Globalism's Discontents

Few subjects have polarized people throughout the world as
much as globalization. Some see it as the way of the future, bringing
unprecedented prosperity to everyone, everywhere. Others, symbolized by the
Seattle protestors of December 1999, fault globalization as the source of untold
problems, from the destruction of native cultures to increasing poverty and
immiseration. In this article, I want to sort out the different meanings of
globalization. In many countries, globalization has brought huge benefits to a
few with few benefits to the many. But in the case of a few countries, it has
brought enormous benefit to the many. Why have there been these huge differences
in experiences? The answer is that globalization has meant different things in
different places.

The countries that have managed globalization on their own, such as those in
East Asia, have, by and large, ensured that they reaped huge benefits and that
those benefits were equitably shared; they were able substantially to control the
terms on which they engaged with the global economy. By contrast, the countries
that have, by and large, had globalization managed for them by the International
Monetary Fund and other international economic institutions have not done so
well. The problem is thus not with globalization but with how it has been

The international financial institutions have pushed a particular
ideology--market fundamentalism--that is both bad economics and bad politics; it
is based on premises concerning how markets work that do not hold even for
developed countries, much less for developing countries. The IMF has pushed these
economics policies without a broader vision of society or the role of economics
within society. And it has pushed these policies in ways that have undermined
emerging democracies.

More generally, globalization itself has been governed in ways that are
undemocratic and have been disadvantageous to developing countries, especially
the poor within those countries. The Seattle protestors pointed to the absence of
democracy and of transparency, the governance of the international economic
institutions by and for special corporate and financial interests, and the
absence of countervailing democratic checks to ensure that these informal and
public institutions serve a general interest. In these complaints, there
is more than a grain of truth.

Beneficial Globalization

Of the countries of the world, those in East Asia have grown the fastest and
done most to reduce poverty. And they have done so, emphatically, via
"globalization." Their growth has been based on exports--by taking advantage of
the global market for exports and by closing the technology gap. It was not just
gaps in capital and other resources that separated the developed from the
less-developed countries, but differences in knowledge. East Asian countries took
advantage of the "globalization of knowledge" to reduce these disparities. But
while some of the countries in the region grew by opening themselves up to
multinational companies, others, such as Korea and Taiwan, grew by creating their
own enterprises. Here is the key distinction: Each of the most successful
globalizing countries determined its own pace of change; each made sure as it
grew that the benefits were shared equitably; each rejected the basic tenets of
the "Washington Consensus," which argued for a minimalist role for government and
rapid privatization and liberalization.

In East Asia, government took an active role in managing the economy. The
steel industry that the Korean government created was among the most efficient in
the world--performing far better than its private-sector rivals in the United
States (which, though private, are constantly turning to the government for
protection and for subsidies). Financial markets were highly regulated. My
research shows that those regulations promoted growth. It was only when these
countries stripped away the regulations, under pressure from the U.S. Treasury
and the IMF, that they encountered problems.

During the 1960s, 1970s, and 1980s, the East Asian economies not only grew
rapidly but were remarkably stable. Two of the countries most touched by the
1997-1998 economic crisis had had in the preceding three decades not a single
year of negative growth; two had only one year--a better performance than the
United States or the other wealthy nations that make up the Organization for
Economic Cooperation and Development (OECD). The single most important factor
leading to the troubles that several of the East Asian countries encountered in
the late 1990s--the East Asian crisis--was the rapid liberalization of financial
and capital markets. In short, the countries of East Asia benefited from
globalization because they made globalization work for them; it was when they
succumbed to the pressures from the outside that they ran into problems that were
beyond their own capacity to manage well.

Globalization can yield immense benefits. Elsewhere in the developing
world, globalization of knowledge has brought improved health, with life spans
increasing at a rapid pace. How can one put a price on these benefits of
globalization? Globalization has brought still other benefits: Today there is the
beginning of a globalized civil society that has begun to succeed with such
reforms as the Mine Ban Treaty and debt forgiveness for the poorest highly
indebted countries (the Jubilee movement). The globalization protest movement
itself would not have been possible without globalization.

The Darker Side of Globalization

How then could a trend with the power to have so many
benefits have produced such opposition? Simply because it has not only failed to
live up to its potential but frequently has had very adverse effects. But this
forces us to ask, why has it had such adverse effects? The answer can be seen by
looking at each of the economic elements of globalization as pursued by the
international financial institutions and especially by the IMF.

