Globalization: Obsession or Necessity

Globalization: Obsession or Necessity?JAMES W. THOMSON

Are Americans obsessed with globalization? Many American politicians, especially President Clinton, have enthusiastically embraced the global marketplace, but for the rest of the world, and for most Americans, it’s a very different story. Since 1997, noticeably fewer foreign political leaders have supported globalization, due principally to the tumultuous economic and financial crises which erupted in South East Asia, then spread quickly to Latin America, Japan, and Russia, before finally reaching Europe and the United States. Unlike many of the now dominant center-left Western European politicians, President Clinton has repeatedly expressed high hopes for global economic integration. In an interview with Argentine reporters on October 17, 1997, Clinton stated that “What I’m trying to do is to promote a process of reorganization of the world so that human beings are organized in a way that takes advantage of the new opportunities of this era.... If we can prove that you can merge integrated economies and integrated democracies, then we’ll be more likely to build a global system of this kind.” With this and other remarks, President Clinton has argued that globalization is a highly desirable scenario that would mesh the world’s economies into an integrated global market regulated by global laws, overseen by international organizations, such as the United Nations, World Bank, World Trade Organization (WTO), and the International Monetary Fund (IMF), all of which are heavily influenced by American leadership. But today, the United States is the only great power to link its economic objectives to the desirability of global free markets. Many other world leaders, particularly the politicians of Europe and Asia, have expressed critical reservations about the American model of unfettered global trade and unrestricted capital flows across national boundaries. Indeed, for many politicians and pundits, it has become more fashionable to declare along with the French Prime Minister, Lionel Jospin, that “capitalism is its own worst enemy. The crises we have witnessed teach us three things: Capitalism remains unstable, the economy is political, and the global economy calls for regulation.”

By global integration, President Clinton meant much more than advocating free trade and free capital policies. In his United Nations address in September, 1997, Clinton praised the following global entities—the United Nations, World Trade Organization (WTO), Global Warming Treaty, Chemical Weapons Convention, NATO Expansion Treaty, General Agreement on Tariffs and Trade (GATT), North American Free Trade Agreement (NAFTA), and several others including a proposed “permanent international court to prosecute the most serious violations of humanitarian law.” Clinton concluded by noting that it is “... necessary to imagine a future that is different from the past, necessary to save ourselves from the destructive pattern of relations with each other and within our own nations and live a future that is different from the past.” There is no lack of resolve in these high sounding phrases because President Clinton apparently believes that globalization represents an effective mechanism that can be used to resolve many of the world’s social, economic, and political problems, while helping many American citizens as well. In the 1998 Economic Report of the President, Clinton’s team of economic advisers presents the standard mainstream view that globalization should strengthen America by promoting job growth, by encouraging exports, by creating greater efficiency, and by allowing consumers access to a greater variety of goods. These likely outcomes represent the undeniable advantages of an integrated global marketplace. Unfortunately, there are other disturbing consequences that are not often acknowledged by globalization advocates; among them, global capitalism will inevitably impact national economies far more than ever before by placing certain sensitive economic variables, including wages and capital flows, beyond the effective control of national governments. The dismal consequences, according to the conservative British political writer John Gray, is that free global markets have generated a long economic boom in which the majority of Americans have not benefited; rather, Gray believes that current levels of income inequality in America now resemble those of many Latin American societies more than any European nation.

Herman E. Daly, Professor of Public Affairs at the University of Maryland, has characterized globalization as the global economic integration of many national economies into one global economy, made possible primarily by free trade and capital mobility, and by easy immigration policies as well. But Professor Daly warns that globalization also implies the effective erasure of national boundaries for economic purposes. As an alternative to globalization, Daly strongly prefers “internationalization” policies—specific trade agreements regulating trade between nations such that national governments can retain their basic economic powers. Consequently, internationalization policies represent an important alternative to globalization since the latter model is grounded on the explicit premise that free markets can properly resolve most economic outcomes, without the alleged error-prone intervention of governments, a belief which has been, of course, the ethos of capitalism as declared by Adam Smith and Bernard Mandeville in the eighteenth century. Since then, the advocacy of free market solutions to fundamental economic problems has been championed by many mainstream economists, most notably by two recent Nobel Laureates—Milton Friedman and Friedrich Hayek—who stridently challenged many collectivist doctrines.

