EEB 09.07 - Globalization


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EEB 09.07 - Globalization

  1. 1. Published byVol. XLVII No. 9ECONOMIC AMERICAN INSTITUTEEDUCATION forBULLETIN ECONOMIC RESEARCHSeptember 2007 Great Barrington, Massachusetts 01230 Globalization by Anna J. Schwartz* Globalization is not a new phenomenon, nor is opposition to it. The world has experienced sev- eral eras of expansion of global trade, flows of capital, and labor migration. Each era has aroused opposition from workers and others who blame globalization for a variety of economic, social, and environmental problems. Their response, historically and currently, has been to demand more restric- tions and regulation of trade, labor, and capital markets. Two recent proposals seek to counter these anti-globalization forces. Globalization is a term that has come into gen- the fifteenth century of great explorations, and theeral use to refer to trade in goods and services and second, the late nineteenth century age of integra-flows of labor and capital among countries, with the tion that World War I ended. The current episodeimplication that the process is worldwide. In fact, may be dated from 1950 on. I first discuss what isthere is a long way to go before globalization is fully distinctive about each of them. I then note forcesin place. Other terms for the same phenomenon are that opposed each era of globalization and, for theglobal openness, global economic integration, and current era, I report two proposals to counter anti-global economic interdependence. globalization forces. A broad definition of the phenomenon holds The Age of Great Explorationsthat it has been going on for thousands of years,ever since a road was built between two regions, Before the voyages of Columbus, Vasco daor a shipping lane connected them. The Roman Gama, and others, trade linked Europeans livingEmpire has been cited as an example of economic along the Mediterranean, the Atlantic, and the Baltic.integration of widely separated regions, unified by The transoceanic explorations by the new breed oftransport and a common language, legal system, and adventurers like Cortés and Pizarro expanded con-currency. My definition is narrower, limiting it to tacts to completely alien worlds. The long voyages,two historical episodes, one beginning at the end of made possible by improvements in ship navigation, sail design, and the compass, stimulated the growth of international trade in directions previously un-*Anna J. Schwartz is a Research Associate at the National Bu-reau of Economic Research, an adjunct professor of economics known. Because of the high costs and risks bothat the Graduate School of the City University of New York, and outbound and inbound, trade was limited to highthe author of numerous publications, including, as co-author value commodities such as tobacco, spices, coffeewith the late Milton Friedman, A Monetary History of the United beans, tea, sugar, silk, and precious metals. TradingStates, 1867-1960, one of the most influential economics booksof the 20th century. She was a guest speaker at AIER’s Summer companies that the British and Dutch establishedFellowship Program this year. as monopolies soon took control of the trade that 1
  2. 2. brought them great wealth. Martin Luther, at the external debts they incurred to obtain foreignheight of the Protestant Reformation, condemned capital. It was available only when denominated inthe sinfulness of indulging in the newly available currencies of capital-rich countries. Many nationalcommodities that drained money from the nation to central banks were also created, ostensibly to man-make foreign lands rich. On this view, foreign trade age the gold standard, but in fact to channel capitalis a zero-sum game, and the wealth of those who to politically desirable recipients. Thus French loansare enriched by commercial activity is illegitimate. to Russia gave that country preferential access toThese negative responses foretell events of our own French markets.time, namely, that economic integration arouses op- By 1913 the world was highly integrated eco-position. nomically. Markets became interconnected thanks Colonization by the French, Spanish, and British to improved communication. National markets werefollowing the explorations abroad, required some created by the reduced costs of new forms of trans-migration of labor, but predominantly the migrations portation, including the opening of the Suez Canal.between 1600 and 1790 were coerced slaves and Steamships replaced ships with sails and barges.contracted indentured labor. International capital Railroads replaced wagons. Tariffs and trade barriersflows were basically precious metals. did little to interfere with trade. Above all, people Negative consequences included price inflation moved by rail and ship, often undertaking long un-produced by inflows of gold and silver, which in comfortable journeys, to countries promising greaterturn paid for military ventures that disturbed the job opportunities and higher standards of living, aspeace. well as religious freedom. It has been estimated that 36 million people left The Age of Integration Before World War I Europe between 1871 