The most adverse effects have arisen from the liberalization of financial
and capital markets--which has posed risks to developing countries without
commensurate rewards. The liberalization has left them prey to hot money pouring
into the country, an influx that has fueled speculative real-estate booms; just
as suddenly, as investor sentiment changes, the money is pulled out, leaving in
its wake economic devastation. Early on, the IMF said that these countries were
being rightly punished for pursuing bad economic policies. But as the crisis
spread from country to country, even those that the IMF had given high marks
found themselves ravaged.

The IMF often speaks about the importance of the discipline provided by
capital markets. In doing so, it exhibits a certain paternalism, a new form of
the old colonial mentality: "We in the establishment, we in the North who run our
capital markets, know best. Do what we tell you to do, and you will prosper." The
arrogance is offensive, but the objection is more than just to style. The
position is highly undemocratic: There is an implied assumption that democracy by
itself does not provide sufficient discipline. But if one is to have an external
disciplinarian, one should choose a good disciplinarian who knows what is good
for growth, who shares one's values. One doesn't want an arbitrary and capricious
taskmaster who one moment praises you for your virtues and the next screams at
you for being rotten to the core. But capital markets are just such a fickle
taskmaster; even ardent advocates talk about their bouts of irrational exuberance
followed by equally irrational pessimism.

Lessons of Crisis

Nowhere was the fickleness more evident than in the last
global financial crisis. Historically, most of the disturbances in capital flows
into and out of a country are not the result of factors inside the country. Major
disturbances arise, rather, from influences outside the country. When Argentina
suddenly faced high interest rates in 1998, it wasn't because of what Argentina
did but because of what happened in Russia. Argentina cannot be blamed for
Russia's crisis.

Small developing countries find it virtually impossible to withstand this
volatility. I have described capital-market liberalization with a simple
metaphor: Small countries are like small boats. Liberalizing capital markets is
like 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 wave
and capsize. But the IMF pushed for the boats to set forth into the roughest
parts 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. Skilled
labor would then provide discipline. Today, a country that does not treat capital
well will find capital quickly withdrawing; in a world of free labor mobility, if
a country did not treat skilled labor well, it too would withdraw. Workers would
worry about the quality of their children's education and their family's health
care, the quality of their environment and of their own wages and working
conditions. They would say to the government: If you fail to provide these
essentials, we will move elsewhere. That is a far cry from the kind of discipline
that free-flowing capital provides.

The liberalization of capital markets has not brought growth: How can
one build factories or create jobs with money that can come in and out of a
country overnight? And it gets worse: Prudential behavior requires countries to
set aside reserves equal to the amount of short-term lending; so if a firm in a
poor country borrows $100 million at, say, 20 percent interest rates short-term
from a bank in the United States, the government must set aside a corresponding
amount. The reserves are typically held in U.S. Treasury bills--a safe, liquid
asset. In effect, the country is borrowing $100 million from the United States
and lending $100 million to the United States. But when it borrows, it pays a
high 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 help
the growth of the poor country. There is also a high opportunity cost of
the reserves; the money could have been much better spent on building rural roads
or constructing schools or health clinics. But instead, the country is, in
effect, 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 other
sectors--such as education and transportation--of badly needed resources. Until
the IMF and the U.S. Treasury came along, Thailand had restricted bank lending
for speculative real estate. The Thais had seen the record: Such lending is an
essential part of the boom-bust cycle that has characterized capitalism for 200
years. It wanted to be sure that the scarce capital went to create jobs. But the
IMF nixed this intervention in the free market. If the free market said, "Build
empty office buildings," so be it! The market knew better than any government
bureaucrat who mistakenly might have thought it wiser to build schools or

The Costs of Volatility

Capital-market liberalization is inevitably accompanied by
huge volatility, and this volatility impedes growth and increases poverty. It
increases the risks of investing in the country, and thus investors demand a risk
premium in the form of higher-than-normal profits. Not only is growth not
enhanced but poverty is increased through several channels. The high volatility
increases the likelihood of recessions--and the poor always bear the brunt of
such downturns. Even in developed countries, safety nets are weak or nonexistent
among the selfemployed and in the rural sector. But these are the dominant
sectors in developing countries. Without adequate safety nets, the recessions
that follow from capital-market liberalization lead to impoverishment. In the
name of imposing budget discipline and reassuring investors, the IMF invariably
demands expenditure reductions, which almost inevitably result in cuts in outlays
for safety nets that are already threadbare.

