Why Globalization Works
Part I: Globalization of Market Systems
FUTURECASTS online magazine
Vol. 6, No. 11, 11/1/04.
Introduction to Parts I and II
Globalization and its critics:
The vast benefits of
globalization, and the deplorable ignorance of most of the critics of international
trade, are set forth by Martin Wolf plainly and in detail in "Why
Globalization Works." This book is required reading for anyone with a
serious interest in globalization. Wolf fills it with detailed facts and cogent
analysis, only a small fraction of which can be referred to in this
overly long book review.
In this book, Wolf explains:
Free trade may not by itself be sufficient, but it is still necessary.
The benefits of globalization - so clearly explained by David
Ricardo two centuries ago - are as plain as the economic advantages of the U.S.
federal union over the previous confederation of sovereign states - or the
economic advantages of the European Union over the divided Europe of the first
half of the 20th century. The collapse of the Soviet Union and all other
attempts to administer non-market economies leaves systems of market capitalism
as the only feasible economic systems, and it is axiomatic that the broader the
market, the better the system.
Utopians have been "liberated" from socialist dogmas "to dream, no longer constrained by anything happening in the world."
|Nevertheless, opponents of "liberal capitalism" have proliferated. They make their voices heard and their influence felt. Among them are utopians who have been "liberated" from socialist dogmas "to dream, no longer constrained by anything happening in the world." More weighty are the many vested economic interests seeking shelter from import competition. These include trades unions, farm lobbies and industrial lobbies - particularly the steel and textile industries - "determined to protect their vulnerable economic positions" at the expense of the public interest as a whole. See, Wolf, "Why Globalization Works," Part II, "Criticism of Market System Globalization."
Defining Economic Globalization
The process of "globalization:"
"Globalization," Wolf points out, is not an ideology - although
opponents seek to present it as such. It is "a name for the process of
integration, across frontiers, of liberalizing market economies at a time of
rapidly falling costs of transportation and communications."
Wolf wisely avoids the trap of lumping economic globalization in with other broad categories of globalization. He thus avoids unmanageable breadth of subject. Although there are always natural connections and obvious dependencies between the three, social and political aspects of globalization are very different processes that Wolf leaves largely beyond the scope of this book. He accepts the view of the primacy of economic processes as "the driving force for almost everything else."
Globalization is a process - a "movement in the direction of greater integration, as both natural and manmade barriers to international economic exchange continue to fall."
Several cogent attempts at defining economic
globalization are set forth by Wolf. He concludes that it is a process - a
"movement in the direction of greater integration, as both natural
and manmade barriers to international economic exchange continue to fall."
As a consequence, economic changes in one part of the world have an increasing
"If we want a better world, we need not a different economics, but better politics."
"The policies and capacities of states remain central to any understanding of how economic globalization works."
Market driven globalization is far from perfect in
practice or utopian in theory, Wolf readily concedes. Like democracy,
despite its many
flaws, it is merely by far the best practical alternative. As
such, again like democracy, it is not that difficult to come up with valid
complaints about various aspects of its actual operations. Wolf candidly deals
There are natural limits to economic integration. The costs of
transportation and communication continue to decline, but except for things that
can be dematerialized - essentially, information - they will never come close to
zero. There also will remain cultural obstacles to mobility. The vast majority
of people will continue to work and go to school within a relatively modest
radius of where they live, and they will strongly prefer to live in the culture
with which they are familiar. This would remain true, Wolf asserts, even if all
"policy barriers to movement" were removed.
Capitalist Market Systems
Freedom, property rights, & rule of law:
The history and logical
connections between individual freedom, property rights and rule of law are
reviewed by Wolf.
Only long term investments build prosperity, and these require reasonable safety and a web of abstract paper claims - all dependent on law.
Capitalism is freedom under laws that facilitate commerce.
A civil society of free individuals must be legally, economically and politically empowered by the rule of law established by government.
A free society is an uncomfortable place for established hierarchies of power or opinion. Those who value "the unchanging and the traditional" experience insecurity in free societies.
However, individual freedom is not anarchy. Indeed, they are
polar opposites, since liberty is impossible under conditions of anarchy. The
individual can be truly free only in a system of appropriate laws. He can build
a prosperous life only if he can have confidence in his long-term rights and
commercial arrangements. Markets - such as the Middle Eastern bazaars - are not
enough. Only long term investments build prosperity, and these require
reasonable safety and a web of abstract paper claims - all dependent on law.
