Globalization is a force for good – just look at the evidence, says the economist and leading free trade proponent Jagdish Bhagwati. Contrary to what anti-globalization activists think, this complex economic process actually advances diverse social agendas worldwide. But to reap its full benefits we need to commit ourselves wholly to the idea, or run the risk of half-baked policy prescriptions
Many politicians contend, while others simply concede, that the anti-globalizers are right in thinking that the social implications of economic globalization range from bad to worse.
The favoured phrase, used in particular by the “alternative way” politicians of social democratic persuasion, is that “globalization needs a human face” – implying, in other words, that it lacks one.
Indeed, the prevailing orthodoxy in activist groups, even those that are more likely to participate in discussions at Davos than to agitate in the streets, is that we need ethical globalization – since somehow economic globalization is unethical in its impact, if not its intent. But is this true?
I would argue that globalization has a human face; that, on balance, globalization advances, rather than harms, social agendas as diverse as reduction of poverty and the reduction of child labour in the poor countries, the real wages of workers in the rich countries, the pursuit of democracy worldwide, the promotion of gender equality and women’s welfare, and the quality of the environment.
So, globalization is not only valuable in terms of increasing the economic pie; it is also an economic issue about which there are few existing populist critics among economists – a group rarer than, say, endangered turtles and, what’s more, less worthy of preservation than such turtles.
Globalization is also beneficial to the social issues that we, as citizens, care deeply about. Its economic and social impacts are not only beneficial, they are also correlated. Increased economic prosperity contributes, generally speaking, to the achievement of social agendas such as the reduction of poverty and of child labour.
Whether or not globalization has a human face is also a question whose answer has immediate implications for the kind of governance regimes we pursue. For, if you believe that globalization lacks a human aspect, then appropriate governance will mean policy interventions that tend to inhibit, handicap and restrain globalization throwing sand into the gears to slow down its processes. But if you believe, as I now do, that globalization has a human face, then you will want altogether different policy interventions – ones that enhance, supplement and complement the good effects that globalization can bring. Nothing is more important, therefore, than to decide which of the two conflicting views of globalization we embrace.
Consider the important issue of poverty in poor countries. Globalization has aided the reduction of poverty because, first, it promotes economic growth, and, second, growth reduces poverty.
Economists are ingenious enough to build models where trade, for instance, need not affect growth or may even reduce it. But an overwhelming amount of evidence shows that the growth of trade – both at given levels of protection and, additionally, as a result of trade liberalization – is strongly linked with the growth of income, and thus economic prosperity.
This evidence comes in a variety of ways. First, the traditional view that protectionism aided growth historically, especially in the 19th century, has now been successfully challenged.
The latest such argument was based on statistical regressions (ie associations) run by the historians Kevin O’Rourke and Jeff Williamson. But Doug Irwin overturned this analysis by adding more countries to the historians’ sample; he also noted that their chief examples of successful protectionists were Canada and Argentina who were in fact major exporters and whose tariffs, in fact, were for revenue and had little protectionist effect. Again, Irwin has shown convincingly that the 19th century “McKinley” tinplate industry tariff, often cited as a case of successful protection in the United States, does not pass a cost-benefit test.
But studies of postwar experience are equally supportive of the beneficial link between trade and growth. Two major projects have established the fact that continuing import substitution was the major cause of reduced growth rates. The research, conducted in the 1960s and 1970s by the OECD and by the National Bureau of Economic Research in the United States, went well beyond simple statistical regressions and was based on detailed country studies.
More recently, Arvind Panagariya has examined growth rates for almost 200 countries over a period of 38 countries from 1961 to 1999. He concludes that, when you classify countries with per capita growth rates of 3% or more as miraculous and those with rates that declined in per capita terms as disastrous, it is remarkable that virtually all countries in the former group rapidly expanded their trade as well.
And the vast majority of the “debacle” countries with declining per capita incomes recorded declines in imports as well. But growth of per capita income, in turn, is also associated with a decline in poverty. Recent work by Xavier Sala-i-Martin, and by the Indian economist Surjit Bhalla, has undermined the conviction that economic growth worldwide has been accompanied by an increase, rather than a decline, in poverty.
Sala-i-Martin has estimated poverty rates for 97 countries between 1970 and 1998, supporting a conjecture that I made in the early 1960s that economic growth has to be the principal (but not the only) force in alleviating poverty – and that growth had to be viewed as an active “pull-up” strategy for reducing poverty, rather than as a passive “trickle-down” strategy.
Contrasting the reversed role of Asia and Africa in poverty rates, Sala-i-Martin concludes that: “Poverty increased dramatically in Africa because African countries did not grow. As a result, perhaps the most important lesson to be learned… is how to make Africa grow.”