and 1915. The immigrants I turn now to economic integration during the contributed to economic growth in the countriesmid-nineteenth century to 1913. The worldwide they moved to by building cities and transport sys-growth of trade far exceeded past increases. The tems that the capital inflows financed. At the samebelief in the advantage of trade for economic growth time, the countries losing population benefitedwas widespread. Goods of wider variety became from the outflow of low-productivity individuals,available. Countries with more developed financial and experienced renewal, as happened in Irelandsystems tended to conduct more foreign trade and and be better integrated with other economies. Finan- Economist Brinley Thomas believed that cyclicalcial reforms were deemed necessary when the status recessions in Britain correlated with cyclical ex-quo threatened disruptions to global trade. Trade pansions in the United States, promoting emigra-monopolies created by government in the past were tion from Britain that strengthened the Americanweakened by competition. economy and increased the demand for British Two features of the nineteenth-century world exports, helping its economy to revive. The returnwere the role played by the gold standard from the on capital, land, and labor was equalized. It has been1870s on and that of the central banks. Before the estimated that 70 percent of real wage convergence1870s only Britain and Portugal were adherents. during this period resulted from the integration ofWhen unified Germany adopted the gold standard, labor markets through migration, and 30 percentother countries followed suit, in the belief that adher- from international trade. Prices of many commodi-ence signified that their monetary and fiscal policies ties also converged globally.were sound and therefore would win them access to Capital moved freely between nations and con-the world capital market. Capital-rich countries all tinents. International integration, measured by netadhered to the gold standard, whereas capital-poor capital movements in relation to Gross Nationalcountries often tried to abide by gold standard rules Produce (GNP), was much greater by 1913 than itbut their efforts were defeated by periodic panics, is in today’s globalized world. Between 1870 andfinancial crises, and defaults, associated with the 1890, Argentina imported capital equivalent to 18.7 2
  3. 3. percent of national income. In the 1990s, it was 2.2 Another response to trade and financial crises inpercent. The difference in capital exports is even countries of mass immigration and in some advancedmore striking. Britain in 1913 exported capital countries was to restrict the movement of people.amounting to 7 percent of its national income. No In the 1890s, Australia began its “white Australia”country since 1945 has come close to matching that policy. Americans claimed new immigrants werefigure. taking the jobs of skilled native workers. In 1897 A similar comparison holds for international Congress debated a reading test for immigrants. Intrade. In 1913 British exports were about 30 per- 1907, a commission sought a way to restrict newcent of national income, and Germany’s were 20 immigrants coming only for economic reasons andpercent. These levels were not surpassed until the for a short time. In Canada farmers protested against1980s or the 1970s, respectively. Another way of “the scum of Continental Europe; we do not wantmeasuring integration is the extent to which the men and women who have behind them a thousandstandardization of products proceeded before 1913 years of ignorance, superstition, anarchy, filth andacross countries. immorality.” In Germany, inflows of foreign labor Free-trade treaties between countries, it was be- were vigorously controlled after 1887.lieved, fostered peace. Instead, a global economy Attempts to regulate and control capital marketsand international society produced nationalism, in in the nineteenth century occurred even as capitalresponse to a perception of an external threat. Its flowed freely, even if not smoothly, from mid-cen-primary goal was national defense. Modern states, tury on. There were waves of British capital: in thehowever, offered social defense as well. At the same 1820s to new South American republics (halted intime that states became open to international trade, 1825, when a default happened), then a wave tothe belief arose that it was the duty of the state to North America in the 1830s, followed by a newprotect those threatened by foreign goods. Tariffs in wave of lending to South America in the 1850s andthe later nineteenth century, particularly grain tariffs, 1860s, then another to the post-Civil War Unitedwere described not as social but as national defense. States that collapsed in 1873. Lending to build rail-Higher food prices for the consumer were said to roads resumed in the 1880s, until a crisis in justified if food protection increased cultivated For political reasons particular bond issues wereareas, raising the defense capacity of the state in either supported or blocked, but long-term capitallonger struggles against others. A social variant of movements were relatively unregulated. Short-this