But why should governments facilitate
private commerce? Why should they accord their subjects the individual
liberty and protection of private property rights required for prosperity?
Monopolistic governments have historically been anything but beneficent. It is only the pressure of competition that induces governments to facilitate private commerce and empower their civil societies economically, legally and politically.
Competition between political entities provides one answer. For
a variety of geographic and cultural reasons, Europe was politically fragmented
among competing - often warring - political entities. Competition proved as
beneficial a disciplinary force for governments and religions in Europe as for
modern business entities. They needed the support of their peoples and the
resources that could be provided by a flourishing commerce. Where such
competition didn't exist - in China, India, Egypt, and
other once advanced civilizations - monopolistic governments abused their powers
and their peoples languished.
The existence of property rights secure from both private and political seizure is essential for the establishment of securely democratic societies.
While not all market economies are in democracies, all democratic states permit the economic freedom of market economies.
"The market underpins democracy, just as democracy should normally strengthen the market."
Constitutional democracy - political freedom under rule of law - provides
a second answer. A benevolent despotism may be replaced by a despotism that is
not so benevolent. To assure that government powers are suitably constrained,
the various institutions of constitutional democracy and rule of law were
developed in Western Europe and spread slowly about the world.
Moreover, only market economies broadly provide prosperity and
economic growth and the broad contentment that support liberal democracy.
Economic growth produces an educated middle class society from which an
economically, politically and legally empowered civil society emerges to provide
the essential support for both political and economic freedom - for both
democracy and capitalism. The zero growth systems advocated by some
environmentalists would inevitably turn autocratic as factions fought for
benefits at the expense of other factions.
A substantial level of morality provides a third answer.
"Values matter," Wolf affirms.
Liberal democracy and market capitalism:
The most fundamental
role of governments in free societies is to protect the liberties of their
citizens. However, increasingly, they have taken on a redistributionist
function. Their revenues as a percent of GDP have increased in the 20th century
- from about 10% at the beginning of the century to about 40% and sometimes as
high as 50%.
Capitalism is not dependent on territory - as small states such as Singapore and Denmark and Hong Kong prove so decisively.
Wealth based on industry is a "positive-sum game"
Even when unilateral, free trade policies "promote prosperity and peaceful relations with other countries." There is, in fact, a direct correlation - both current and historic - between open markets and prosperity.
However, the great failed - often bloody - 20th century experiments with state socialism proved that "liberal democracy is the only political and economic system capable of generating sustained prosperity and political stability."
Liberal democracy also promotes peaceful international relations.
Capitalism is not dependent on territory - as small states such as Singapore and
Denmark and Hong Kong prove so decisively. Liberal democracies are more reliable
treaty participants. Their treaties become a part of their laws and are
internally enforceable. Their citizens increasingly associate across boundaries
for civic as well as commercial purposes.
Nationalist and collectivist systems seek advantage through
protectionism and imperialism. Such systems - involving trading blocs that seek
advantages by discriminating against outsiders - are "self-fulfilling
prophecies - they create the dog-eat-dog world their proponents believe
Mercantilist policies benefit the politically influential at the expense of the nation as a whole.
The task ahead is, instead, not to halt global economic integration, but to make it work for more people than ever before."
Unfortunately, special interests may profit from actions that
impoverish the rest of the nation. Ruling classes may benefit from plunder and
wars that impoverish the peoples of both the defeated and the victorious nation. Mercantilist
policies benefit the politically influential at the expense of the nation as a
The history and essential characteristics of market
systems is provided by the author. Wolf covers the basics, only a few of
which are included in this review.
| Four important aspects of modern market systems
are highlighted: the
limited liability corporation; innovation and growth; intellectual property; and
the financing mechanisms - all functioning under laws designed to facilitate
commerce. These are essential characteristics of the modern market economy
without which it could not function. Yet, all four are under attack by the
critics of globalization.
The industrial revolution was to a large extent a product of market economics. Industrial progress - a "Promethean revolution" involving the harnessing of fossil fuels - arose as a result of "a new way of organizing economic activities of society as a whole - a sophisticated market economy with secure property rights."
Profit-seeking business people exploit and drive the economic transformation processes of market systems.
