutions serve a general interest. In these complaints, thereis more than a grain of truth.
Beneficial Globalization
Of the countries of the world, those in East Asia have grown the fastest anddone most to reduce poverty. And they have done so, emphatically, via"globalization." Their growth has been based on exports--by taking advantage ofthe global market for exports and by closing the technology gap. It was not justgaps in capital and other resources that separated the developed from theless-developed countries, but differences in knowledge. East Asian countries tookadvantage of the "globalization of knowledge" to reduce these disparities. Butwhile some of the countries in the region grew by opening themselves up tomultinational companies, others, such as Korea and Taiwan, grew by creating theirown enterprises. Here is the key distinction: Each of the most successfulglobalizing countries determined its own pace of change; each made sure as itgrew that the benefits were shared equitably; each rejected the basic tenets ofthe "Washington Consensus," which argued for a minimalist role for government andrapid privatization and liberalization.
In East Asia, government took an active role in managing the economy. Thesteel industry that the Korean government created was among the most efficient inthe world--performing far better than its private-sector rivals in the UnitedStates (which, though private, are constantly turning to the government forprotection and for subsidies). Financial markets were highly regulated. Myresearch shows that those regulations promoted growth. It was only when thesecountries stripped away the regulations, under pressure from the U.S. Treasuryand the IMF, that they encountered problems.
During the 1960s, 1970s, and 1980s, the East Asian economies not only grewrapidly but were remarkably stable. Two of the countries most touched by the1997-1998 economic crisis had had in the preceding three decades not a singleyear of negative growth; two had only one year--a better performance than theUnited States or the other wealthy nations that make up the Organization forEconomic Cooperation and Development (OECD). The single most important factorleading to the troubles that several of the East Asian countries encountered inthe late 1990s--the East Asian crisis--was the rapid liberalization of financialand capital markets. In short, the countries of East Asia benefited fromglobalization because they made globalization work for them; it was when theysuccumbed to the pressures from the outside that they ran into problems that werebeyond their own capacity to manage well.
Globalization can yield immense benefits. Elsewhere in the developingworld, globalization of knowledge has brought improved health, with life spansincreasing at a rapid pace. How can one put a price on these benefits ofglobalization? Globalization has brought still other benefits: Today there is thebeginning of a globalized civil society that has begun to succeed with suchreforms as the Mine Ban Treaty and debt forgiveness for the poorest highlyindebted countries (the Jubilee movement). The globalization protest movementitself would not have been possible without globalization.
The Darker Side of Globalization
How then could a trend with the power to have so manybenefits have produced such opposition? Simply because it has not only failed tolive up to its potential but frequently has had very adverse effects. But thisforces us to ask, why has it had such adverse effects? The answer can be seen bylooking at each of the economic elements of globalization as pursued by theinternational financial institutions and especially by the IMF.
The most adverse effects have arisen from the liberalization of financialand capital markets--which has posed risks to developing countries withoutcommensurate rewards. The liberalization has left them prey to hot money pouringinto the country, an influx that has fueled speculative real-estate booms; justas suddenly, as investor sentiment changes, the money is pulled out, leaving inits wake economic devastation. Early on, the IMF said that these countries werebeing rightly punished for pursuing bad economic policies. But as the crisisspread from country to country, even those that the IMF had given high marksfound themselves ravaged.
The IMF often speaks about the importance of the discipline provided bycapital markets. In doing so, it exhibits a certain paternalism, a new form ofthe old colonial mentality: "We in the establishment, we in the North who run ourcapital markets, know best. Do what we tell you to do, and you will prosper." Thearrogance is offensive, but the objection is more than just to style. Theposition is highly undemocratic: There is an implied assumption that democracy byitself does not provide sufficient discipline. But if one is to have an externaldisciplinarian, one should choose a good disciplinarian who knows what is goodfor growth, who shares one's values. One doesn't want an arbitrary and capricioustaskmaster who one moment praises you for your virtues and the next screams atyou for being rotten to the core. But capital markets are just such a fickletaskmaster; even ardent advocates talk about their bouts of irrational exuberancefollowed by equally irrational pessimism.
Lessons of Crisis
Nowhere was the fickleness more evident than in the lastglobal financial crisis. Historically, most of the disturbances in capital flowsinto and out of a country are not the result of factors inside the country. Majordisturbances arise, rather, from influences outside the country. When Argentinasuddenly faced high interest rates in 1998, it wasn't because of what Argentinadid but because of what happened in Russia. Argentina cannot be blamed forRussia's crisis.