argument was that an effective army depended term capital movements, because of their effectson rural recruits, so farmers were the chief support on money and hence prices, were less welcome.of military as well as social order. World War I and Its Aftermath Europe adopted protective tariffs as a responseto lower freight rates and falling grain prices in The guns of August 1914 shattered the worldthe 1870s. The price declines affected land prices of international integration. When the war ended,and thus the political power of an agrarian society. people were nostalgic for the lost pre-war world.Agrarians built coalitions to protect their interests, They sought to restore it through international in-and incidentally altered the function of the state stitutions. The new League of Nations promotedas one that provides security for victims of global financial stabilization, and the Bank for Interna-events, in particular, trade protection. In 1887, tional Settlements coordinated central bank activi-Britain enacted the Merchandise Marks Acts in ties. Trade negotiations, no longer bilateral, wereresponse to protests against competition by Ger- conducted within a framework of large internationalman producers of consumer goods. The legislation conferences under the League’s auspices. Problemsrequired imports to be stamped with their country of of the 1920s overwhelmed the drive for integration.origin, and was copied by other countries. Protests The decline in raw materials prices, in part owingwere fueled by the labeling. Germans retorted to to wartime extension of areas of production, inBritish trade envy. part owing to misguided commodity stabilization 3
  4. 4. schemes, made difficulties for capital-importing trade in legal, financial, medical, and engineeringcountries. Lower food prices, however, benefited services has also expanded. In addition, the locationindustrial countries. Trade restrictions were adopted of world manufacturing capacity has changed. Inin response to economic problems, of which the U.S. the nineteenth century, advanced countries exportedSmoot-Hawley tariff is the prime exhibit. In addi- manufactured goods, and less developed countriestion, the international political situation was poi- exported commodities. Nowadays, the share ofsoned by conflict over war debts and reparations. world manufacturing capacity keeps growing in The attempts to find new means to achieve inte- less developed countries.gration failed, destroyed by the Great Depression of The current era began with widespread use ofthe 1930s. Economic nationalism and protectionism controls on capital movements that gradually de-emerged. Autarky and war preparations were the clined, first in advanced countries. The supply oforder of the times. Globalization ended. capital expanded greatly as hedge funds, pension funds, college endowments, mutual funds, and in- The Current Era dividual investors became participants in the world The process of globalization resumed after World capital market. Net capital flows in the nineteenthWar II ended. Technological developments again century era were higher than in the current era, butinfluenced the process. Cheap air travel, new ship- gross capital flows currently are higher. Capitalping techniques such as air freight fleets and con- flows today aren’t limited to railroad bonds andtainerization, enhanced telephone communication, government securities, as they were in the nineteenththe digital computer, and the rise of the Internet all century; they now include varied debt instruments,changed the way the world works. Political changes equities, derivatives, and claims on many privatealso contributed to the restoration of international and public sector borrowers. Foreign direct invest-trade and the monetary system. Liberalization of ment as a share of world output currently is muchinternational trade in goods and services has pro- greater than it was in the past. A striking differenceceeded by fits and starts. Integration of the more from the nineteenth century era is that back then theadvanced industrialized economies is far ahead of British trade surplus was used to export capital toconditions in less developed nations. less developed countries. In the current era, the U.S. As mentioned earlier, decades passed after 1945 trade deficit is financed by capital exports from lessbefore trade as a share of global output equaled that developed countries.of the era of globalization before World War I. Re- Capital account liberalization enabled bankscently, however, the scale of growth in exports has and corporations, as well as developing countries,vastly exceeded the 1913 peak. Merchandise exports to fund themselves offshore. Capital movements,are now over 20 percent of global output, versus however, revealed weaknesses in domestic financialonly 8 percent in 1913. The pace at which people of systems. The fear that the benefits of free trade willChina, India, and the former Soviet republics have be destroyed by monetary disorder is a powerfulbeen integrated into the world economy is unprec- goad to prevent financial crises.edented. Trade in the current era is distinguished by The third pillar of globalization, along with tradethe prevalence