Since mainstream economists accept the logic of free markets, they should be willing to concede, although perhaps sheepishly, that in a fully integrated global economy, wages would be set in China (source of the cheapest industrial labor); the cost of capital would be determined in New York, London, or Tokyo (sites of the largest amounts of private capital); and business tax rates would be set in the Cayman Islands (location of the lowest business tax rates). All these admittedly extreme possibilities reflect the inescapable logic of global capitalism; yet they have scarcely been considered by most politicians; however, many Americans, unlike our political leaders, believe that globalization does threaten them. In a recent Wall Street Journal (December, 1998) study, 58% agreed that foreign trade had been bad for the U.S. economy because cheap imports have cost wages and jobs here; additionally, some 72% stated an anti-immigrant position. Not much support for globalization policies in these poll results; rather, there was a majority for an “America First” position—that Americans and their own interests should rank first, not the requirements of the “global economy” or the needs of multinational corporations or new immigrants.

What are the sources of Clinton’s globalization agenda? It’s not difficult to establish the chronology. The pivotal year was 1989. On November 9, 1989 the Berlin Wall was demolished; a few weeks later, Germany was reunified. Eastern Europe followed suit by rejecting socialist ideology and by accepting capitalism. By the end of 1991, the Soviet Union disintegrated; its newly independent republics moved toward capitalism and restoring democracy. It seemed to many observers that not only had “socialism” and “communism” passed away but so had all the other utopian views—leaving liberal democratic capitalism as the only remaining choice to organize economic activity. Since 1989, most non-market measures fell swiftly into disfavor and the appeal of socialism waned even for developing nations such as India that had long relied on centralized state planning. In the 1990s, as Dani Rodrik, Professor of International Economics at Harvard University, has reported, most influential Western advocates of reform in the world economy believed that the ultimate policy objective should be a well-functioning global capitalist system. Most global trade authorities believed that a global marketplace would deliver the goods successfully, guaranteeing prosperity for all, as long as governments acted to reduce global capitalism’s alleged excesses. In policy terms, it was widely accepted that if governments acted to ensure unimpeded free trade in goods, services, capital, and technology, then an integrated capitalist global market would stimulate competition and spur productivity thus raising living standards, particularly for the aspiring citizens of the developing countries. In this sense, Clinton’s proposed globalization policies can be viewed simply as part of the “conventional economic wisdom,” insofar as trade policy was perceived by most influential policy makers, most mainstream economists, and certainly not last, by many American multinational corporations in the 1990s.

Professor Rodrik contends that much of this “conventional wisdom” can be attributed to the 1980s Reagan and Thatcher political “revolutions” which led to a number of myths and half truths that glorified free markets. The wide acceptance of “market fundamentalism” implied that opening up international trade represented the most certain path to global prosperity (as Bill Clinton put it recently); that foreign investment was the key to promoting rapid progress in emerging market economies; that free capital flows would allocate the world’s resources more efficiently; that international capital markets would “discipline” governments to accept sounder economic policies; that all countries were converging to a universal form of capitalism based upon the American free market model; and, finally, that all these expected results would occur without creating major social and economic disruptions. Regrettably, the recent economic events in Asia, Russia, Latin America, and elsewhere have damaged our faith in these optimistic assumptions. Financial markets have long been known to be vulnerable to panics and crashes, particularly when lenders (or borrowers) are guaranteed government aid in financial crises, whether for Japanese banks or for American savings banks. Additionally, the relationships between trade, foreign investment, and economic growth are dependent upon many complex factors, some of which are as yet only dimly understood. Also, there is little evidence to suggest that many nations, particularly in Europe or Asia, are eager to “reinvent” themselves, especially since they know that for the majority of Americans, real income levels have fallen over the last quarter century and that, according to John Gray, levels of social division in America have reached levels that no Western European or Asian nation would tolerate. Finally, it is unlikely that many nations would respond to American leadership, unless it was the sole course of action left to obtain critical funding from the U.S. Treasury or other American dominated institutions such as the World Bank or the International Monetary Fund. Even then, attaining I.M.F. aid could be dangerous. According to James Tobin, the winner of the 1981 Nobel Prize in Economics, I.M.F. policies have frequently been devastating to those developing countries that have been sufficiently unwise to have accepted the I.M.F. standard remedies of fiscal stringency and high interest rates.