Small developing countries find it virtually impossible to withstand thisvolatility. I have described capital-market liberalization with a simplemetaphor: Small countries are like small boats. Liberalizing capital markets islike setting them loose on a rough sea. Even if the boats are well captained,even if the boats are sound, they are likely to be hit broadside by a big waveand capsize. But the IMF pushed for the boats to set forth into the roughestparts of the sea before they were seaworthy, with untrained captains and crews,and without life vests. No wonder matters turned out so badly!
To see why it is important to choose a disciplinarian who shares one's values,consider a world in which there were free mobility of skilled labor. Skilledlabor would then provide discipline. Today, a country that does not treat capitalwell will find capital quickly withdrawing; in a world of free labor mobility, ifa country did not treat skilled labor well, it too would withdraw. Workers wouldworry about the quality of their children's education and their family's healthcare, the quality of their environment and of their own wages and workingconditions. They would say to the government: If you fail to provide theseessentials, we will move elsewhere. That is a far cry from the kind of disciplinethat free-flowing capital provides.
The liberalization of capital markets has not brought growth: How canone build factories or create jobs with money that can come in and out of acountry overnight? And it gets worse: Prudential behavior requires countries toset aside reserves equal to the amount of short-term lending; so if a firm in apoor country borrows $100 million at, say, 20 percent interest rates short-termfrom a bank in the United States, the government must set aside a correspondingamount. The reserves are typically held in U.S. Treasury bills--a safe, liquidasset. In effect, the country is borrowing $100 million from the United Statesand lending $100 million to the United States. But when it borrows, it pays ahigh interest rate, 20 percent; when it lends, it receives a low interest rate,around 4 percent. This may be great for the United States, but it can hardly helpthe growth of the poor country. There is also a high opportunity cost ofthe reserves; the money could have been much better spent on building rural roadsor constructing schools or health clinics. But instead, the country is, ineffect, forced to lend money to the United States.
Thailand illustrates the true ironies of such policies: There,the free market led to investments in empty office buildings, starving othersectors--such as education and transportation--of badly needed resources. Untilthe IMF and the U.S. Treasury came along, Thailand had restricted bank lendingfor speculative real estate. The Thais had seen the record: Such lending is anessential part of the boom-bust cycle that has characterized capitalism for 200years. It wanted to be sure that the scarce capital went to create jobs. But theIMF nixed this intervention in the free market. If the free market said, "Buildempty office buildings," so be it! The market knew better than any governmentbureaucrat who mistakenly might have thought it wiser to build schools orfactories.
The Costs of Volatility
Capital-market liberalization is inevitably accompanied byhuge volatility, and this volatility impedes growth and increases poverty. Itincreases the risks of investing in the country, and thus investors demand a riskpremium in the form of higher-than-normal profits. Not only is growth notenhanced but poverty is increased through several channels. The high volatilityincreases the likelihood of recessions--and the poor always bear the brunt ofsuch downturns. Even in developed countries, safety nets are weak or nonexistentamong the selfemployed and in the rural sector. But these are the dominantsectors in developing countries. Without adequate safety nets, the recessionsthat follow from capital-market liberalization lead to impoverishment. In thename of imposing budget discipline and reassuring investors, the IMF invariablydemands expenditure reductions, which almost inevitably result in cuts in outlaysfor safety nets that are already threadbare.
But matters are even worse--for under the doctrines of the "discipline ofthe capital markets," if countries try to tax capital, capital flees. Thus, theIMF doctrines inevitably lead to an increase in tax burdens on the poor and themiddle classes. Thus, while IMF bailouts enable the rich to take their money outof the country at more favorable terms (at the overvalued exchange rates), theburden of repaying the loans lies with the workers who remain behind.
The reason that I emphasize capital-market liberalization is that thecase against it--and against the IMF's stance in pushing it--is so compelling. Itillustrates what can go wrong with globalization. Even economists like JagdishBhagwati, strong advocates of free trade, see the folly in liberalizing capitalmarkets. Belatedly, so too has the IMF--at least in its official rhetoric, thoughless so in its policy stances--but too late for all those countries that havesuffered so much from following the IMF's prescriptions.
