Douglas Irwin, The Case for Free Trade (Princeton: Princeton University Press, 2002), 288 pp., $27.95.
Joseph E. Stiglitz, Globalization and Its Discontents (New York: W.W. Norton, 2002), 192 pp., $24.95.
George Soros, On Globalization (New York: Public Affairs, 2002), 160 pp., $20.
Globalization has become a focus of widespread but on the whole quite inchoate discontent. As other writers in these pages have pointed out, it is not easy to characterize the opposition to the international mobility of factors of production in simple political or social terms. Some of that opposition comes from a leftist alliance of ecologists, anti-capitalists and elite third worlders who worry that globalization is impoverishing workers in already poor countries. Some of it comes from labor unions in rich countries concerned that unfair competition is hurting their members. Still other opposition comes from what might traditionally be conceived as the Right, but again from very diverse sources: from racists who see immigration as a threat to an idealized view of a homogenous national community, and from small businessmen who see competitive pressures eroding their advantages. Some of these opponents dislike the idea of anything that moves across long distances; but most protesters claim to want a different and better globalization.
On immigration and trade issues, the Right and the Left anti-globalizers present roughly similar agendas: workers' rights, the welfare state, and the insistence that the national community can only be defended by keeping out those who would introduce lower wage demands and other foreign elements into the national economy. Most of today's iconoclastic politicians in the industrial countries, sensing advantage in appealing to these various constituencies, have an anti-global touch, whether in Europe (Jörg Haider, Umberto Bossi), or in the United States (Patrick Buchanan, Ralph Nader). A recent high point of the influence of anti-globalism was when Jean-Marie Le Pen of the anti-immigrationist French National Front advanced to the second round of the French presidential election.
Most academic analysts of globalization and the backlash against it try to see the response in terms of interests badly hit by globalization. Douglas Irwin's Free Trade Under Fire is a first-rate book that deals in a systematic and logical way with the arguments and the myths about globalization and trade. One such argument revolves around the impact of liberalized trade on labor markets. Irwin shows that the overall effect of increased trade on employment is neutral; but it shifts workers into relatively well-rewarded jobs (producing for export markets), while industries that compete against imports tend to be low wage. Widening inequality is a consequence less of increased trade than of technology raising the demand for skilled workers. A final section examines how new issues-environmental protection and labor standards-entered the international discussion in the 1990s.
One source of constant frustration and surprise to economists is why arguments for free trade are not more widely accepted. The best rational explanation lies in terms of the logic of collective action, as explained some years ago by the late Mancur Olson. Those who gain from the protection of particular industries have a powerful incentive to organize for protection, even though the overall costs to the national economy will exceed the benefits; less-organized consumers, who may each lose only a small amount from the additional protection, lack sufficient incentive to counter-mobilize. Indeed, this case was made in Elmer Schattschneider's classic 1935 study of the most notorious of all U.S. tariffs, the Hawley-Smoot Act of 1930. This study had a powerful effect; it helped to solidify the case that trade policy was better left to the Executive Branch (the 1934 Reciprocal Trade Agreements Act set up the fundamental mechanism empowering the Executive Branch to negotiate trade agreements; this has continued in the postwar GATT system).
It would be most agreeable if Irwin's argument had a similar effect to that of Schattschneider in building a consensus that trade issues are too important to be left to sectional interests and congressional politics. Agreeable, but unlikely. It takes a catastrophe-such as the trade contraction of the Great Depression-for political behavior to be reshaped in such a manner. But even in that case, the most likely initial outcome of the catastrophe would be more apocalyptic ideologies rather than more sober thought. Already today, after the unprecedentedly long expansion in the 1990s and then a very weak recession, there is plenty of apocalyptic analysis of economic issues.
Indeed, a great deal of the response to globalization is conducted along the lines of a morality drama. Globalization is held to be not just dangerous, but downright sinful. That is why, one suspects, it has become so appealing to recycle the title of Freud's great gloomy analysis of interwar Europe's cultural malaise (Das Unbehagen in der Kultur, usually translated as "Civilization and its Discontents"). Saskia Sassen a few years ago used the title Globalization and its Discontents, and Joseph Stiglitz now uses it too. (Perhaps there are so many books on globalization that authors are running out of good titles?) We can best understand the present feeling of moral unease if we apply a longer-term historical perspective.