But matters are even worse--for under the doctrines of the "discipline of
the capital markets," if countries try to tax capital, capital flees. Thus, the
IMF doctrines inevitably lead to an increase in tax burdens on the poor and the
middle classes. Thus, while IMF bailouts enable the rich to take their money out
of the country at more favorable terms (at the overvalued exchange rates), the
burden of repaying the loans lies with the workers who remain behind.

The reason that I emphasize capital-market liberalization is that the
case against it--and against the IMF's stance in pushing it--is so compelling. It
illustrates what can go wrong with globalization. Even economists like Jagdish
Bhagwati, strong advocates of free trade, see the folly in liberalizing capital
markets. Belatedly, so too has the IMF--at least in its official rhetoric, though
less so in its policy stances--but too late for all those countries that have
suffered so much from following the IMF's prescriptions.

But while the case for trade liberalization--when properly done--is quite
compelling, 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 in
resources moving from inefficient protected sectors to more efficient export
sectors. The problem is not only that job destruction comes before the job
creation--so that unemployment and poverty result--but that the IMF's "structural
adjustment programs" (designed in ways that allegedly would reassure global
investors) make job creation almost impossible. For these programs are often
accompanied by high interest rates that are often justified by a single-minded
focus on inflation. Sometimes that concern is deserved; often, though, it is
carried to an extreme. In the United States, we worry that small increases in the
interest rate will discourage investment. The IMF has pushed for far higher
interest rates in countries with a far less hospitable investment environment.
The high interest rates mean that new jobs and enterprises are not created. What
happens is that trade liberalization, rather than moving workers from
low-productivity jobs to high-productivity ones, moves them from low-productivity
jobs to unemployment. Rather than enhanced growth, the effect is increased
poverty. To make matters even worse, the unfair trade-liberalization agenda
forces poor countries to compete with highly subsidized American and European

The Governance of Globalization

As the market economy has matured within countries, there
has 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 domestic
process that was in some ways analogous to globalization. In the United States,
government promoted the formation of the national economy, the building of the
railroads, and the development of the telegraph--all of which reduced
transportation and communication costs within the United States. As that process
occurred, the democratically elected national government provided oversight:
supervising and regulating, balancing interests, tempering crises, and limiting
adverse consequences of this very large change in economic structure. So, for
instance, in 1863 the U.S. government established the first financial-banking
regulatory authority--the Office of the Comptroller of Currency--because it was
important 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 in
the mid-nineteenth century, was supported by the 1862 Morrill Act, which
established research, extension, and teaching programs. That system worked
extremely well and is widely credited with playing a central role in the enormous
increases in agricultural productivity over the last century and a half. We
established an industrial policy for other fledgling industries, including radio
and civil aviation. The beginning of the telecommunications industry, with the
first telegraph line between Baltimore and Washington, D.C., was funded by the
federal 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 what
I call global governance without global government. International institutions
like the World Trade Organization, the IMF, the World Bank, and others provide an
ad hoc system of global governance, but it is a far cry from global government
and lacks democratic accountability. Although it is perhaps better than not
having any system of global governance, the system is structured not to serve
general interests or assure equitable results. This not only raises issues of
whether broader values are given short shrift; it does not even promote growth as
much as an alternative might.

Governance through Ideology

Consider the contrast between how economic decisions are
made inside the United States and how they are made in the international economic
institutions. In this country, economic decisions within the administration are
undertaken largely by the National Economic Council, which includes the secretary
of labor, the secretary of commerce, the chairman of the Council of Economic
Advisers, the treasury secretary, the assistant attorney general for antitrust,
and the U.S. trade representative. The Treasury is only one vote and often gets
voted down. All of these officials, of course, are part of an administration that
must face Congress and the democratic electorate. But in the international arena,
only the voices of the financial community are heard. The IMF reports to the
ministers of finance and the governors of the central banks, and one of the
important items on its agenda is to make these central banks more
independent--and less democratically accountable. It might make little difference
if the IMF dealt only with matters of concern to the financial community, such as
the 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 the
trade-off between inflation and unemployment, and in that trade-off it always
puts far more weight on inflation than on jobs.