But while the case for trade liberalization--when properly done--is quitecompelling, the way it has been pushed by the IMF has been far more problematic.The basic logic is simple: Trade liberalization is supposed to result inresources moving from inefficient protected sectors to more efficient exportsectors. The problem is not only that job destruction comes before the jobcreation--so that unemployment and poverty result--but that the IMF's "structuraladjustment programs" (designed in ways that allegedly would reassure globalinvestors) make job creation almost impossible. For these programs are oftenaccompanied by high interest rates that are often justified by a single-mindedfocus on inflation. Sometimes that concern is deserved; often, though, it iscarried to an extreme. In the United States, we worry that small increases in theinterest rate will discourage investment. The IMF has pushed for far higherinterest rates in countries with a far less hospitable investment environment.The high interest rates mean that new jobs and enterprises are not created. Whathappens is that trade liberalization, rather than moving workers fromlow-productivity jobs to high-productivity ones, moves them from low-productivityjobs to unemployment. Rather than enhanced growth, the effect is increasedpoverty. To make matters even worse, the unfair trade-liberalization agendaforces poor countries to compete with highly subsidized American and Europeanagriculture.
The Governance of Globalization
As the market economy has matured within countries, therehas been increasing recognition of the importance of having rules to govern it.One hundred fifty years ago, in many parts of the world, there was a domesticprocess that was in some ways analogous to globalization. In the United States,government promoted the formation of the national economy, the building of therailroads, and the development of the telegraph--all of which reducedtransportation and communication costs within the United States. As that processoccurred, the democratically elected national government provided oversight:supervising and regulating, balancing interests, tempering crises, and limitingadverse consequences of this very large change in economic structure. So, forinstance, in 1863 the U.S. government established the first financial-bankingregulatory authority--the Office of the Comptroller of Currency--because it wasimportant to have strong national banks, and that requires strong regulation.
The United States, among the least statist of the industrial democracies,adopted other policies. Agriculture, the central industry of the United States inthe mid-nineteenth century, was supported by the 1862 Morrill Act, whichestablished research, extension, and teaching programs. That system workedextremely well and is widely credited with playing a central role in the enormousincreases in agricultural productivity over the last century and a half. Weestablished an industrial policy for other fledgling industries, including radioand civil aviation. The beginning of the telecommunications industry, with thefirst telegraph line between Baltimore and Washington, D.C., was funded by thefederal government. And it is a tradition that has continued, with the U.S.government's founding of the Internet.
By contrast, in the current process of globalization we have a system of whatI call global governance without global government. International institutionslike the World Trade Organization, the IMF, the World Bank, and others provide anad hoc system of global governance, but it is a far cry from global governmentand lacks democratic accountability. Although it is perhaps better than nothaving any system of global governance, the system is structured not to servegeneral interests or assure equitable results. This not only raises issues ofwhether broader values are given short shrift; it does not even promote growth asmuch as an alternative might.
Governance through Ideology
Consider the contrast between how economic decisions aremade inside the United States and how they are made in the international economicinstitutions. In this country, economic decisions within the administration areundertaken largely by the National Economic Council, which includes the secretaryof labor, the secretary of commerce, the chairman of the Council of EconomicAdvisers, the treasury secretary, the assistant attorney general for antitrust,and the U.S. trade representative. The Treasury is only one vote and often getsvoted down. All of these officials, of course, are part of an administration thatmust face Congress and the democratic electorate. But in the international arena,only the voices of the financial community are heard. The IMF reports to theministers of finance and the governors of the central banks, and one of theimportant items on its agenda is to make these central banks moreindependent--and less democratically accountable. It might make little differenceif the IMF dealt only with matters of concern to the financial community, such asthe clearance of checks; but in fact, its policies affect every aspect of life.It forces countries to have tight monetary and fiscal policies: It evaluates thetrade-off between inflation and unemployment, and in that trade-off it alwaysputs far more weight on inflation than on jobs.
The problem with having the rules of the game dictated by the IMF--and thusby the financial community--is not just a question of values (though that isimportant) but also a question of ideology. The financial community's view of theworld predominates--even when there is little evidence in its support. Indeed,beliefs on key issues are held so strongly that theoretical and empirical supportof the positions is viewed as hardly necessary.
Recall again the IMF's position on liberalizing capital markets. As noted, theIMF pushed a set of policies that exposed countries to serious risk. One mighthave thought, given the evidence of the costs, that the IMF could offer plenty ofevidence that the policies also did some good. In fact, there was no suchevidence; the evidence that was available suggested that there was little if anypositive effect on growth. Ideology enabled IMF officials not only to ignore theabsence of benefits but also to overlook the evidence of the huge costs imposedon countries.