It is legitimate to theorize, as Rodrik, Gray, and many other writers contend, that free markets are sustainable only insofar as they are “embedded” in a matrix of supporting social and political institutions. In the absence of these institutions, as in the current global capitalist marketplace, free markets are deprived of their support functions without which they may not survive. In the midst of World War II, the economic historian, Karl Polanyi, in The Great Transformation, speculated that social and political institutions should regulate, stabilize, and legitimatize market outcomes. Polanyi contended that without these supporting institutions, unfettered free markets would subject societies to fraud, unfair competition, destabilizing boom and bust cycles, and major social and economic dislocations, thereby destroying the “legitimacy” of free markets and capitalism itself. As a severe critic of capitalism, Polanyi believed that the nineteenth century ideal of free markets was a “stark utopia” and that unwise reliance on free markets had created the politico-economic conditions which eventually led to the two World Wars which decimated Europe. After the Great Depression “meltdown” of the 1930s, most well-functioning capitalist societies adopted the interventionist policies of John Maynard Keynes and other like-minded writers, and implemented these support functions; however, at the global level, none of these institutions exist. In particular, Keynes regarded the free market system as “the best safeguard of personal liberty”; however, he did advocate a “mixed” economy while stating the various limitations of a purely capitalist economy. All of which may suggest, as Rodrik argues, that an integrated global capitalist market can not long endure without some form of global government, a fortuitous outcome which is not likely to occur in the near future given the fractious nature of the world’s political entities.

For Gray and Rodrik, capitalism is only a national phenomenon, not a global one, and they submit that we are unlikely to move smoothly toward global capitalism except in the unlikely event that all nations intentionally surrender their sovereignty. As a result, the internationalist policy objectives, as suggested by Rodrik, Gray, and Daly, are far more modest than those required by globalization: these proposals would allow each state to apply its own national rules such that its citizens can confidently expect to prosper from global trade, without experiencing the highly volatile risks that are likely to result from unfettered free trade. Proposed trade regulations might include low tariffs, possible capital controls, and certain tariffs that could be imposed at the border for various reasons, say environmental concerns, humanitarian reasons, or specific reactions to the trade strategies of other nations. Unlike the global trade decrees handed down by the World Trade Organization or the I.M.F., the “internationalist” trade theorists believe that far more viable trade agreements could be achieved by relying upon negotiations between nations.

Most economists will reluctantly admit that free trade may create some losers as well as many winners; unfortunately, most policy makers have often been unwilling to consider the plight of the losers. The result is a dilemma. Has globalization created an effective solution for the problem of encouraging economic growth or has it merely created new and more difficult problems, which affect more people due to the larger scope and complexity of an integrated global marketplace? A consensus is far from certain on this unsettling question: the public is undecided, and, surprisingly, so are many international trade experts. Historically, free trade policies have not necessarily always encouraged economic growth: England lost its world economic leadership after it embraced free trade doctrines in the nineteenth century; while, also in the last century, the United States and Germany, both sheltered behind protectionist tariffs, surpassed Great Britain; finally, in this century, Japan created the world’s second largest economy by employing protectionist and mercantilist policies. The European economist Paul Bairoch has written that the historical data suggests that economic growth leads to international trade, but that the converse relationship that trade always leads to economic growth has not been empirically substantiated. Confirming this surprising thesis, Rodrik has shown that there is only a weak statistical correlation between economic growth and degrees of trade “openness,” with the critical factor being the presence of complimentary policies and institutions. The world is still hotly debating globalization, whether it has the specific consent of the trading nations using the internationalist trade policies favored by Rodrik, Daly, and Gray or the more sweeping measures favored by most global trade advocates, which includes President Clinton, Wall Street and most multinational firms.