The result in market economy nations was massive improvements in
living standards and health at all levels of society. By the 21st century, all
but the most dysfunctional states had received considerable benefits from the
technological advances in the advanced market systems, but market systems had
prospered far more than non-market systems.
A sophisticated array of legal rules and government regulation and customary commercial practice have slowly evolved to facilitate market commerce. These rules of the game are essential to a properly functioning market.
Modern capitalism requires a high degree of ethics so that such functions as borrowing, lending and insuring can be carried out in confidence.
The "magic of the market" delivers a cornucopia of
economic benefits without anybody being in charge. "Self-interest, coordinated
through the markets, motivates people to invent, produce and sell a vast array
of goods, services and assets," just as Adam Smith pointed out.
Wolf notes five problems that a market system must solve to work well.
"High levels of personal probity and honest dealing" are essential for efficient and effective markets.
It is trust in commercial arrangements with strangers that
elevates the modern capitalist society over the bazaar economy. A wide array of
laws, regulations and commercial practices have been developed to assure the
reliability of commercial arrangements, but "high levels of personal
probity and honest dealing" are essential for efficient and effective
Market discipline is a powerful factor in enforcing proper conduct.
The right to fail is a powerful cleansing mechanism for elimination
of the untrustworthy and the incompetent. Government bailouts of failing
companies short-circuit that mechanism.
Without trustworthy conduct, "costs of supervision and control become exorbitant. At the limit, a range of transactions and long-term relationships becomes impossible and society remains impoverished." This applies not just to corporations, but broadly throughout the market system.
Innovation is also driven by market discipline. Innovation
competition even more than price competition drives the market, and producers
must compete or die. Fear of failure even more than hope
of profit drives constant striving for innovation. That is an inherent feature
of competitive market systems. It is "hard-wired" into competitive
There is a direct relationship between the sophistication of financing systems and the prosperity of nations.
Financial intermediation is the "bloodstream" of
modern markets. There is a direct relationship between the sophistication of
financing systems and the prosperity of nations. Financial systems mobilize savings, allocate
capital, monitor managers, and transfer risk to those willing to bear it.
Perfect competition and full information are illusions - not only beyond human capacity but also counterproductive in certain instances. (Fortunately, perfection in these virtues is not essential. A cornucopia of benefits flow from even imperfect competition and any substantial level of transparency.)
Criticism of market-directed capitalism:
Challenges based on inequality,
power and morality are quickly dispatched by Wolf.
Capitalist wealth does provide unequal power and wealth and is
permeated with conflicting interests. However, this is far less so than for political position in pre-capitalist and modern non-market collectivist
alternatives. No corporate plutocrat has as much power as the political leaders
of pre-capitalist and non-market collectivist systems.
Prosperous peoples in capitalist systems routinely engage in a vast array of civic activities and build the civil society that supports both democracy and capitalism itself.
Even the much-maligned self-interestedness of capitalism is mitigated by the prosperity generated by capitalism. Impoverished peoples in non-capitalist states are perforce totally involved in their self-interested efforts of survival. Prosperous peoples in capitalist systems routinely engage in a vast array of civic activities and build the civil society that supports both democracy and capitalism itself. They also engage in a variety of noble causes - and in opposition to the economic system that makes it possible to engage in noble causes.
It was the supposedly benevolent state-socialist economies that created the worst environmental catastrophes.
Capitalist market systems provide the essential basis for political and individual freedom - encourage a wide array of moral virtues - and provide the wherewithal for a vibrant civil society active in cultural and moral activities.
Even environmental criticism misses the mark. It was the supposedly benevolent state-socialist economies that created the worst environmental catastrophes.
Capitalist market systems cannot provide utopian results, Wolf readily concedes. They are as inherently imperfect as the human beings active within them. They are simply by a considerable margin the best economic systems available. They provide the essential basis for political and individual freedom - encourage a wide array of moral virtues - and provide the wherewithal for a vibrant civil society active in cultural and moral activities.
Government Economic Policy
Government facilitation of commerce:
The stupidity of central
planning - so popular in many intellectual circles just a few decades ago -
is easily and irrefutably established by Wolf. (See, "Government
Futurecast," Part II.) Faith in central planning - ("industrial
policy" and socialist alternatives) - was, as Hayek stated, the "fatal
conceit." (See, "Modern Advocacy Scholars"
for some amazing examples of such "fatal conceit.")
