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Published: October 11, 2002


Best Business Books 2002: Globalization

Two Cheers for Free Trade

Globalization — the process by which the world is becoming increasingly integrated — has transformed economies and societies and created vast new opportunities to improve standards of living, especially for people in developing countries. Yet it has also produced a powerful wave of opposition, most evident in the large and sometimes violent protests that have recently accompanied routine meetings of trade officials and economists around the world.

Some of the forces that have led to globalization, such as advances in communication and transportation, are so pervasive that they are unlikely to be slowed (much less defeated) by globalization’s opponents. But the dynamic that lies at the heart of globalization — the movement toward free trade among nations in goods, services, and capital — is more easily attacked.

Antiglobalization critics have lobbied successfully to make continued trade liberalization conditional upon the inclusion of labor and environmental protection concerns in the world trade agenda. The roles of the international economic institutions that have the most influence on global trade — the International Monetary Fund, the World Bank, and the World Trade Organization — have been sharply questioned. And lobbyists for special interests have scored victories against free trade, notably in the U.S., where the current administration imposed punitive tariffs against foreign steelmakers earlier this year. This will likely lead to more, rather than less, protectionism around the world. As the 21st century opens, globalization, which seemed both relentless and inevitable a decade ago, has arrived at an inflection point, with its future path in doubt.

An understanding of the core arguments of the opposition to globalization is crucial in dealing with it — as a matter of overall corporate policy, as a practical matter in addressing global competition everywhere, and in planning and conducting operations in developing markets. The future of globalization is of particular interest to managers and business strategists of multinational corporations. Although a day-to-day check of the news and business pages of your newspaper provides an instant information update (the globalization controversy plays in both newspaper sections), a deeper understanding of the story demands a fuller overview of the past and present, as well as the outlook for the future.

For Free Trade
The best and most straightforward case for the benefits of globalization and open markets is made by Douglas A. Irwin, an economics professor at Dartmouth College. In Free Trade under Fire (Princeton University Press, 2002), Irwin makes the classic economic case for the benefits of free trade — an argument that dates back 200 years to the work of British economists Adam Smith and David Ricardo and one that has had enormous influence. But he also reviews recent empirical research conducted by academic economists, much of which is too technical to be accessible to noneconomists. Still, the verdict is clear: Expanded trade leads to higher productivity, more investment, and improved living standards, both in developed countries and in the developing world.

Irwin also tackles the antiglobalist critique that free trade destroys jobs, a perspective that resonates forcefully with labor unions, the general public, and politicians. However, he shows that efforts to protect domestic workers tend to reduce a nation’s exports, and thus wind up destroying jobs in other industries. Free Trade under Fire includes a well-researched history of U.S. policy and the world trading
system over the last 50 years, a review of the role and history of the World Trade Organization and its predecessors, and an investigation of the recent attempts by critics of globalization to use trade negotiations to accomplish larger social goals. So far we’ve been lucky, Irwin concludes: Opposition to the liberalization of trade has been surprisingly weak and ineffectual. In the future, however, he warns, the forces opposing globalization are likely to gain in strength and momentum, making it more difficult to sustain a freer trading system.

Brink Lindsey’s Against the Dead Hand: The Uncertain Struggle for Global Capitalism (John Wiley & Sons, 2001) is the most intellectually stimulating of all the recent books on globalization. Lindsey articulates a fervent defense of open markets at the same time he poses serious concerns about their future. Director of the libertarian Cato Institute’s Center for Trade Policy Studies, a Washington think tank, Lindsey worries that too many people assume that the continuation of globalization is inevitable. He instead believes that globalization is in its infancy and will be threatened by a series of childhood maladies that could include national and regional financial crises, protectionist backlashes, and antiglobalization political movements.

Lindsey recasts the history of trade and commerce over the past 150 years in a highly original way that will intrigue anyone involved in international business. His thesis is that the first great wave of globalization, which lasted until World War I, arose both because of the strength of the intellectual argument in its favor and because of the technological innovations of the Industrial Revolution. But as early as the 1880s, he finds the beginnings of what he calls “the Industrial Counterrevolution.” Starting with the writings of Karl Marx and the rise of German state socialism under Otto von Bismarck, the political opposition to free trade and globalization mounted in the late 19th and early 20th centuries, taking the form of protectionism, imperialism, and militarism.

It all culminated in World War I, which, Lindsey writes, “provided both the means and motive for the collectivist spasm that followed.” In the social and economic chaos that gripped the world from the start of World War I to the end of World War II, the earlier progress toward globalization, writes Lindsey, “was interrupted, its achievements demolished.”

