A False Alarm: Overcoming Globalization's Discontents

Critics also charge that globalization brings a flood of cheap imports into developed countries, thus reducing the relative wages of unskilled workers who are suddenly forced to compete with inexpensive labor in the developing world. There is some weak theoretical validity to this claim, but the empirical evidence is ambiguous. For example, during the 1980s and 1990s, the price of clothing rose relative to the price of other manufactured goods despite an increase in imports from low-wage countries. In the United States, the wages of unskilled workers did decline, but much academic research suggests that only a fraction of this drop (perhaps ten percent) was attributable to an influx of cheap imports. Bhagwati suggests that even this figure may be too high. Since globalization delivers new capital and technology to developing countries, it may actually raise wages and shift production away from labor-intensive goods.

Bhagwati is less keen on the free movement of capital across national borders. He attributes the financial meltdowns of the 1990s to a "Wall Street-Treasury Complex" that pressured developing countries to liberalize capital flows. His discussion of financial crises, however, is uncharacteristically sloppy and naive. Although Washington did fight for capital liberalization (and misguidedly continues to do so in bilateral trade negotiations), other countries can resist if it goes against their interests (as both Singapore and Chile did successfully). There was also tremendous variation among the countries that suffered crises, which Bhagwati's simplistic account overlooks. Indonesia had accepted the free movement of capital more than 20 years prior to its financial meltdown. Thailand and South Korea accepted only limited capital liberalization in the early 1990s and carried it out in ways that clearly invited trouble. Brazil and Russia maintained some capital controls throughout (although not on foreign purchases of government securities), but such measures offered little protection. And Malaysia's much-touted restrictions on foreign capital flight were not introduced until a year after the crisis broke and thus do not explain that country's shallower recession, as critics of capital liberalization often claim.

A look at history reveals that financial crises are not unique to the 1990s. In the nineteenth century, long before the U.S. Treasury and the International Monetary Fund became influential on the international stage, rapidly growing countries -- the United Kingdom, France, and the United States, the developing nations of the day -- experienced financial crises at least once a decade. Successful industrialists and financiers, caught up in the euphoria of growth and unimpeded by regulation, drove a dramatic boom-and-bust cycle. That pattern has repeated again and again and seems to be an inherent part of development. If there is any lesson here, it is that governments should learn more from the unpleasant experiences of other countries in other times.

BEYOND DISCONTENT

Spouting facile criticism of globalization is easy, especially when unconstrained by fact, and so is refuting it. Bhagwati's defense of globalization is persuasive. He is less successful, however, in his attempt to offer feasible policy alternatives that are likely to improve on existing arrangements. He suggests that the World Bank finance adjustment assistance with respect to trade liberalization in developing countries, showing no awareness that the World Bank must borrow most of its funds in capital markets at market interest rates (and hence must be repaid by its borrowers) or that adjustment assistance has worked poorly in the United States. He suggests a retroactive tax on carbon dioxide emissions over the past century, the proceeds of which would go to help developing countries reduce their own greenhouse gas emissions. He recommends that multinational corporations operating in developing countries follow the same labor and environmental standards as they do at home, without acknowledging that such advice may contradict local law and could discourage some multinationals from expanding to developing countries, thus denying them the many benefits, well expounded by Bhagwati, that foreign companies can bring.

Overall, however, Bhagwati combines the hard-nosed perspective of a liberal on trade and investment with the soft-hearted sensitivities of a social democrat on poverty and human welfare. He thus has an admirable ability to address patiently and sympathetically globalization's well-meaning but wrong-headed critics. This book offers a cogent, erudite, and, indeed, enjoyable discussion of economic globalization and its discontents.