The problem with having the rules of the game dictated by the IMF--and thus
by the financial community--is not just a question of values (though that is
important) but also a question of ideology. The financial community's view of the
world predominates--even when there is little evidence in its support. Indeed,
beliefs on key issues are held so strongly that theoretical and empirical support
of the positions is viewed as hardly necessary.

Recall again the IMF's position on liberalizing capital markets. As noted, the
IMF pushed a set of policies that exposed countries to serious risk. One might
have thought, given the evidence of the costs, that the IMF could offer plenty of
evidence that the policies also did some good. In fact, there was no such
evidence; the evidence that was available suggested that there was little if any
positive effect on growth. Ideology enabled IMF officials not only to ignore the
absence of benefits but also to overlook the evidence of the huge costs imposed
on 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, a
disproportionate part of the gains has accrued to the advanced industrial
countries, and in some cases the less-developed countries have actually been
worse off. After the last round of trade negotiations, the Uruguay Round that
ended in 1994, the World Bank calculated the gains and losses to each of the
regions of the world. The United States and Europe gained enormously. But
sub-Saharan Africa, the poorest region of the world, lost by about 2 percent
because of terms-of-trade effects: The trade negotiations opened their markets to
manufactured goods produced by the industrialized countries but did not open up
the markets of Europe and the United States to the agricultural goods in which
poor countries often have a comparative advantage. Nor did the trade agreements
eliminate the subsidies to agriculture that make it so hard for the developing
countries to compete.

The U.S. negotiations with China over its membership in the WTO
displayed a double standard bordering on the surreal. The U.S. trade
representative, the chief negotiator for the United States, began by insisting
that China was a developed country. Under WTO rules, developing countries are
allowed longer transition periods in which state subsidies and other departures
from the WTO strictures are permitted. China certainly wishes it were a developed
country, 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 small
average incomes and conclude that the People's Republic is a big economy. But
China 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 China
got 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 States
to get extra time to shelter the American textile industry.

Trade negotiations in the service industries also illustrate the unlevel
nature of the playing field. Which service industries did the United States say
were very important? Financial services--industries in which Wall Street
has a comparative advantage. Construction industries and maritime services were
not on the agenda, because the developing countries would have a comparative
advantage in these sectors.

Consider also intellectual-property rights, which are important if innovators
are to have incentives to innovate (though many of the corporate advocates of
intellectual property exaggerate its importance and fail to note that much of the
most important research, as in basic science and mathematics, is not patentable).
Intellectual-property rights, such as patents and trademarks, need to balance the
interests of producers with those of users--not only users in developing
countries, but researchers in developed countries. If we underprice the
profitability of innovation to the inventor, we deter invention. If we overprice
its cost to the research community and the end user, we retard its diffusion and
beneficial effects on living standards.

In the final stages of the Uruguay negotiations, both the White House Office
of Science and Technology Policy and the Council of Economic Advisers worried
that we had not got the balance right--that the agreement put producers'
interests over users'. We worried that, with this imbalance, the rate of progress
and innovation might actually be impeded. After all, knowledge is the most
important input into research, and overly strong intellectual-property rights
can, in effect, increase the price of this input. We were also concerned about
the consequences of denying lifesaving medicines to the poor. This issue
subsequently gained international attention in the context of the provision of
AIDS medicines in South Africa [see "Medicine as a Luxury" by Merrill Goozner, on
page A7]. The international outrage forced the drug companies to back down--and
it appears that, going forward, the most adverse consequences will be
circumscribed. 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 traditional
medicines. Not only do they seek to make money from "resources" and knowledge
that rightfully belong to the developing countries, but in doing so they squelch
domestic firms who long provided these traditional medicines. While it is not
clear whether these patents would hold up in court if they were effectively
challenged, it is clear that the less-developed countries may not have the legal
and financial resources required to mount such a challenge. The issue has become
the source of enormous emotional, and potentially economic, concern throughout
the developing world. This fall, while I was in Ecuador visiting a village in the
high Andes, the Indian mayor railed against how globalization had led to

Globalization and September 11

September 11 brought home a still darker side of
globalization--it provided a global arena for terrorists. But the ensuing events
and discussions highlighted broader aspects of the globalization debate. It made
clear how untenable American unilateralist positions were. President Bush, who
had unilaterally rejected the international agreement to address one of the
long-term global risks perceived by countries around the world--global warming,
in which the United States is the largest culprit--called for a global alliance
against terrorism. The administration realized that success would require
concerted action by all.

