Globalization, for Better or Worse?

Greater Caution in the Wake of Hard-Earned Experience

VATICAN CITY, MAY 10, 2003 ( Globalization needs to be guided and regulated for the benefit of the entire human family, John Paul II recommended to participants in a recent meeting organized by the Pontifical Academy for Social Sciences.

Opinions continue to be divided on the theme of globalization, but among many there is a shift from the hard-line pro and contra positions that often characterized the debate. Even the International Monetary Fund is acknowledging the risks associated with opening markets, the Financial Times noted March 18.

A study co-written by IMF chief economist Ken Rogoff admitted that opening up financial markets does not guarantee poor countries will be able to catch up to rich nations. “If financial integration has a positive effect on growth, there is as yet no clear and robust empirical proof that the effect is quantitatively significant,” the study said. In fact, liberalization could make output and consumption in poor economies more volatile because of their dependence on fickle international investors, it said.

“It is more evidence that the Fund is taking a much more nuanced view,” Morris Goldstein, a senior fellow at the Institute for International Economics in Washington, D.C., told the Financial Times.

Open markets, but with care

In a March 14 text prepared for parliamentarians from economies in process of transition, the director of external relations for the IMF, Thomas Dawson, acknowledged that proponents of globalization say that it has boosted immensely the quality of life in many parts of the world. However, he added, critics argue that the world’s poorest do not share in its benefits, claiming that free trade favors rich countries while volatile capital markets hurt developing nations.

Dawson said that a World Bank study published in 2001 on the relation between free trade and economic growth revealed that countries pursuing an open trade policy grew at a higher rate than non-globalizing economies. He asked: “Is it trade that led to the superior growth performance of the globalizers?”

“We can’t be absolutely sure,” was his reply. The problem is that countries that opened up to trade often carried out a number of domestic policy changes at the same time. Consequently, it is very difficult to establish the precise role that trade played in helping growth. At the very least, the study makes it difficult for the anti-globalizers to claim that more trade leads to lower growth, he argued.

But it is not enough just to open up markets, cautioned Dawson. “The emerging consensus view — including that of the IMF — is that developing countries need to have a set of preconditions in place to benefit from financial globalization and to avoid an increased probability of a currency or banking crisis.”

Among these preconditions is the need to give priority to long-term investment over short-term capital flows in the initial phase. There may even be a case for imposing or retaining some capital controls. Another important requirement is careful regulation of banks and other institutions in the financial sector.

Poverty, inequality and growth

Surjit Bhalla’s recent book “Imagine There’s No Country” defends the benefits of globalization. Bhalla, a New Delhi, India-based academic and managing director of an advisory firm, argues that globalization has reduced inequality and that the “globalization period has been the golden age of development.”

But Bhalla also notes that there have been marked regional divergences. Globalization has been extraordinarily beneficial for Asian countries, which account for two-thirds of the developing world’s population. Average income for Asians has risen fourfold since 1960, an annual increase of 3.7%, compared with the 2.3% rate for industrialized nations.

By contrast, after almost doubling per capita income from 1960 to 1980, Latin American economies barely maintained their level during the next 20 years. Africa did worse, with a 12% decline in per capita incomes for the 1980-2000 period.

On the question of inequality, Bhalla observes that many academics and organizations conclude that the last two decades of the 20th century saw a growing divergence in incomes, with an increasing in inequality accompanying the faster economic growth.

He dedicates a number of chapters to show that the inequality is not as bad as some depict it. One important factor that many do not give sufficient weight to, he argues, is the notable improvement in the economic situation of China and India. Sustained growth in these two countries has lifted many people out of poverty. It is true that the average poor person is still a long way from the level of rich people, but income growth rates for the poor are higher than those of the rich.

Patronizing complacency

A less optimistic view of globalization is taken by John Plender, editorial writer and columnist for the Financial Times. His 2003 book, “Going Off the Rails: Global Capital and the Crisis of Legitimacy,” argues that globalization’s advocates have “shown a patronizing complacency in downplaying the problems of free capital flows.”

The Washington consensus — shorthand for the position that emphasizes financial deregulation, budgetary discipline, free trade and investment and market-oriented policies — has its roots in 19th-century liberalism, explains Plender. This was reinforced by the opening of international capital markets in recent years. But, adds Plender, the dotcom bubble and accounting scandals have demonstrated the pitfalls of an unregulated system.

Plender does not deny the benefits of globalization. He notes that it has “enormous potential to improve living standards in both the developed and the developing worlds.” Nevertheless, the opening of markets has also often resulted in greater instability and painful adjustments, highlighted in the 1997 Asian financial crisis, he says.

Even so, flexibility has its advantages, he points out, noting how the United States has dealt more successfully with recent financial strains, compared to the more inflexible economic systems of Germany and Japan.

Not an all-or-nothing package

Another recent, and more optimistic, contribution to the globalization debate is from Philippe Legrain, an economics journalist. In his book “Open World: The Truth About Globalization,” he warns that we need to beware of attributing all the world’s evils to globalization. The wretched poverty of many subsistence farmers is hardly due to global markets, he notes, since they don’t trade.

Moreover, he argues that we should not ignore how many poor countries have benefited from the opening of markets. The value of China’s exports, for example, has grown by an average of 15% a year for the last 20 years.

We need, therefore, to move ahead from simplistic positions about globalization and focus our attention on what kind of globalization we want, states Legrain. It’s not an all-or-nothing package: Each country can adapt it according to local needs.

Among the measures Legrain recommends is a lowering of agricultural subsidies by richer countries, and allowing more imports in general from developing regions. Well-off countries also have an obligation to increase aid to developing nations. And governments should do more to help people out who will suffer from the economic transitions associated with globalization.

The Pope, in his May 2 speech to the Rome meeting participants, called for “guidelines that will place globalization firmly at the service of authentic human development.” He also noted that globalization in itself is not the problem.

“Rather,” he said, “difficulties arise from the lack of effective mechanisms for giving it proper direction. Globalization needs to be inserted into the larger context of a political and economic program that seeks the authentic progress of all mankind.” Economic commentators are increasingly in agreement with the Pope.

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