As today, previous periods of greater market integration and increased long-distance trade created new opportunities and new riches. But many people felt that there was something inherently illegitimate about both, since the benefits were not equally shared. The Renaissance and the great age of European exploration were also periods of great poverty (because of population growth rather than because of the dynamism of the economy). Moralists such as the fiery Florentine friar Girolamo Savoranola or the dyspeptic German Martin Luther fulminated against luxury and long-distance trade. In the latter half of the 19th century, Karl Marx, Richard Wagner and many others excoriated the ills of luxurious and sinful capitalism. The expansion of trade had often been associated with new opportunities for greed, corruption and self-enrichment; and many commentators rapidly reached the conclusion that this was all there was to the new developments.
Most of those pre-20th century protesters thought in terms of some simple moral alternative made of theological or quasi-theological-not economic or socioeconomic-stuff. In the mid 20th century, contrarily, anti-globalizers turned to apparently simple and appealing alternative political models-offered by leaders such as Mussolini, Hitler or Stalin who saw it as their mission to formulate a new philosophy for the state. Today's globalization, driven by financial flows and financial institutions, also offers many examples analogous to the scandals of the past. But at the moment, there is no simple and coherent, either theological or ideological, solution to the challenge posed by globalization-unless it is the radical one of some versions of Islamic fundamentalism. Can there be a modern protest rationale against the present pulse of global economic integration that is not so extreme?
Many clever people have tried to work out what might be a sensible "anti-globalization" stance. Like many of the modern protesters themselves, Joseph Stiglitz and George Soros make clear that they are not against globalization as such; they want a "globalization with a human face" in which the social and moral costs are lower. Their books are complementary, and indeed their authors are complimentary about each other. Both come with ringing mutual endorsements. Soros calls Stiglitz's tome a "penetrating, insightful book", a "seminal work that must be read by anyone who cares about the future course of world economies." Returning the favor, Stiglitz wrote a lengthy review of Soros's "brilliant, powerful book" in the May 23, 2002 New York Review of Books, in which he credited Soros with writing "carefully, dispassionately and calmly."
Stiglitz's critique of globalization as currently practiced relies on three major indictments: first, that globalization has produced an increase in poverty; secondly, that globalization is unstable (and its instability creates additional poverty); and thirdly, that it is managed by incompetent and malevolent international institutions (whose operations also increase poverty). Stiglitz and Soros both agree that at base the problem is "market fundamentalism", an unreasoned belief that free-market mechanisms can solve all problems; and they both see state action as the way out of the problem. Stiglitz is more radical, and actually spells out what he sees as the model of success: above all, the People's Republic of China. In the reshaped political environment after September 11, too, Stiglitz and Soros see their program as the basis for a new international agenda, for they both see poverty as a breeding ground for terrorism (although Soros is subtle enough to insist that it is not the only cause, and that there are very rich terrorists and many poor people who passively accept their destinies).
For their indictments to hold, however, it needs to be clearly established that world poverty has in fact increased. At the beginning of his book, Stiglitz clearly states the claim: "Despite repeated promises of poverty reduction made over the last decade of the twentieth century, the actual number of people living in poverty has actually increased by almost 100 million. This occurred at the same time that total world income actually increased by an average of 2.5 percent annually." The use in a comparative sentence of absolute figures followed by a percentage from a different kind of statistic should alert an attentive reader that something odd is going on here. Indeed, it is.
The data come from a World Bank publication to which Stiglitz, in his previous capacity as chief economist of the World Bank, had written a preface. It depends on an estimate of the number of people living on a constant price purchasing power (PPP) adjusted level of $2 a day: for 1990, the World Bank estimated this number to be 2.71 billion, and for 1998, 2.80 billion. But measured as a share of the world's population, the proportion declined from 51.4 percent to 47.3 percent. If the critical figure is taken as the lower level of $1 a day (which Stiglitz later uses to show that his favorite country, China, is quite successful), the proportion fell over this period from 24.2 percent to 20.2 percent; even the absolute numbers show a decline from 1.27 billion to 1.20 billion. The factual basis of the claim on which the book rests is thus-as Stiglitz must be aware-quite problematical. It is not at all clear, and it is certainly not demonstrated by Stiglitz, that globalization increases poverty. Indeed, there is much evidence that the opposite is true: that countries open to the world market grow more quickly and reduce poverty.