Both he and Bhalla conclude, in absolute terms that poverty, as a proportion of the population, has diminished, not increased. Nor should the anti-globalizers think that experience shows that income inequality among nations, as distinct from poverty, has increased in recent decades. The World Bank, a major source of the estimates that Sala-i-Martin and Bhalla debunk, has also estimated that if you were to put all households of the world next to one another and estimate the income inequality among them, world inequality has increased.
The Bank’s conclusions have been undermined by Sala-i-Martin. He has calculated, in fact, nine different measures of global inequality and finds that, according to all of them, global inequality has declined in the past two decades.
So, the anti-globalizers have it all wrong: trade enhances growth and growth reduces poverty. It is good to know that, at least in this instance, economics and common sense go together.
But if poor countries profit in terms of both increased prosperity and reduced poverty, should we then worry – as labour unions do – that the labour standards of rich countries are therefore at risk, and that there is now a “race to the bottom” thanks to trade and direct foreign investment?
Admittedly, this fear is plausible. But it is misplaced. The unions believe that employers will say to them: “if, in this globally competitive economy, you do not accept lower standards, jobs will be lost to countries where these standards are lower; or we will just take our production to these other countries. So hard-won standards will be lowered.”
But there is practically no evidence that standards have indeed been lowered in this way.
Consider the most competitive industry: garment manufacturing. Sweatshop conditions are common even in New York factories, where legislated standards are being flouted. But the reason why these standards are low, despite the mandated high standards, is simply because the industry employs illegal immigrants who cannot assert their rights.
Furthermore, there is virtually no enforcement. Nor is there any evidence that, because of low standards in Guatemala and similar places, the legislated standards in the United States have fallen in any way at all.
Take the furniture industry as another example. Some players in this industry crossed the Rio Grande into Mexico because the lead paint restrictions in California were too stringent, and there was almost no such regulation in Mexico. Did this lead to decline in the lead-paint standards in California? Absolutely not.
Much systematic work by political scientists today shows why this is so. There are many institutions which have evolved and worked over decades to develop the high standards; so these pressures to lower the standards are successfully fought.
It was feared that the former president Bush’s Competitiveness Council, headed by vice president Dan Quayle in the early 1990s, would be a source of pressure to reduce US standards. But there was almost no instance where it succeeded, simply because any pressure was resolutely rolled back.
When competition with low-standard countries is feared, these institutions, including the unions and opposition politicians, have tried to deflect the competitiveness game into one of demanding higher standards abroad.
So, politically, there has been an attempt at creating a “race to the top” instead of succumbing to a “race to the bottom”. Indeed, as one goes down the litany of complaints and fears of the anti-globalizers – including the effects on mainstream and indigenous cultures – the conclusion is inescapable that the effects economic globalization on several social dimensions are benign, on balance, rather than malign.
But then we must ask: what institutional and policy framework is necessary to improve on the benign outcomes that globalization already bears?
Three types of issues matter. First, even if the overall effect is sometimes benign, it is not always so in every instance. Therefore, we must devise institutions to deal with downsides, as and when they arise.
I have argued that developing countries often lack adjustment assistance programmes of the kind that the developed countries have evolved over time as they liberalized their trade regimes. But how can the poor countries finance such programmes?
Evidently, aid agencies such as the World Bank can be mobilized to provide funds to support trade liberalization.
Second, we need to ensure that we do not repeat the mistake made by the reformers in Russia, where shock therapy was tried and failed. Maximal speed is not necessarily optimal speed: both economics and politics require cautious adjustment.
When the economist Jeffrey Sachs insisted on shock therapy in Russia in the 1990s, he used the analogy: “You cannot cross a chasm in two leaps.” The Soviet expert Padma Desai replied: “You cannot cross it in one leap either unless you are Indiana Jones; it is better to drop a bridge.” Events proved her right.
Finally, we need to use supplementary policies to accelerate the pace at which social agendas are advanced. True, child labour will be reduced by the prosperity enhanced by globalization. But then what more can we do to reduce it faster?
Here, the unions in rich countries have taken the view that only trade sanctions have teeth. This is a myopic and counterproductive view. Today it is far better, as many intellectuals from the developing countries argue, to base arguments on moral suasion. After all, God gave us a tongue as well. In today’s age, with democratic regimes worldwide, with CNN and with NGOs, a good tongue-lashing is far more powerful than sanctions imposed by governments whose own credentials are often not unblemished.
Globalization has a human face. Globalization works. But we can make it work better. That is the chief task before all of us today.
Jagdish Bhagwati is University Professor at Columbia University and Andre Meyer Senior Fellow in International Economics at the Council on Foreign Relations. An external adviser to the Director General of the World Trade Organization, he has been Economic Policy Adviser to the Director General of GATT, and Special Adviser to the United Nations on Globalization and Economic Policy. His forthcoming book, In Defence of Globalization, is published by Oxford University Press (March, 2004).