One of the ways to fight terrorists, Washington soon discovered, was to cut
off their sources of funding. Ever since the East Asian crisis, global attention
had focused on the secretive offshore banking centers. Discussions following that
crisis focused on the importance of good information--transparency, or
openness--but this was intended for the developing countries. As international
discussions turned to the lack of transparency shown by the IMF and the offshore
banking centers, the U.S. Treasury changed its tune. It is not because these
secretive banking havens provide better services than those provided by banks in
New York or London that billions have been put there; the secrecy serves a
variety of nefarious purposes--including avoiding taxation and money laundering.
These institutions could be shut down overnight--or forced to comply with
international norms--if the United States and the other leading countries wanted.
They continue to exist because they serve the interests of the financial
community and the wealthy. Their continuing existence is no accident. Indeed, the
OECD drafted an agreement to limit their scope--and before September 11, the Bush
administration unilaterally walked away from this agreement too. How foolish this
looks now in retrospect! Had it been embraced, we would have been further along
the 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. It
used to be said that when the United States sneezed, Mexico caught a cold. With
globalization, when the United States sneezes, much of the rest of the world
risks catching pneumonia. And the United States now has a bad case of the flu.
With globalization, mismanaged macroeconomic policy in the United States--the
failure to design an effective stimulus package--has global consequences. But
around the world, anger at the traditional IMF policies is growing. The
developing countries are saying to the industrialized nations: "When you face a
slowdown, 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, they
are impermissible--even if we can raise the funds through 'selling forward,' say,
some natural resources." A heightened sense of inequity prevails, partly because
the consequences of maintaining contractionary policies are so great.

Global Social Justice

Today, in much of the developing world, globalization is
being questioned. For instance, in Latin America, after a short burst of growth
in the early 1990s, stagnation and recession have set in. The growth was not
sustained--some might say, was not sustainable. Indeed, at this juncture, the
growth record of the so-called post-reform era looks no better, and in some
countries much worse, than in the widely criticized import-substitution period of
the 1950s and 1960s when Latin countries tried to industrialize by discouraging
imports. Indeed, reform critics point out that the burst of growth in the early
1990s was little more than a "catch-up" that did not even make up for the lost
decade of the 1980s.

Throughout the region, people are asking: "Has reform failed or has
globalization failed?" The distinction is perhaps artificial, for globalization
was at the center of the reforms. Even in those countries that have managed to
grow, such as Mexico, the benefits have accrued largely to the upper 30 percent
and have been even more concentrated in the top 10 percent. Those at the bottom
have gained little; many are even worse off. The reforms have exposed countries
to greater risk, and the risks have been borne disproportionately by those least
able to cope with them. Just as in many countries where the pacing and sequencing
of reforms has resulted in job destruction outmatching job creation, so too has
the exposure to risk outmatched the ability to create institutions for coping
with risk, including effective safety nets.

In this bleak landscape, there are some positive signs. Those in the North
have become more aware of the inequities of the global economic architecture. The
agreement at Doha to hold a new round of trade negotiations--the "Development
Round"--promises to rectify some of the imbalances of the past. There has been a
marked change in the rhetoric of the international economic institutions--at
least they talk about poverty. At the World Bank, there have been some real
reforms; there has been some progress in translating the rhetoric into
reality--in ensuring that the voices of the poor are heard and the concerns of
the developing countries are listened to. But elsewhere, there is often a gap
between the rhetoric and the reality. Serious reforms in governance, in who makes
decisions and how they are made, are not on the table. If one of the problems at
the IMF has been that the ideology, interests, and perspectives of the financial
community in the advanced industrialized countries have been given
disproportionate weight (in matters whose effects go well beyond finance), then
the prospects for success in the current discussions of reform, in which the same
parties continue to predominate, are bleak. They are more likely to result in
slight changes in the shape of the table, not changes in who is at the
table or what is on the agenda.

September 11 has resulted in a global alliance against terrorism. What we now
need is not just an alliance against evil, but an alliance for
something positive--a global alliance for reducing poverty and for creating a
better environment, an alliance for creating a global society with more social