The debate about poverty statistics should not detract, however, from one important message of the book. It is undoubtedly true that there are many poor people, and yes, we should be more concerned with their plight than most people in industrial countries seem to be. But the rest of the message, that globalization needs to be harnessed and modified if there is to be a chance of reducing poverty, is deeply misleading, for it leads Stiglitz to worry about every kind of economic opening and liberalization. Trade liberalization, for example, can destroy precarious domestic industries. The examples he chooses, however, are hardly convincing. He sets up Coca-Cola and McDonalds in a familiar way as the iconic demons of global capitalism. He tells us how "soft drink manufacturers around the world have been overwhelmed by the entrance of Coca-Cola and Pepsi into their home markets." But Stiglitz does not spell out why this should be so bad. Anyone who traveled to Eastern Europe or Russia before 1990 will remember the vile tasting and grotesquely sweetened local alternative "colas" that have been mercifully wiped from the market over the past decade. Consumers simply got a product they preferred, and one that before long came to be bottled, distributed and marketed locally.
The ultimate sin of the modern world, as Stiglitz sees it, is not free trade but rather capital market liberalization. Stiglitz's most insistent point is that no one has ever demonstrated that capital mobility enhances growth. Whereas market economics ("market fundamentalism" as Stiglitz and Soros both put it) would allocate capital internationally in accordance with a price (where returns are higher because of higher growth, capital flows in), both authors point out that this generates waves of irrational flows that distort fundamentals and make for bubbles and bursts. There is some truth in this, of course. To claim, however, that there would be more prosperity without capital inflows simply defies logic: without such inflows, the chances of growth and investment would be sharply restricted.
This leads us ineluctably to the question of whether "good" and "bad" flows can be distinguished from each other, the bad prevented and the good encouraged. Unfortunately, money doesn't work like that. There isn't such a thing as a "good" or a "bad" dollar bill. A generalization that short-term investment is always bad and long-term foreign direct investment is always good inevitably evokes counter-examples. Short-term flows are essential for trade finance; long-term investments may signal the failure of local entrepreneurship.
The boldest (and surely the weakest) claim of Stiglitz's book is that it is based on a correct interpretation of the economic history of globalization over the last fifty years. "Over the past fifty years", he says, "economic science has explained why, and the conditions under which, markets work well and when they do not." State-guided growth, in this interpretation, did much better than is usually credited in contemporary discussions. (Those who want a nuanced and sober depiction of the historical context of Asia's state-guided transformation would do well to read an important new book of essays by E.L. Jones entitled The Record of Global Economic Development [Edward Elgar, 2002]. Jones, the author of two earlier books with a unique and very long-term historical vision, has described how modern economic growth developed in Europe rather than in Asia as a result of different institutions and, above all, of the fact of competition between states. In some of the new essays, he looks at the 1997-98 Asia crisis as the crisis of state-driven growth.) But it is state-guided growth that, in Stiglitz's interpretation, produces both the most stable and the best results. What are his models of success? Above all China; under state direction, development has led to "the largest reduction in poverty in such a short time" (358 million people in 1990 had less than $1 a day, and in 1997, 208 million). Capital controls meant that China was not caught up in the contagion of the 1997-98 Asia crisis.
