The Miracles of Globalization

By the early 1980s, a number of distinguished economists had amassed compelling evidence that outward-oriented trade policies were far more likely than protectionism to lead to economic growth. The evidence was contained in two multi-country research projects-one at the Organization for Economic Cooperation and Development (OECD), led by Ian Little and others, and the other at the National Bureau of Economic Research, directed by Jagdish Bhagwati and Anne Krueger-and in a series of studies at the World Bank.

When developing countries, convinced by these findings, began to embrace outward-oriented policies, pro-free trade economists believed they had scored a decisive victory over protectionists and turned their attention to other problems related to development. But the protectionists were not so easily defeated. Over the next few decades, they regrouped, building a new case for protectionism based on examples of countries that had apparently opened up but had failed to grow rapidly or had suffered financial crises. They also forged new alliances with certain nongovernmental organizations (NGOS) dedicated to preserving the environment and improving labor standards. By the late 1990s, the protectionists-now rechristened "anti-globalizers" to reflect the expanded scope of their agenda-seemed to have recovered some of their lost ground. Their newfound vocalism made headlines during the World Trade Organization (WTO) ministerial meeting in Seattle in 1999.

Today, however, advocates of globalization are gaining the upper hand again. Bhagwati's strikingly successful defense of open markets in his recent book In Defense of Globalization has been bolstered by another influential pro-globalization voice, that of Martin Wolf of the Financial Times. Wolf's weekly columns have already established him as one of the world's most respected economic journalists. Now his ambitious new book, Why Globalization Works, offers a patient and persuasive refutation of many of the arguments most frequently marshaled by critics of trade liberalization.

STRAW MEN

Wolf's book ranges over many topics, including, in Part III, the rise and fall of what may be called the period of "first globalization" that flourished from 1870 to 1914. But the book's most important contents are in Part IV, in which Wolf examines and dismisses current critiques of free trade, of the role of multinational corporations in the global economy, and of capital mobility. Since this is the part of the book that will invite the most attention from pro-and anti-globalization advocates alike, it deserves particularly close scrutiny.

To those who complain that increased openness to trade during the 1980s and 1990s has failed to deliver faster growth, Wolf points to the contrary experiences of China and India. Both countries witnessed significant jumps in their growth rates as they opened up their economies to international trade and foreign investment. As Wolf points out, "Never before have so many people-or so large a proportion of the world's population-enjoyed such large rises in their standards of living."

Wolf argues that although trade openness alone may not always lead to sustained growth, the former is necessary for the latter. In my own research, I have found that growth "miracles"-countries that grew at rates of three percent per capita or more on a sustained basis between 1961 and 1999-almost always experienced rapid growth in trade. Moreover, there are few examples of highly protected countries that managed to grow rapidly on a sustained basis without lowering their level of protection. Symmetrically, countries that had stagnant or declining per capita incomes-what I call growth "debacles"-were characterized by dismal trade performance. Wolf is correct, therefore, in asserting that the empirical evidence refutes the claim made by critics of globalization that trade openness wreaks havoc on economies.

Although the data show that openness to trade is not sufficient for growth, this is readily explicable by proponents of free trade such as Wolf. Trade is enabling, but if other obstacles remain in place, it may not lead to results. Thus, for instance, Indian economists working on the OECD project in the 1960s correctly identified that India's stifling industrial licensing system would nullify any benefits from opening up trade. More generally, if trade is embraced but there are no transport facilities, or if potential trading partners have closed their markets, de facto autarky will continue.

Wolf also argues that the ability of trade to improve growth may be undermined by poor governance: "Poor performers have corrupt, predatory or brutal governments or, sometimes even worse, no government at all, but rather civil war among competing warlords." But this is not an argument against opening to trade. Indeed, Wolf could have made his defense of trade even stronger by posing the question, Is a poorly run country better off pursuing outward-rather than inward-looking policies? More often than not, the answer would be yes.

Wolf also could have challenged the frequent assertion that Latin America-which has tried neoliberal reforms, including trade liberalization, with disappointing results-undermines his arguments for globalization. The fact remains that much of South America has borrowed too much and has therefore been particularly vulnerable to financial crises. This, in turn, has made it difficult for many countries in the region to reap gains from trade liberalization. Chile is a rare counterexample: it has managed to grow at more than 5 percent for nearly two decades largely because it has reduced its trade barriers to OECD levels while limiting its foreign borrowing to prudent levels and maintaining macroeconomic stability.

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