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IMF seminar: Bhagwati counters critics of globalization, stresses its social and economic benefits

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International Monetary Fund. External Relations Dept.
Published Date:
January 2001
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Why do many people get so agitated by globalization? Speaking at an IMF seminar held on March 2, Jagdish Bhagwati, Professor of Economics and Political Science at Columbia University and Senior Fellow in International Economics at the Council on Foreign Relations, took issue with the notion, held by many critics, that globalization may be good for economic prosperity but is definitely bad for social goals.

On one level, he said, it is tempting to dismiss some protesters as part of the “tyranny of the missing alternative”—there is simply nothing else to protest against. For such groups, the protest against the institutions and corporations of the global economy might be written off as a knee-jerk reaction against the triumphalism of capitalism. But more significantly, Bhagwati observed, the voice of civil society has begun to be heard strongly even inside some international financial institutions. The many groups with an interest in broad “social agendas” sometimes concede that globalization may be economically benign but argue that it is socially malign.

Somehow, the critics who argue that globalization is harmful are seen by many as having seized the moral high ground. For many years, Bhagwati argued, the free traders held the high ground, and the protectionists appeared to be merely defending narrow special interest groups. But now, in the eyes of many, it is the antiglobalization groups who wear the halo and who claim that free trade damages social justice, peace, and women’s rights, for example. Are these groups wrong? One of their shortcomings, argued Bhagwati, is the “fallacy of aggregation.” Opponents do not distinguish between the different forms of globalization—trade, short-term capital flows, foreign direct investment, migration, and technology. They visit the sins of one form of globalization on all the others.

For instance, there is much hostility toward globalization in Asia because of the 1997-98 crisis. But this was a crisis caused by problems with just one aspect of globalization—capital flows. Bhagwati asserted that capital liberalization had been pressed too hard, without adequate support mechanisms. That said, he believed it would be absurd to turn away from capital flows. The ability to borrow, Bhagwati noted, is a very productive force and just because there was a problem with short-term capital flows, there was no reason to turn away from trade.

“Free trade is great, but great is not good enough”

This brought Bhagwati to his main theses: first, the growth of trade does lead to economic prosperity, and, second, trade is the friend, not the foe, of social agendas. But he introduced two broad qualifications:

  • Countries need broad institutional support—governance—to deal with the problems that arise from liberalizing; and
  • Even if social agendas are ultimately advanced by rising incomes, it may still be desirable to press ahead faster. For instance, child labor is almost certain to decline as poverty is reduced, but there are also good grounds to tackle it more directly and more quickly.

Bhagwati characterized the objections of the protesters, and even some academics (Jeffrey Sachs, Dani Rodrik, Joseph Stiglitz), as being based on selected instances of market failure. But even where there is market failure, the benefits of trade expansion may well outweigh the costs. For example, when an economy opens up, unemployment may occur because real wages do not fall (wage rigidity). But the population as a whole may gain—through a rise in the terms of trade and an increase in consumption—from the creation of new export industries. The better solution, of course, would be to fix the market failure, so that the conditions for free trade are created. If there is a market failure, such as environmental damage, the solution may be to establish, say, a “polluter pays” principle.

At the end of the day, the empirical evidence is all in favor of free trade. Contrast the experience of India—25 years of inward-looking policies and modest growth—with that of east Asia with its outward-looking policies and much higher growth rates. Or consider Japan, long viewed by some as proof of the success of protectionism, now languishing after a decade of low growth.

“Trade liberalization is the friend, not the foe, of social agendas”

Bhagwati argued that the social benefits of globalization are perhaps not as evident as the economic ones. It was, he said, desirable for economists to engage protesters on the very issues that they claim are the downside of globalization. He presented four examples to illustrate his argument.

Trade and gender. Take Japan, where, in the public domain, women are treated poorly compared with their peers in other high-income countries. The 1980s and 1990s saw a boom in Japanese foreign direct investment. Although it was the men who represented Japanese corporations in markets around the world, women went as spouses. These women then saw firsthand how women are treated elsewhere, and they became instruments of change when they returned home.

While not defending “sweat shops,” Bhagwati pointed out that women held most of the jobs in the export-processing zones in many developing countries and clamored for overtime to build their household savings as rapidly as possible. Imagine the alternative—probably oppression—if these women lacked such opportunities.

Trade and culture. Trade means cultural as well as economic interchange. Bhagwati dismissed complaints about the transfer of “low-culture” symbols, such as McDonald’s or Taco Bell, asking whether it really mattered. More important, he suggested, was the transfer of “high culture,” by which he meant values such as women’s and children’s rights. Surely, there is nothing to complain about, he said, if globalization spreads values that improve conditions for women and children. It is the traditional elites who are most affected by globalization, Bhagwati argued, and it is they who are most likely to react against social change.

