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IMF Book Forum: Why globalization works

International Monetary Fund. External Relations Dept.
Published Date:
January 2004
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The debate on the merits of globalization continues, with one side arguing that it raises living standards and the other that it worsens poverty and inequality. At a September 22 IMF Book Forum, Martin Wolf, Associate Editor and Chief Economics Commentator at the Financial Times, offered a robust defense of globalization and an upbeat assessment of its prospects. In discussing his new book, Why Globalization Works, he rebutted claims that globalization undermines sovereignty, weakens democracy, intensifies inequality, favors “exploitative” multinational corporations, and devastates the environment.

Given economic instability, fears of terrorism, protectionist reactions to economic change, and the rise of new competitors—above all, China, and now India—opponents of economic integration could yet do grave damage, Wolf conceded. But the forces against globalization are not strong enough to cause its disintegration, he said, and it seemed implausible that global integration would collapse, as it had in the interwar years of the early 20th century as a consequence of international rivalries, economic instability, protectionist interests, and anti-liberal ideas.

Today, the situation is different in four fundamental respects, Wolf explained. First, there is, for the moment, a single undisputed hegemon—the United States—and a war among great powers in the near future seems unlikely. Second, all the great powers seem to have abandoned the notion that prosperity derives from territorial gains and plunder rather than from internal economic development and peaceful exchange. Third, all the great powers now share a commitment to market-led economic development and international economic and political integration of some kind. And, fourth, global institutions and close international cooperation reinforce the basic stability of the political order.

Threats to globalization?

But against this, noted Wolf, there is one obvious parallel to the 1930s. The breakdown of the early 20th century order occurred in large part because of the pressures to accommodate rising powers in the global economic and political order. “If the United States remains wedded to notions of global primacy rather than of a shared global order, conflict with a rising China would seem almost inevitable,” he cautioned. In addition to these political pressures, China’s ascent will force uncomfortable economic adjustment on the rest of the world—a phenomenon that is already fueling protectionist pressures in a number of countries. But a greater threat to the world’s commitment to open borders is megaterrorism, said Wolf. He called for global cooperation and improved security measures, rather than closing borders, as a means of controlling terrorists.

A second danger is economic instability. The decisive event, without doubt, in the collapse of the integrated economy of the late 19th and early 20th century was the Great Depression, and its related financial and exchange rate crises. In developing countries, over the past two decades, “financial and exchange rate crises have come with depressing frequency,” said Wolf. Substantial financial and exchange rate crises also erupted in advanced economies in the 1980s and early 1990s; Japan is still struggling with the aftermath of its bubble economy; and the United States experienced a huge stock market bubble that peaked in 2000. All these are signs of financial instability. “Yet it is almost impossible,” said Wolf, “to believe that the outcome will be anything like another 1930s.” The move to floating exchange rates has significantly reduced the risk of crises. And, he said, “it is striking that, despite recent crises, no significant country has reversed its commitment to liberal trade.”

Protectionist interests are also not as strong as they were historically, Wolf noted, and “the rise of the internationally integrated transnational company has reduced the ability and willingness of producers to wrap themselves in national flags.” In his view, “the concept of a purely national business sector has become, thankfully, increasingly irrelevant, diffusing protectionist lobbying.” Also, while many people in high-income countries express concern about the decline in relative wages and opportunities for skilled labor, the political clout of these critics has, for better or worse, diminished with the general decline of the industrial working class. A web of strong international commitments also makes it far more difficult for protectionist interests to capture legislatures as they once did.

The final element of the 20th century collapse began with the rise of anti-liberal ideas. There are parallels today, particularly in the groups united to protest global capitalism. But these groups, which include environmentalists, development lobbies, populists, socialists, communists, and anarchists, are “vastly less intellectually coherent than the opponents of liberalism of a century ago,” Wolf said. They “are united only in what they oppose and offer no alternative way of running an economy.” A movement that offers only protest is unlikely to triumph, he concluded.

Making this world work better

In Wolf’s view, the biggest obstacle to a more even spread of global prosperity is neither global economic integration nor transnational companies, as critics allege. It is the multiplicity of independent sovereign states, vastly divergent in their capacities and qualities. The most important source of inequality and persistent poverty is the fact that humanity is locked into almost 200 distinct countries, some of which are prosperous, well governed, and civilized, while many others are, alas, poor, mal-governed, and, at present, apparently incapable of providing the basis for a tolerable existence. The principal challenge in development, thus, is getting around political fragmentation and its consequences.

How can the reality of a world divided into unequal sovereignities be reconciled with the opportunities afforded by integration? Some of the critics’ concerns need to be taken into account, Wolf said. There is, for example, a reasonable case for permitting some form of infant. Industry promotion—though not protection—in developing countries. There is also an overwhelmingly powerful argument for higherincome countries to open their markets in favor of the exports from developing countries.

“But the most hysterical complaints of the critics of integration are nonsense,” Wolf emphasized. Transnational companies do not rule the world. Neither the World Trade Organization nor the IMF can force countries to do what they would very much prefer not to do. Crises do not afflict sound financial systems. Global economic integration does not render states helpless, nor has it created unprecedented poverty and inequality.

Ten commandments of globalization

“What precisely should we be trying to do?” asked Wolf. He offered what he called the “Ten Commandments of Globalization.”

• The market economy is indeed the only arrangement capable of generating sustained increases in prosperity; providing the underpinnings of stable, liberal democracies; and giving individual human beings the opportunity to seek what they desire in life.

• Individual states remain the locus of political debate and legitimacy. Supranational institutions must always remember that they derive their legitimacy and authority from the states that belong to them.

• It is in the interest of both states and their citizens to participate in international treaty-based regimes and institutions that deliver global public goods.

• Such regimes do, however, need to be specific, focused, enforceable, and limited.

• Of those regimes, the World Trade Organization, though enormously successful, has strayed too far from its primary function of promoting trade liberalization—by, for example, becoming involved in traderelated aspects of international property rights—and should be brought back firmly to its specific aim.

• There is a case for regimes covering investment and global competition, but it would be best to create such regimes among select countries and forgo universality, thus ensuring that these regimes have reasonably high standards.

• It is in the long-run interest of countries to integrate into global financial markets, but they must do so carefully, with a full and proper understanding of the risks.

• In the absence of a global lender of last resort, it is necessary, as the IMF has been arguing, to have a specific and explicit system to coordinate and organize standstills and renegotiate sovereign debt.

• Though official development assistance is very far from a guarantee of successful development, the sums now provided are so small and the resources of some countries so inadequate that the case for increased aid is very strong. Without expanded assistance, a large part of the world will fall ever further behind.

• Finally, and this is perhaps the most difficult, countries should always—or almost always—be allowed to learn from their own mistakes. But the international community also needs the capacity, the will, and the wisdom to intervene where it is evident that states have permanently failed.

All these commandments matter, he argued, but the first two—about markets and states—are the most important. “If we wish to make our world a better place, we must look not at the failures of the market economy,” Wolf concluded, “but at the hypocrisy, greed, and stupidity—and worse—that so often mar our politics in both developing and developed countries.”

Why Globalization Works, by Martin Wolf, is published by Yale University Press. Copies are available for $30.00 each.

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