In his view, the creation of the modern multilateral financial institutions of the international economy in the postwar years, along with the championing of free trade by the United States, slowly recreated the conditions that enable globalization, but it was a long road back. Lindsey notes that world merchandise trade as a percentage of world output has been estimated at 11.9 percent in 1913 — a level of export performance that wasn’t matched again until the 1970s. And still, the ideas and movements that produced the Industrial Counterrevolution live on, he says, to distort and frustrate the world’s economic development. This is the “dead hand” of his title.

Most of the ills commonly blamed on globalization, he argues, are caused by “the continued bulking presence of antimarket policies and institutions” in many of the developing and emerging market countries. The real blame for Russia’s problems, for instance, should be placed on such matters as the efforts of its federal and regional governments to prop up moribund industrial enterprises from the Communist era. Such explicit subsidies, the author notes, have been as high as 8 to 10 percent of GDP in recent years. All over the Third World, protectionism is still strong, with tariff rates averaging 13.3 percent in developing countries, compared with rates of 2.6 percent in the industrialized nations.

Yet Lindsey concludes Against the Dead Hand optimistically: “For a century the world was enthralled by the false promises of the Industrial Counterrevolution; the chains of misplaced faith have now been broken, and the revival of globalization is one consequence. The present era, uncertain and trying as it sometimes may be, is thus a time of deliverance. Furthermore, there is good reason to believe that we are on our way to somewhere better.”

Tough Critics
The depth and breadth of the opposition to globalization, and the conviction of those who oppose it, are best captured by an older volume, The Case Against the Global Economy — and for a Turn Toward the Local (University of California Press, 1996), edited by Jerry Mander and Edward Goldsmith. Containing 43 essays in more than 500 pages, the book surveys the antitechnological, anticapitalist, pro-labor, and environmentalist critiques of the globalization agenda. Just about the only constituency not represented are the anarchists, those black-clad provocateurs who have led the violent protests at world trade meetings in Seattle, Genoa, and elsewhere, and who have probably done more than anyone else to call attention to the antiglobalist position. Essays on such subjects as the perils of deregulation, the problems of corporate governance in an interconnected world, environmental concerns, and the social disruptions caused by the pace and intensity of economic change raise issues that even globalization’s defenders can’t ignore.

A recent and more provocative critique is Globalization and Its Discontents (W.W. Norton & Company, 2002), by Joseph E. Stiglitz. A Columbia University economics professor, former World Bank official, and Clinton administration advisor, Stiglitz won the 2001 Nobel Prize in economics for his research on the imperfections of markets. His prominence should ensure that the book gains an audience, and it will
probably be widely quoted by antiglobalists in developing countries.

Although Stiglitz says he believes that globalization “can be a force for good and that it has the potential [author’s emphasis] to enrich everyone in the world, particularly the poor,” he is harshly critical of globalization in practice. His years in Washington, he says, gave him a firsthand view of “the devastating effect that globalization can have on developing countries,” and left him convinced that it needs to be “radically rethought.”

Stiglitz’s main complaints are with the International Monetary Fund (IMF) and the U.S. government, particularly the Department of the Treasury, and the way these institutions have directed international economic policy over the past decade. Much of the book is devoted to this criticism. Its tone is so vituperative that a fitting subtitle for the book would have been How Washington Is Impoverishing the Third World and Why It Must Be Stopped.

Although many economists — from both ends of the political spectrum — have criticized the way the IMF and the U.S. Treasury handled the 1990s economic crises in East Asia and Russia, few in the mainstream of academia are as critical as Stiglitz. He strongly disapproves of the IMF’s and Treasury’s insistence that developing nations keep government budgets under control, reform their financial markets, and open their markets to world trade. A major problem, in his view, is that international economic institutions are dominated “not just by the wealthiest industrial countries but by the commercial and financial interests in those countries, and the policies of the institutions naturally reflect this.”

His attack relies on a straw man he calls “the Washington Consensus.” In Stiglitz’s argument, the problem is a right-wing doctrine of “market fundamentalism,” in which, by assumption, “markets work perfectly” and unemployment can be blamed only on “greedy unions and politicians interfering with the working of free markets.”

But this straw man is flawed. Although there are indeed market fundamentalists who hold such views (the same kind of people who disfavor trade unions and public libraries), few people familiar with the IMF and the Clinton Treasury would agree that these views were reflected at those institutions. The senior economist at the IMF during the Clinton years was Stanley Fischer, a highly respected former professor at the Massachusetts Institute of Technology who is coauthor of one of the standard textbooks on macroeconomics. At the Treasury, the most influential economist was Lawrence Summers, a former Harvard University professor (now the university’s president) who served in senior roles from 1993 onward and was appointed secretary of the Treasury in 1999. Summers is, in fact, a liberal Democrat, and an economist, whose views reflect the collective views of mainstream American economics, perhaps as much as any single individual’s ever have.

