Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries
A century ago the world entered the first age of globalization. Trade and investment spread rapidly around the world, spurred by revolutions in communication and production technologies and a stable gold standard. Behind the scenes stood Great Britain -- preeminent in manufacturing, finance, and naval power -- which championed free trade throughout the Victorian era, beginning with the celebrated repeal of its protectionist Corn Laws in 1846. A succession of British governments pursued agreements to lower tariffs; London banks put capital to productive use abroad; and the Royal Navy ensured open access to world markets and resources. The result was an unprecedented flow of goods, capital, and people -- and the rise of the first truly open world economy.
In 1900 there was every reason to expect and welcome a future of continued world economic openness. Nineteenth-century globalization advocates such as Richard Cobden and John Bright argued that free trade fostered growth and created vested interests in favor of stable and peaceful relations between countries. After all, Britain's trade missions to continental Europe during this period were not just business initiatives but peace missions as well.
But this optimism was soon to end. The open world order came crashing down in 1914, a victim of rapidly shifting power relations, escalating strategic rivalries, the waning of Pax Britannica, and finally, war.
Today the world is well into the second age of globalization, propelled by technological revolutions and the advanced industrial states' commitment to the liberalization of capital and trade. This time, the United States has put its hegemonic weight behind developing the open world economy -- creating multilateral institutions, sponsoring trade rounds, opening its own markets to imports, and singing the praises of commercial liberalism. Just like a century ago, the march of global capitalism appears irresistible.
But is this new age of globalization any more secure than the last? In a masterful new account of contemporary world capitalism, one of America's most distinguished scholars of international relations tells us that there is reason to worry. For Robert Gilpin, the political foundations of economic openness have dramatically weakened in the last decade as the explosion of trade and investment has placed new strains on global institutions. In his view, the end of the Cold War was the seminal event for the world economy. Paradoxically, it unleashed new global market forces while intensifying economic conflict among the industrial countries and eroding America's commitment to liberal multilateralism. The rules-based world economy launched at Bretton Woods in 1944 is now breaking down as the political bonds among Europe, Japan, and the United States dissolve. Most worrying, the United States appears increasingly unwilling -- or unable -- to provide the strong political leadership that was the central pillar of the postwar liberal order. If these political foundations of world capitalism are not rebuilt, the world economy just might return to its unhappy past: escalating upheavals in financial markets, rising trade conflict, renewed economic nationalism, and ultimately the return of antagonistic regional blocs.
Gilpin's book reaches this dour conclusion through a careful review of the components of the world political economy -- the trade, monetary, financial, and foreign investment regimes -- along with the economic strategies of the United States, Europe, and Japan. The result is a grand illumination of modern capitalism. Gilpin convincingly shows how deeply rooted the current world economy is in the American-led Cold War order, making a strong case that the forces of globalization actually have not transcended states to escape the political control of their leaders. Rather than imparting a logic of discipline and reward that will tame authoritarian and nationalist passions, the chaotic forces of globalization create losers as well as winners -- a potentially dangerous source of conflict. Gilpin brings a welcome sobriety to the often overheated debate over globalization. But he does not venture to say whether the current turmoil will lead to a political breakdown or create a new order that supports and governs world economic openness.
RISE AND FALL
Throughout his career, Gilpin has explored the underlying political, security, and institutional structures on which markets depend. U.S. Power and the Multinational Corporation (1975) argued that America's world dominance made possible the rapid postwar growth in multinational corporations, bolstered by a security framework with Europe and Asia that supported trade and direct foreign investment. In War and Change in World Politics (1981), Gilpin expanded this logic to the entire history of international relations. Transplanting the classic realist model of anarchic, interest-based world politics to economics, Gilpin portrayed a world economy that mirrored the ongoing historical dynamic of rise and decline. Markets do not spring to life automatically but rather occupy the space created by the world's dominant state and its partners. The subsequent flow of trade, investment, and technology gradually redistributes power and wealth; states rise and fall; and the conditions for the next violent transformation of order eventually emerge.
At the core of Gilpin's work is the proposition that markets are in their essence neither autonomous nor self-regulating. An open world economy -- marked by free trade, currency convertibility, and capital mobility -- can be secured only by the power and steady hand of a leading state. Without this discipline, the global order tends toward fragmentation. And this is what worries Gilpin most about today's capitalist system: the power and the steady hand of the United States are wavering.