Idealized concepts of local systems are equally stupid. The
proponents ignore the limitations of such systems, their hardships, and their
tendency to be dominated by oppressive social hierarchies.
governments have essential roles to play in capitalist market systems. Wolf
demonstrates the importance and extent of the things governments must do and can
do to facilitate competitive, market directed commerce. (See, "Government
Futurecast," Part I.)
The quality of legal systems is another factor for which there is an observable correlation with the economic prosperity of nations.
"Public goods" include protection of persons and
their property, and enforcement of property and commercial rights as well as a
broad array of civil rights. By providing rule of law and an independent
judiciary, the government can also protect people from the predatory
inclinations of government. The quality of legal systems is another factor for
which there is an observable correlation with the economic prosperity of
Internalization of externalities means preservation of the environmental commons.
As the author points out, the roles of government are
pervasive. However, such government activities - although far superior in
advanced nations than in undeveloped nations - are attended by a multitude of
weaknesses, inefficiency and often outright failure. For improving policy making
in these areas, Wolf offers some suggestions concerning credibility -
predictability - transparency and consistency - establishing precise objectives
- working with market incentives - and establishing practical objectives that
recognize the limitations of government instead of chasing ideal but
Inherent weaknesses of government management:
"The mechanism of the state is at least as defective as that of the market," Wolf points out. Indeed, historically, "it has been far more so."
Modern governments have become hugely complex, largely opaque, subject to a wide array of conflicting narrow interests, hobbled by bureaucratic and political imperatives, to mention just a few of the obstacles to effective government.
Today's advanced nations have "the most sophisticated, responsive and law abiding" governments in the history of the world. Nevertheless, they are hugely complex, largely opaque, subject to a wide array of conflicting narrow interests, hobbled by bureaucratic and political imperatives, to mention just a few of the obstacles to effective government.
The results can be horrendous - and almost impossible to remedy. Agricultural policy and much trade policy, environmental policy, energy policy and labour market policy in many advanced nations contain such horror stories.
Yet, there have been clear improvements. Historically, it was much worse - and outside the advanced nations, it is much worse.
The author goes into some detail on the corruption and financial and
management failure experienced by third world governments in recent decades.
"In many countries, it has been easy to find examples of negative
value-added production - enterprises whose inputs were worth more than their
outputs." System wide levels of corruption are especially obstructive for
Special interest influence is always greater in non-market systems, since every divergence from market results opens more inducements and opportunities for corruption.
Privatization and deregulation materially reduce opportunities
for government corruption and simplify government management tasks and
responsibilities. Wolf provides a cogent explanation for this phenomenon. (See,
Shleifer and Vishny, "The Grabbing Hand.")
Advantages of international trade:
of national markets are described by Wolf. These characteristics exist in
great variety for the different nations of the world, and give international
trade its unique nature, and special advantages.
Comparative advantage - the brilliant insight of David Ricardo - assures that all nations can participate in and benefit from international trade, even if there is nothing that they produce that can't be produced more efficiently elsewhere. See, Ricardo, "Principles of Political Economy and Taxation."
There are no examples in the last 50 years of any nation that succeeded in economic development with substantially protectionist trade policies.
There are no examples in the last 50 years of any nation that succeeded in economic development with substantially protectionist trade policies. Nations like India have "destroyed growth and the future of two generations" by closing their markets to trade.
The vast majority of capital flows are within or among the advanced nations. Only a tiny proportion goes to developing nations since the possible high returns remain outweighed by the risks and other disadvantages.
Although clearly beneficial, free trade and capital mobility cannot by themselves equalize global incomes.
However, undeveloped nations suffer from a multitude of
disadvantages. They make finance "expensive, small in size and, worst
of all, unstable."
Governance of trade flows:
Governance is the key to
reaping the benefits of globalization. While perfection is not necessary - and
never even remotely achieved - getting the pertinent governance policies
substantially right is a precondition for international commerce just as it is
for domestic commerce.
Policies that block imports are among the most destructive. Wolf easily dispatches arguments based on:
It is almost always better to deal directly with problems
in the domestic economy than indirectly by obstruction of trade flows.
Poverty stricken peoples remain in hopeless poverty because their governments refuse to open their markets to international commerce, and fail to establish conditions that facilitate domestic commerce and make trade attractive.