Trade, poverty, and literacy. From the 1950s through the 1980s, India was held back by antiglobalization sentiment and had, at best, a modest record of growth and poverty reduction. It would have been astonishing, Bhagwati said, if poverty had been reduced substantially when overall growth was so slow. But has globalization helped India? The crisis of the early 1990s undoubtedly led to important reforms, in which the IMF played a role. The country’s new outward orientation has led to growth and the prospect of faster social change.

For years, India lacked the resources to build enough schools, despite a reordering of expenditures. Against that background, Bhagwati said, it is difficult to imagine increased literacy or greater educational attainment. Stronger growth, he emphasized, offers the hope of higher social expenditure and the possibility of building more schools and clinics.

Trade and wages. One argument, heard particularly from trade unions in the advanced countries, is that globalization leads to lower real wages and job loss. Critics paint a picture of a flood of labor-intensive goods from low-wage developing countries destroying jobs in the industrial countries. Bhagwati challenged this argument, noting that it is often used to restrict imports from the developing countries.

In fact, Bhagwati observed, the story is rather more complex. Over the past few decades, first one group of countries then another has begun to open up and benefit from trade. As these countries grow richer, their real wages rise, and they are no longer competitive in labor-intensive production. Not only do they cease to be a threat to workers in the industrial countries, he said, but they become importers of labor-intensive goods themselves. This process was seen first in Japan in the 1970s, east Asia in the 1980s, and China in the 1990s. India may well be next if it keeps its reforms on track.

Accelerating social agendas

The gains from globalization almost always outweigh the losses, Bhagwati noted. But there are losses, and, to deal with them, countries need appropriate institutions. First, they need national institutions. Consider the example of an export-oriented shrimp-farming project in India. It generated economic growth and social progress within the region but also produced some pollution from spillovers. The answer, Bhagwati emphasized, was not to close the operation down—as some activists wanted—but to find solutions to specific problems. The appropriate economic response, in his view, is to introduce a mechanism whereby the polluter pays. But in practice, he acknowledged, institutions such as an environmental ministry and a legal and judicial structure are needed to make that mechanism work.

Second, countries need support from international institutions. Bhagwati recalled the “banana case” whose settlement had created costs of up to 10 percent of GDP in some of the Caribbean countries affected. The international community cannot simply leave such countries to fend for themselves. It must find ways of providing real support to help them through the transition. It is not inappropriate, he argued, for activists and governments in the rich countries to want to advance social goals in the poor countries. But they should choose the right instruments, and not be so quick to resort to trade sanctions.

Take child labor. With 200-300 million children affected, it is simply too large an issue to address through generalized trade sanctions. Perhaps it can be addressed in selected industries, such as rug making. But the problem needs to be tackled through targeted programs, at the ground level, adapted to the particular circumstances. This is where local nongovernmental organizations (NGOs) have a role to play.

Bhagwati accused the “quad powers” (Canada, the European Union, Japan, and the United States) of incoherence in advancing social agendas. Although they are willing to subscribe only small amounts of money to the World Trade Organization (WTO), they still pressed for a “social clause.” It is impossible for the WTO, a tiny institution, to have an impact on social issues, Bhagwati said. If these countries are really interested in social goals rather than trade sanctions, they should look to the International Labor Organization, the World Health Organization, or other international agencies with a relevant mandate.

Finally, Bhagwati pointed to a factor that contributed to the failure in Seattle: a North-South divide, not just among nations, but within civil society. NGOs in the North see themselves as civil society institutions and, as the international organizations are reformed, expect their voices to be heard. But the countries—and the NGOs—of the South want to make their own case, he said. Of course, this is partly a resource issue: the northern NGOs and unions are much better placed financially than their southern counterparts.

In concluding, Bhagwati stressed that we need the NGOs in international life. Each international organization must learn to work with civil society in ways appropriate to its mandate and activities. Some agencies, like the WTO, deal with treaties and international negotiation. Others, like the IMF, also offer financial support and detailed policy advice to individual member countries. As these organizations establish their own ways of working with civil society, they can help diminish the agitation felt by so many about globalization.

Ian S. McDonald

Editor-in-Chief

Sara Kane

Deputy Editor

Sheila Meehan

Senior Editor

Elisa Diehl

Assistant Editor

Sharon Metzger

Senior Editorial Assistant

Lijun Li

Editorial Assistant

Joann Wheeler

StaffAssistant

Philip Torsani

Art Editor/Graphic Artist

Jack Federici

Graphic Artist

Prakash Loungani

Contributing Editor

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