Without a straw man, these charges against the Washington establishment lose their force. What really appears to be going on is simple: Stiglitz disagreed fundamentally with the policies of the IMF and Treasury in the 1990s, but his was the minority view, and he lost. He pines for the Keynesian economic policies that held sway in the 1960s, the kind of programs that “emphasized market failures and the role for government in job creation.” Those policies were abandoned because policymakers concluded they had never worked well.

Stiglitz’s ideas for reform include shifting more power from within the international financial institutions to the developing nations themselves, which is likely to be resisted by the governments of those countries. However, he offers a number of practical ideas for reform that may be more achievable, including: allowing developing nations more leeway to intervene in their capital markets to reduce instability; reforming bankruptcy law to make greater allowances for commercial bankruptcies resulting from macroeconomic disturbances; improving banking regulations in the developed and developing world to lead to more effective cross-border lending and less instability; and better managing risk so that the large developing nations would assume some of the currency risks that have produced severe difficulties for small nations such as Thailand.

An Idiosyncratic Soros
A more idiosyncratic and interesting critique of the world economic order comes from George Soros, the well-known hedge fund operator and philanthropist. George Soros on Globalization (Public Affairs, 2002), like the Stiglitz book, finds fault with institutions such as the IMF and also complains about the ideas of “market fundamentalists,” but Soros’s critique is more evenhanded.

The author accepts that policymakers have been trying to do the best they can with the knowledge and techniques available. He is more modest than Stiglitz in his prescriptions, taking it as a given that wholesale policy change at these institutions is unlikely. Instead, he suggests some practical reforms, such as allowing the central banks of developed nations to accept treasury securities from selected developing countries that are experiencing liquidity problems. Another of his reforms is his idea for making international institutions such as the World Bank less dependent on their shareholder governments: He recommends that the institutions’ directors be chosen on the basis of their personal and professional qualifications, appointed for fixed terms, and given more independence, which is the way that governors of the U.S. Federal Reserve are selected.

But Soros’s most powerful argument is exceedingly idealistic. Although he counts himself “an ardent supporter of globalization,” he believes that it can continue and succeed only if the industrialized nations — especially the U.S. — vastly increase the amount of foreign aid they offer to the developing world. He is not a Pollyanna about the chances of this happening. Foreign aid is unpopular, he notes, because it has produced such poor results in the past. He offers ideas to improve its efficiency that are based on his own experience as a philanthropist. Instead of foreign aid being doled out on a government-to-government basis, with the donors retaining control over the aid they provide, Soros recommends that foreign aid be managed by boards composed of nationals of the recipient countries, who are empowered to work with the local government when they can and independently when they cannot.

One way to pay for increased foreign aid, he suggests, is to enact a tax on foreign exchange trading. Supporters of such a tax in the past have claimed it could reduce volatility in the foreign exchange market. Soros disagrees, but he supports the idea as a convenient way to simply raise the money.

Soros theorizes that if foreign aid accomplished more, Americans would be more willing to pay for it. One encouraging sign, he notes, is the success of the Jubilee 2000 movement, a network of activists and church groups from more than 60 nations that has encouraged industrialized nations to forgive the debts of the poorest countries — something not considered possible 10 years ago.

Soros’s book is somewhat disorganized. It was finished just before September 11 last year, and he then unwisely decided to tack on a muddled peroration about geopolitics. But his views on the international economy and globalization are heartfelt, and his ideas on ways to improve the world are invariably interesting and original.

Role in the Debate
Those who live and work in the world of international business and finance should hope that those optimistic about globalization’s future are right. As these new titles make clear, there are likely to be many more battles and setbacks in the effort to create a more open world economic system. Especially against the awful backdrop of recent world events — terrorism, regional conflict, and even the possibility of nuclear war — it is not hard to envision a future in which more of the attacks on globalization succeed.

Still, the debate is wide open, and in need of broad participation and understanding on the part of business leaders. Anybody who works for or with multinational corporations should pay close attention to both the champions and the critics of globalization.  

Reprint No. 02407

Rob Norton, 
Rob Norton writes the economics column “Not So Fast” in Fortune magazine, where he worked for 15 years, lastly as executive editor. Mr. Norton was director of knowledge development at Nua Ltd., an Irish software firm. He is coauthor of The Web Content Style Guide and has written recently for Business 2.0, Corporate Board Member, and the Washington Post.
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