Mercantilist practices are based on the view of trade
as conflict, with exports the benefit and imports the cost. The U.S. has
always had a mercantilist mindset, Wolf notes.
History of globalization:
nothing new. The difference for modern globalization is just one of degree.
People have always been engaged in trade,
intermarriage, war, conquest, plunder, and the diffusion of culture, religion,
and technology. Wolf stresses the expansion of political entities to encompass
broadening commercial activities, and the moments of acceleration of these
trends. The industrial revolution was the most recent of these moments.
Since 1945, under U.S. leadership, globalization has been
slowly making up the lost ground. (See, O'Rourke and Williamson, "Globalization and History.")
It accelerated greatly after 1989 with the collapse of the Soviet Union and of
socialism worldwide. Details of these trends are provided by Wolf at some
There has been an obvious correlation between prosperity - the growth of income per person - and the growth rates of trade - both for individual nations and worldwide.
Will globalization and prosperity continue to expand, or will the forces of protectionism again impose restraints sufficient to impoverish peoples world wide? There has been an obvious correlation between prosperity - the growth of income per person - and the growth rates of trade - both for individual nations and worldwide. Nations that do not participate in globalization - that restrain international trade - such as Argentina, Brazil and India - have been markedly less successful and less prosperous.
While opponents of globalization grieve over jobs lost to imports, they ignore the surprisingly large percentage of U.S. merchandise production for export markets. The U.S. manufactures more than ever. It just does it more efficiently, with fewer workers. And, U.S. trade is predominantly with other advanced nations. International financial flows, too, are predominantly between the advanced nations. Even foreign direct investment goes predominantly - by 74% - to advanced nations.
Today, there are significant differences in the character
of capital flows when compared to a century ago. As a result, it is labor
markets that are "certainly the world's most unintegrated," and the
discrepancy in rewards to labor is "the world's biggest economic
Details of the rise and fall and restoration of global
trade during the last two centuries are provided by Wolf. Nineteenth century
globalization was made possible by technological advances in transportation and
communications. It was furthered by policies of liberal trade and sound money
pegged to gold that spread from Great Britain across Europe and thus to the
world. It was supported by a growing middle class that sought peaceful
international relations, the economic benefits of liberal trade, and the
monetary security of the gold standard.
Rising real wages and costly welfare programs "made
it far less attractive to share the benefits of citizenship with
outsiders." Extending the suffrage down the economic ladder provided
political muscle for redistributionist ideologies like trade unionism, welfarism,
socialism and communism. "It made control over immigration inevitable."
Tariffs thereafter rose throughout Europe and the Western
hemisphere. They had been high in the U.S. since just after the Civil War, and
they stayed high.
World War I powerfully reinforced all the illiberal
forces and left the European world awash in debts and financially enfeebled.
Inflation became widespread. Only the U.S., Britain, and to some extent, France,
remained financially stable.
The Smoot-Hawley tariff in the U.S. "was the last
straw." (U.S. tariffs were already higher than those of any other nation
except Spain - and the U.S. was now the world's premier creditor nation.) Tariffs
rose everywhere, and international trade collapsed. "This collapse in trade
was a huge spur to the search for autarky and Lebensraum, most of all for
Germany and Japan." The Great Depression seemed to confirm all the doubts about
However, all that changed with WW-II. U.S.
leadership provided peace treaties that were not vindictive. It provided processes
supporting trade liberalization and currency convertibility. Trade agreements
liberalized world trade between advanced nations, but excluded the labor
intensive goods like clothing and agricultural products that developing nations
depended upon for export earnings. With U.S. support and encouragement, a
process of economic integration was begun in Western Europe. Prosperity
The result of the failures of Keynesian policies and the
subsequent collapse of the Soviet Union and socialist alternatives "was a
reunification of economic policy, as developing countries adopted regimes
similar to those of the advanced countries -- trade liberalization, relaxation
of exchange controls, fiscal stability and low inflation." Developing
countries also increasingly abandoned fixed exchange rates in exchange for
inflation targets and liberalized exchange controls.
The global market works. Globalization has brought widespread prosperity, but remains tragically limited. Wealthy nations unconscionably close their markets to the exports of underdeveloped nations. However, many underdeveloped nations shut themselves off from globalization and condemn their peoples to hopeless poverty. Development succeeds where globalization has been welcomed and implemented.
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