An Unfair Trade Agenda
The trade-liberalization agenda has been set by the North,or more accurately, by special interests in the North. Consequently, adisproportionate part of the gains has accrued to the advanced industrialcountries, and in some cases the less-developed countries have actually beenworse off. After the last round of trade negotiations, the Uruguay Round thatended in 1994, the World Bank calculated the gains and losses to each of theregions of the world. The United States and Europe gained enormously. Butsub-Saharan Africa, the poorest region of the world, lost by about 2 percentbecause of terms-of-trade effects: The trade negotiations opened their markets tomanufactured goods produced by the industrialized countries but did not open upthe markets of Europe and the United States to the agricultural goods in whichpoor countries often have a comparative advantage. Nor did the trade agreementseliminate the subsidies to agriculture that make it so hard for the developingcountries to compete.
The U.S. negotiations with China over its membership in the WTOdisplayed a double standard bordering on the surreal. The U.S. traderepresentative, the chief negotiator for the United States, began by insistingthat China was a developed country. Under WTO rules, developing countries areallowed longer transition periods in which state subsidies and other departuresfrom the WTO strictures are permitted. China certainly wishes it were a developedcountry, with Western-style per capita incomes. And since China has a lot of"capitas," it's possible to multiply a huge number of people by very smallaverage incomes and conclude that the People's Republic is a big economy. ButChina is not only a developing economy; it is a low-income developing country.Yet the United States insisted that China be treated like a developed country!China went along with the fiction; the negotiations dragged on so long that Chinagot some extra time to adjust. But the true hypocrisy was shown when U.S.negotiators asked, in effect, for developing-country status for the United Statesto get extra time to shelter the American textile industry.
Trade negotiations in the service industries also illustrate the unlevelnature of the playing field. Which service industries did the United States saywere very important? Financial services--industries in which Wall Streethas a comparative advantage. Construction industries and maritime services werenot on the agenda, because the developing countries would have a comparativeadvantage in these sectors.
Consider also intellectual-property rights, which are important if innovatorsare to have incentives to innovate (though many of the corporate advocates ofintellectual property exaggerate its importance and fail to note that much of themost important research, as in basic science and mathematics, is not patentable).Intellectual-property rights, such as patents and trademarks, need to balance theinterests of producers with those of users--not only users in developingcountries, but researchers in developed countries. If we underprice theprofitability of innovation to the inventor, we deter invention. If we overpriceits cost to the research community and the end user, we retard its diffusion andbeneficial effects on living standards.
In the final stages of the Uruguay negotiations, both the White House Officeof Science and Technology Policy and the Council of Economic Advisers worriedthat we had not got the balance right--that the agreement put producers'interests over users'. We worried that, with this imbalance, the rate of progressand innovation might actually be impeded. After all, knowledge is the mostimportant input into research, and overly strong intellectual-property rightscan, in effect, increase the price of this input. We were also concerned aboutthe consequences of denying lifesaving medicines to the poor. This issuesubsequently gained international attention in the context of the provision ofAIDS medicines in South Africa [see "Medicine as a Luxury" by Merrill Goozner, onpage A7]. The international outrage forced the drug companies to back down--andit appears that, going forward, the most adverse consequences will becircumscribed. But it is worth noting that initially, even the Democratic U.S.administration supported the pharmaceutical companies.
What we were not fully aware of was another danger--what has come to be called"biopiracy," which involves international drug companies patenting traditionalmedicines. Not only do they seek to make money from "resources" and knowledgethat rightfully belong to the developing countries, but in doing so they squelchdomestic firms who long provided these traditional medicines. While it is notclear whether these patents would hold up in court if they were effectivelychallenged, it is clear that the less-developed countries may not have the legaland financial resources required to mount such a challenge. The issue has becomethe source of enormous emotional, and potentially economic, concern throughoutthe developing world. This fall, while I was in Ecuador visiting a village in thehigh Andes, the Indian mayor railed against how globalization had led tobiopiracy.
Globalization and September 11
September 11 brought home a still darker side ofglobalization--it provided a global arena for terrorists. But the ensuing eventsand discussions highlighted broader aspects of the globalization debate. It madeclear how untenable American unilateralist positions were. President Bush, whohad unilaterally rejected the international agreement to address one of thelong-term global risks perceived by countries around the world--global warming,in which the United States is the largest culprit--called for a global allianceagainst terrorism. The administration realized that success would requireconcerted action by all.