In truth, however, the Chinese experience does not look quite so impressive as the overall growth figures appear to suggest. Stiglitz's own sources indicate that Chinese poverty (defined as subsistence on less than $1 per day) increased in absolute terms in the later 1990s during the Asian crisis. Regional inequalities within China have widened enormously, as they have in India (which Stiglitz attacks for opening up too rapidly), and in Russia (which Stiglitz thinks had too much shock therapy in the 1990s, and which he condemns as a basket case, even though its purchasing power parity per capita income is more than double that of China's, and the number of homeless people in China exceeds the entire population of Russia). China still has huge problems with non-performing loans and insolvent banks, and an enormous and inefficient state sector stands as the main cause of both-and of more besides. One powerful view is that China simply postponed a crisis in 1997-98, but that its crisis, when it breaks out, will be far more dramatic (and more politically destabilizing) than what we saw in Thailand, Indonesia and elsewhere five years ago.
Since Stiglitz opposes "market fundamentalism", it stands to reason that his analysis of transition strategies from planned to market economics would have a certain edge. It does. It is constructed around curiously chosen pairs that appear to have been arbitrarily matched in order to make political points. China is good, Russia is bad; Poland good, the Czech Republic bad. The dichotomies are crude, and the analysis behind them even more so. Poland is supposed to have been a great success in the 1990s because it explicitly rejected the Washington consensus (at least according to the highly controversial former finance minister who has just been re-appointed to that position, Grzegorz Kolodko) and did not adopt rapid privatization; while the Czech Republic was a failure because it privatized too quickly and was too enthusiastic about shock therapy. But Poland is better known as an example of very quick and dramatic reform in 1989-90 under a much better known finance minister, Leszek Balcerowicz, who criticized the IMF's advice as being not tough enough. Telling the story of Polish reforms without mentioning Balcerowicz is rather like making a synopsis of Shakespeare's most famous play in which it is Fortinbras who restores political order to the tangled affairs of Denmark.
Stiglitz also claims that the IMF in Poland (and presumably elsewhere) did not pay enough attention to "democratic support of the reforms." But the IMF's then Managing Director, Michel Camdessus, whom Stiglitz consistently describes with withering contempt, engaged in December 1989 in a deliberately broad range of talks with the President of Poland (General Jaruzelski, a holdover from the communist era), with reformers around Balcerowicz, with communist trade unions, Solidarity unions, and the Catholic Church in order to determine exactly this question of the democratic sustainability of reforms.
Another odd choice of countries summoned to support Stiglitz's argument involves the recovery from the 1997 Asia crisis. Korea and Malaysia both recovered quickly and effectively, and most analysts reason from this that substantial strengths in the Asian economies allowed a successful bounceback, irrespective of whether the countries rejected the IMF's advice (Malaysia) or followed it (Korea). But Stiglitz insists that both Malaysia and Korea followed very unorthodox policies, thereby denying any positive contributions by the IMF to Korea's recovery.
It is difficult to avoid the conclusion that Stiglitz has his own quite rigid fundamentalism: that everything the IMF does is wrongheaded, and that a sensible political and economic course depends on doing precisely the opposite. He sets out the standard right-wing criticism of the IMF, that it encouraged the 1997 crisis by appearing to give a guarantee to foreign lending (the "moral hazard" argument); and the standard left-wing criticism, that the IMF was managing the crisis in the interests of American finance capital. Just to be complete, one supposes, he also adds the middle-of-the-road Keynesian criticism, that the IMF imposed a "conditionality" that contained too savage a fiscal deflation on the crisis-ridden countries. He launches a series of ad hominem critiques of the IMF's leading figures. The two most recent senior U.S. officials at the IMF are especially castigated, one for going to a position with an investment bank upon leaving the Fund, and the other for having followed market economics as chief economist of the World Bank in the 1980s. He thinks-contrary to the evidence of the past five years-that the IMF is quite incapable of modifying its approach to policy problems.
The most basic weakness of the IMF, in Stiglitz's eyes, is that it forces high interest rates on the countries it rescues, and thus makes recovery impossible. This is an intrinsically odd claim. High interest rates in poor economies are simply an indication of a high level of uncertainty-nothing more than a high discount on a future that is risky. In many poor countries, governments try to combat the disincentive to development posed by interest rates by offering credit at especially favorable rates to particular sectors, firms or individuals (a phenomenon known technically as "interest rate repression"). Such policies, which were widely practiced at least in a mild form in many of the Asian economies held up as models by Stiglitz, make access to credit more difficult for the non-favored, who may well be the most entrepreneurial. It is correct to note that IMF programs have often tried to remove or reduce interest rate repression, with the intention of lowering the overall long-term rate of interest: sometimes such programs have been successful, sometimes not. In a crisis situation, IMF lending is almost inevitably below market interest levels, were markets to price risk appropriately (which, however, they cannot do in the midst of a financial panic).