The sly old folk saying tells us that “Money has no conscience.” But globalization and the free mobility of capital suggests that many multinational corporations, in their relentless search for markets and profits, often after having virtually severed their relationships with the societies that have nurtured them, may very well act as if they had no obligations to anyone other than their own corporate interests. This critical possibility represents the conundrum of the world’s uncertain march toward global capitalism: globalization will surely result in economic gains for many and losses for others; but regrettably, globalization also implies the weakening of the capacity of nation states to shape their own economic destinies, and confers those powers instead to the leaders of the global marketplace. Today, most critics of globalization are routinely dismissed by the facile use of the “x-word”—xenophobia. But that only begs the question. Can we, as citizens, simply trust that our powerful transnational corporations will actually deliver prosperity for us, or will they merely enrich their owners and managers, by pursuing larger markets, higher profits, and lower costs?

At this writing, most reform proposals are concentrated on changing many of the practices of international trade beginning with regulating capital flows between nations, and reforming the scope of the World Bank and the International Monetary Fund, with suggestions for the latter ranging from abolition (Milton Friedman), change (Martin Feldstein), to a new global central bank (Jeffrey Garten and George Soros). Currently, 13 of the 15 countries in the European Union have left-center coalitions that strongly believe in governing markets; these nations have recently tended to oppose American plans for world free capital markets; the Europeans have also insisted on greater influence in the I.M.F. The Asian nations have also expressed their reservations. The future of globalization, or at least its American form, which is based upon the free flow of goods and capital with scant regulation, is now very much in doubt. Instead, as John Gray has gloomily argued, the central economic paradox of our time may be that globalization does not strengthen global laissez-faire; rather, it works to undermine global capitalism by weakening the supporting social institutions that allow free markets to flourish. And as Geoffrey Hodgson has suggested, modern capitalism need not necessarily exist only in the extreme free market form sought by the globalists; instead it could evolve into a plurality of viable forms differing in property management, regulatory activity, and types of markets with varying institutional parameters.

REFERENCESBairoch, Paul, Economics and World History (Chicago: University of Chicago Press, 1993).Barro, Robert J., Determinants of Economic Growth (Cambridge, MA: MIT Press, 1997).Barro, Robert J., Getting It Right (Cambridge, MA: MIT Press, 1996).Daly, Herman E., “The Perils of Free Trade,” Scientific American, November 1993, 50-57.Daly, Herman E., “Globalization and National Defense,” World Watch, November/December 1998, 7.Freeman, Richard B., “Are Your Wages Set in Beijing?”, Journal of Economic Perspectives, Summer 1995, 15-32.Gray, John, False Dawn (New York: The New Press, 1998).Gray, John, “Not for the First Time, the World Sours on Free Markets,” The Nation, October 19, 1998, 17-18.Hodgson, Geoffrey M., Economics and Utopia (London: Routledge, 1999).Krugman, Paul, “The Return of Depression Economics,” Foreign Affairs, January/February 1999, 56-74.Polanyi, Karl, The Great Transformation (Boston, MA: Beacon Press, 1944).Rodrik, Dani, Has Globalization Gone Too Far? (Washington, D.C.: Institute for International Economics, 1997).Rodrik, Dani, “Symposium on Globalization in Perspective: An Introduction,” Journal of Economic Perspectives, Fall 1998, 3-8.Rodrik, Dani, “The Global Fix,” The New Republic, November 2, 1998, 17-19.Summers, Lawrence H., “Reflections on Managing Global Integration,” Journal of Economic Perspectives, Spring 1999, 3-18.

James W. Thomson is at Thomson Investments, an investment management firm in Bellevue, Washington.

From Business and Society Review, Volume 104, Number 4, Winter 1999, pp. 397-405. © 1999 by Bentley College on behalf of the Center for Business Ethics. Reprinted by permission of Blackwell Publishers, Ltd.