One of the ways to fight terrorists, Washington soon discovered, was to cutoff their sources of funding. Ever since the East Asian crisis, global attentionhad focused on the secretive offshore banking centers. Discussions following thatcrisis focused on the importance of good information--transparency, oropenness--but this was intended for the developing countries. As internationaldiscussions turned to the lack of transparency shown by the IMF and the offshorebanking centers, the U.S. Treasury changed its tune. It is not because thesesecretive banking havens provide better services than those provided by banks inNew York or London that billions have been put there; the secrecy serves avariety of nefarious purposes--including avoiding taxation and money laundering.These institutions could be shut down overnight--or forced to comply withinternational norms--if the United States and the other leading countries wanted.They continue to exist because they serve the interests of the financialcommunity and the wealthy. Their continuing existence is no accident. Indeed, theOECD drafted an agreement to limit their scope--and before September 11, the Bushadministration unilaterally walked away from this agreement too. How foolish thislooks now in retrospect! Had it been embraced, we would have been further alongthe road to controlling the flow of money into the hands of the terrorists.
There is one more aspect to the aftermath of September 11 worth noting here.The United States was already in recession, but the attack made matters worse. Itused to be said that when the United States sneezed, Mexico caught a cold. Withglobalization, when the United States sneezes, much of the rest of the worldrisks catching pneumonia. And the United States now has a bad case of the flu.With globalization, mismanaged macroeconomic policy in the United States--thefailure to design an effective stimulus package--has global consequences. Butaround the world, anger at the traditional IMF policies is growing. Thedeveloping countries are saying to the industrialized nations: "When you face aslowdown, you follow the precepts that we are all taught in our economic courses:You adopt expansionary monetary and fiscal policies. But when we face a slowdown,you insist on contractionary policies. For you, deficits are okay; for us, theyare impermissible--even if we can raise the funds through 'selling forward,' say,some natural resources." A heightened sense of inequity prevails, partly becausethe consequences of maintaining contractionary policies are so great.
Global Social Justice
Today, in much of the developing world, globalization isbeing questioned. For instance, in Latin America, after a short burst of growthin the early 1990s, stagnation and recession have set in. The growth was notsustained--some might say, was not sustainable. Indeed, at this juncture, thegrowth record of the so-called post-reform era looks no better, and in somecountries much worse, than in the widely criticized import-substitution period ofthe 1950s and 1960s when Latin countries tried to industrialize by discouragingimports. Indeed, reform critics point out that the burst of growth in the early1990s was little more than a "catch-up" that did not even make up for the lostdecade of the 1980s.
Throughout the region, people are asking: "Has reform failed or hasglobalization failed?" The distinction is perhaps artificial, for globalizationwas at the center of the reforms. Even in those countries that have managed togrow, such as Mexico, the benefits have accrued largely to the upper 30 percentand have been even more concentrated in the top 10 percent. Those at the bottomhave gained little; many are even worse off. The reforms have exposed countriesto greater risk, and the risks have been borne disproportionately by those leastable to cope with them. Just as in many countries where the pacing and sequencingof reforms has resulted in job destruction outmatching job creation, so too hasthe exposure to risk outmatched the ability to create institutions for copingwith risk, including effective safety nets.
In this bleak landscape, there are some positive signs. Those in the Northhave become more aware of the inequities of the global economic architecture. Theagreement at Doha to hold a new round of trade negotiations--the "DevelopmentRound"--promises to rectify some of the imbalances of the past. There has been amarked change in the rhetoric of the international economic institutions--atleast they talk about poverty. At the World Bank, there have been some realreforms; there has been some progress in translating the rhetoric intoreality--in ensuring that the voices of the poor are heard and the concerns ofthe developing countries are listened to. But elsewhere, there is often a gapbetween the rhetoric and the reality. Serious reforms in governance, in who makesdecisions and how they are made, are not on the table. If one of the problems atthe IMF has been that the ideology, interests, and perspectives of the financialcommunity in the advanced industrialized countries have been givendisproportionate weight (in matters whose effects go well beyond finance), thenthe prospects for success in the current discussions of reform, in which the sameparties continue to predominate, are bleak. They are more likely to result inslight changes in the shape of the table, not changes in who is at thetable or what is on the agenda.
September 11 has resulted in a global alliance against terrorism. What we nowneed is not just an alliance against evil, but an alliance forsomething positive--a global alliance for reducing poverty and for creating abetter environment, an alliance for creating a global society with more socialjustice.