Why does Stiglitz think that the IMF should behave so badly on a systematic basis? He offers a simple answer: because the IMF's "real" mandate has changed from the original beneficent vision of John Maynard Keynes of stabilizing economies and regulating (in practice preventing) capital flows, to a sinister servitude to powerful (American) interests, "serving the interest of global finance." The IMF could only be saved by a return to the original vision, in which little room existed for capital mobility.
George Soros agrees with much of Stiglitz's analysis, but his is a more nuanced diagnosis and a more modest proposal. He agrees with many recent analysts that grants to poor countries are often more efficient than loans. He likes proposals for an international equivalent of bankruptcy procedures, on the lines recently proposed by the IMF's First Deputy Managing Director, Anne Krueger (whose name Stiglitz even manages to misspell). He thinks that crisis prevention (through the pre-approval of emergency credit lines) is better than crisis management. He wants the IMF to play a more central part in the international economy, and in particular to increase the reserve position of its poorer members by allocating to them a part of a new increase in IMF money (known rather arcanely as "Special Drawing Rights").
Soros's suggestions are undoubtedly more practical and more realistic than the parallel menu devised by Stiglitz, which amounts to encouraging more state action (being more like China). A modest increase in the reserves of poor countries would do some good, maybe, and give some measure of additional strength in managing capital inflows. It certainly, however, would not transform the world or guarantee an absence of crises.
Soros's diagnosis, while appealing in parts, nevertheless lacks internal consistency. In particular, he grapples with the case for global institutions to manage reform. Are such institutions useful? Yes, if they manage skillfully; no, if they manage badly. On the one hand, he thinks that in the 1990s there was inadequate support to transition economies, especially in the former Soviet Union. On the other hand, he rightly notes that "international assistance given to repressive or corrupt regimes can go to reinforce those regimes." On the basis of these two observations, on the same page, it is hard to work out, for example, whether there should have been-in his view-more or less support for Boris Yeltsin's Russia in the 1990s. It needed economic help, but it was deeply corrupt.
Soros goes on to say that there should be less bureaucracy and more entrepreneurship: and, of course, one of the attractions of his book is that he has actually done much of this kind of entrepreneurial work and has really helped to rebuild post-Soviet societies. But he stops short of proposing a systemic solution involving more Soroses and less IMF. If an institution such as the IMF is to be impartial (and not bend to corrupt regimes) it has to operate, he says, according to a system of rules; but this is exactly the approach derided as the "cookie-cutter" or "one size fits all" or "bureaucratic" approach by the IMF's critics-including, from time to time, Soros.
Globalization produces a dilemma for people who think they can and should help in addressing the world's problems, and thus make themselves more "moral." It is exactly the feeling that true morality cannot be realized, but only limited compromises brokered, that produces the consequent perception of globalization as sin. More people-even one of the most rhetorically persuasive economists in the world (Stiglitz), or one of the most powerful financiers in the world (Soros)-seem unable to alter the course of an apparently inexorable automaton. After the Asia crisis, there was a great outpouring of papers, books, conferences and high level discussions on a new "financial architecture", but very little came of this-hence Soros's frustration with the status quo. Hence also the problem of the IMF-which is thought to be central to the stability of the world economy, and which consequently arouses expectations so great that they are inevitably disappointed. We trundle on, however, as best we are able; what choice really do we have?
One of the central figures in the drama of the IMF's troubled relations with Russia in the mid-1990s was Prime Minister Viktor Chernomyrdin. He once commented: "We hoped for the best, but things turned out as they always do." That, in the end, is why so many people feel dissatisfied with globalization as it is, and why it gets such a bad rap. It evokes the equivalent of religious passions, but the logic of capital is not sentimental. That is exactly why it produces such great discontents.Essay Types: Book Review