Gilpin's most interesting claim is that the open world economy is fundamentally a creature of the Cold War. The Soviet threat, he argues, fostered cohesion among the capitalist democracies and provided the political glue that held the world economy together. Over time, an elaborate American-led political order emerged that was built on two pillars: the U.S. dollar and the American security umbrella. The American military guarantee to Europe and Asia provided a national-security rationale for Japan and the Western democracies to open their markets. Free trade helped cement the alliance, and in turn the alliance helped settle economic disputes. In Asia, the export-oriented development strategies of Japan and the smaller Asian tigers depended on America's willingness to accept their imports and live with huge trade deficits; alliances with Japan, South Korea, and other Southeast Asian countries made this politically tolerable.
The reserve and transaction-currency role of the dollar also solidified the open postwar system. The dollar's special status, Gilpin writes, gave the United States the rights of "seigniorage": it could print extra money to fight foreign wars, increase domestic spending, and go deeply into debt without fearing the pain that other states would experience. Other countries would have to adjust their currencies, which were linked to the dollar, when Washington pursued an inflationary course to meet its foreign and domestic policy agendas. Because of its dominance, the United States did not have to raise interest rates to defend its currency, taking pressure off its chronic trade imbalances. In the 1960s, French President Charles de Gaulle understood this hidden source of American hegemony all too well and complained bitterly. But most of America's Cold War allies were willing to hold dollars for fear that a currency collapse might lead the United States to withdraw its forces overseas and retreat into isolationism.
In this postwar bargain, extended military deterrence and the American dollar bound the allies together and created the institutional supports of the open world economy. Markets served a larger political purpose. Historic compromises between business and labor were politically possible -- and led to the building of domestic social safety nets that buffered swings in world markets. In short, America's leadership in creating a stable and open world economy was an offshoot of its Cold War leadership. And because the U.S. economy dwarfed other industrial countries, it did not need to worry about controlling the distribution of gains from trade between itself and its allies.
Today, Gilpin laments, this postwar bargain is breaking down as the Cold War recedes into history. The United States is still the dominant power, but it no longer needs to lead a global alliance. Europeans and Asians have stopped worrying about the security implications of economic disputes. The loosening of Cold War bonds has been matched by the rising salience of regional economic groups in Europe, East Asia, and Latin America. The European Union (EU), the Asia-Pacific Economic Cooperation forum (APEC), and the North American Free Trade Agreement (NAFTA) are all evidence that global multilateralism has lost its primacy. Gilpin cites the Single European Act of 1986 as the start of competitive regionalism, as each region attempted to enhance its position in relation to the others. Driven by both market forces and government policies, regionalism has now become reinforced by differences among Asian, Anglo-American, and continental European capitalism, accompanied by regional corporate groupings and production networks. Japan's strategy in Asia, for example, has encouraged government and business to work together and foster regionalism by directing the flow of trade, aid, and foreign direct investment. If the global reserve and transaction role of the dollar cedes to regional dominance of the euro and the yen, Gilpin fears, the world economy will be pushed in the dangerous direction of competing regional blocs.
In the meantime, the expansion of trade and investment has put new demands on this increasingly shaky postwar framework. More and more economic activity takes place outside rule-based regimes and is becoming increasingly chaotic, thanks to the dramatic speed and volume of international capital movements. Economic globalization has far outpaced political globalization and desperately needs new rules and institutions, Gilpin concludes. But his view of how order is built and sustained -- which requires a benign hegemonic leader for stability -- makes the prospects for governance look quite uncertain.
YOUR FRIENDS AND NEIGHBORS
But is the open world economy really as unstable as Gilpin suggests? One of the biggest surprises since the end of the Cold War is how little relations among western Europe, Japan, and the United States have changed. Economic disputes have remained quite muted. It is difficult to argue that the conflicts between the United States and its European and Japanese trade partners over bananas, Fuji film, or other issues during the 1990s have been more frequent or intense than such spats were during the Cold War. Gilpin's review of Cold War-era trade and monetary relations -- which covers such disputes as the Nixon administration's unexpected abandonment of the gold standard, its unilateral import duties, and the subsequent disputes over oil price controls -- unintentionally shows that the Cold War allies did indeed wage economic battles among themselves.
Meanwhile, the postwar alliances and the American security umbrella are still firmly in place. Indeed, NATO has been enlarged and the American-Japanese security pact has been deepened by new agreements. Intergovernmental cooperation among the Group of Seven wealthy industrial nations (G-7) has expanded, letting the major democracies better tackle transnational issues such as organized crime, environmental quality, and weapons proliferation. Gilpin is correct to argue that a strategic rupture in G-7 relations would doom the open world economy. But he fails to persuade the reader that the Cold War's end was a world-historical event that triggered new geopolitical rivalries.
Gilpin's fears over the rise of regionalism also seem misplaced. Economic regionalism today looks a lot less ominous than it did at the beginning of the 1990s. Debate about a possible "Fortress Europe" has disappeared. The primary purpose of European integration -- as Gilpin himself notes -- has been the reconciliation of France and Germany, and it will be decades before the true significance of a more united Europe becomes clear. Japan's regional ambitions in Asia have also been tamer than many people expected. Japan has remained ambivalent about placing itself at the center of an East Asian economic order, while its strategic-investment approach to fostering regionalism has yielded only modest results. In fact, the irony is that the trade-oriented model that Japan has exported to Asia's tigers depends on American willingness to accept imports. This increases American leverage in the region and makes it all the more difficult to conceive of economic regionalism in Asia without the United States.
The rise of global trade and foreign investment also works against the image of rival regions. Again, Gilpin inadvertently weakens his own argument by noting the internationalization of services and manufacturing. The resulting spread of global production linkages is creating a more profound form of interdependence than was ever created by trade or portfolio investment. Complementing this trend is a dramatic increase in corporate alliances; by one count, more than 20,000 such partnerships formed in the last several years alone. It is easier than it was a decade ago to think that economic regions could actually rise up and dominate world politics. Indeed, at times Gilpin does not seem fully convinced of his own thesis that adversarial regional blocs are ascending, in particular when he describes the relationship between regionalism and the globalization of economic linkages as "dialectical" rather than truly adversarial. But he does not say where this dialectical process will end.
UNCLE SAM NEEDS WHO?
The decline of American leadership in the world economy disturbs Gilpin most. The United States played the leading role in constructing an open postwar order, and he fears it is poised to do the most damage today. During the Reagan administration, America turned away from its strong postwar commitment to multilateral economic openness toward a strategic mix of multilateral, unilateral, and regional policies. This movement toward a "multitrack" orientation continued during the Bush and Clinton terms. A symbol of the new American pursuit of narrow self-interest was the famous "Super 301" clause in a 1988 trade bill, which gave the president the authority to retaliate against what Washington deemed to be unfair trading behavior. As Gilpin sees it, this move toward unilateral and results-oriented trade policy, combined with the championing of NAFTA and other regional trade measures, signaled that America was abandoning its commitment to multilateral cooperation with its Cold War allies. To make matters worse, American domestic politics began to intrude into trade policy and undermine the Cold War imperative to act for the greater good.
Gilpin is right to identify the unilateralist impulse in American post-Cold War foreign economic policy. But he fails to understand that this tendency has been countered by regional policy approaches that can serve the long-term goal of global economic openness. NAFTA was championed by the United States in part as a way of locking in Mexico's democratization and liberalization. APEC is a regional grouping, but it enshrines multilateral market openness. The World Trade Organization is a dramatic step by the world community to place economic relations and conflict resolution in a legal framework. All of these institutional innovations create rules and practices that actually limit the extent to which the United States can disregard the wider system.
The end of the Cold War does deny the U.S. president a compelling rationale for international leadership and cooperation. But the Cold War strategic partnerships with Europe and Asia still exist and continue to provide a political foundation as the major powers struggle over globalization's dilemmas. Gilpin's catalog of the growing conflicts, strains, and dysfunctions that plague the world economy overlooks the fact that that economy is situated within the most institutionalized international order ever created. Moreover, it exists in the first era in which the leading great powers -- especially the Cold War allies -- are profoundly at peace with one another.
Gilpin's book remains valuable nevertheless. Better than any other recent book, it shows that globalization rests squarely on an aging security order binding the great powers together. If these alliances erode and are replaced with more ambiguous -- and even rival -- strategic relations, all bets are off. One of Gilpin's most telling observations is that leadership in support of an open world economy must be based on more than military and economic power -- a "larger political purpose than simply one nation's narrowly defined interest." Absent the Soviet threat, what is this new political purpose? For many people, globalization has become a remote process that offers more insecurities than rewards. As political leaders across the industrial world are discovering, support for globalization will be difficult to sustain if the world economy is seen as a system that privileges the owners of capital at the expense of workers, communities, and the environment.
The question that Gilpin's book brilliantly poses is whether globalization's upheaval will result in a more inclusive and responsive set of international rules and institutions or whether it signals a more dangerous breakdown. Gilpin understands better than most that globalization rests on a political foundation. But he fails to see that that foundation is more than a Cold War legacy. The second era of globalization was the postwar generation's attempt to solve the problems of the 1930s -- the economic spheres of influence, competitive currency relations, militarized blocs, and protectionist agendas that so violently shook the world. The institutions that took hold after World War II continue to provide governance now, and the economic interests and political consensus that lie behind them are more, not less, supportive of an open world economy today than during the Cold War. The current struggles are not about pushing the world toward closure or breakdown but about creating a global system that is more sprawling, pluralistic, and acrimonious -- yet nonetheless unified.