of trade between industrial countries and capital, is migration. In the post-World War IIwith similar resource endowments producing similar period, immigration policies that the receivingtypes of manufactured goods. Comparative advan- countries introduced earlier in the century initiallytage doesn’t drive this trade. Multinational firms controlled inflows. The policies changed in theengage in this cross-country trade for reasons of 1960s in the United States, Canada, Australia, andeconomies of scale. The products and services New Zealand, shifting from quotas that favoredtraded internationally in the current era are more northeast Europe immigrants. Immigration to thesevaried than ever. To save on costs, components of countries rose gradually to one million per annum ina product may be produced in different countries the 1990s. The absolute numbers are similar to im-and assembled in another country. International migration a century earlier, but, relative to the pres- 4
  5. 5. ent population of the receiving countries, are much Joseph Stiglitz is the author of a book, Globalizationsmaller. In the United States, the foreign-born were and its Discontents.15 percent of the population in 1910, 4.7 percent in Responses to Anti-Globalization Views1970, increasing to 10 percent in 2000, thanks to thegrowing postwar immigration. Illegal immigration Dr. Stiglitz has just published a new book,has risen as demand for visas has exceeded the sup- Making Globalization Work, with a more positiveply the receiving countries make available. message than in his earlier work. His remedies to make globalization more equitable are freer trade, Why is There Opposition to Globalization? eliminating loopholes for rich countries and corpo- Having reviewed past and current eras of glo- rate lobbies, curtailing intellectual property rights,balization, I need to discuss why opposition to the changing GDP accounting to factor in resourceprocess has arisen in the past and in our own day. depletion and ecological damage, more transparency The protests in our own day have been violent, in international finance to curb corruption, and debtdirected against meetings of the international trade forgiveness by foolhardy creditors for low-incomeand financial organizations. In November 1999, a country borrowers. He writes, “It seemed terriblyministerial meeting in Seattle of the World Trade unfair that in a world of richness and plenty, so manyOrganization was disrupted by street riots by citi- should live in such poverty.”zens of mainly wealthy countries. They demanded Dr. Stiglitz prescribes that after developingthat the trade talks introduce environmental and countries get their “fair share,” they must use “thelabor standards in trade negotiations. Developing money well.” So they will need non-kleptocraticcountries regard these conditions as forms of pro- governments, uncensored media, enforced propertytectionism harmful to their interests. The chaotic rights, and the rule of law. In support of his prefer-scene in Seattle became a protest against American ence for regulation over market solutions, he citesinfluence, exemplified by the international spread Japan and South Korea as examples of successfulof McDonalds. management of an economic boom. Other evidence The 2000 meetings of the IMF and World Bank in contradicts Stiglitz’s view.Washington, D.C. again provoked street rioters com- Another version of how globalization can beplaining about the injustices of the global economy increased has been offered by Gordon Brown, thethat have made the world more unequal, and permit- new British Prime Minister. Previously he was theted monopoly multinationals to rule trade. Chancellor of the Exchequer, and he was also the It is not only global trade that arouses protest. chairman of the International Monetary and FinanceThe volume and volatility of capital movements, it Committee at the annual meeting of the IMF andis contended, destabilize emerging economies rather World Bank in Singapore in 2006.than promote their development. Controlling capital These annual meetings have attracted protestsmovements, rather than liberalizing them, was the by dissidents demonstrating against trade, environ-solution favored by critics. mental and economic policies of the capital rich A backlash against the international order, both countries. The meetings in 1999 and 2000 nearlyagainst goods markets and international migration, were shut down by violence. In recent years thehas also been identified. The proposed solutions protests have been more peaceful. The IMF andare more trade protection and control of immigra- World Bank have tried to mollify angry protestorstion. by inviting groups to their meetings. For the 2006 It is not only ordinary people who express their meeting, about 500 representatives from more thandisapproval of the workings of the global economy 45 countries were accredited. However, much to theby street riots. Respected economists also are among embarrassment of the World Bank, Singapore policevociferous objectors. Kevin O’Rourke and Jeffrey barred representatives of several such groups at theirWilliamson argue that each era of globalization has meeting with leaders of poor countries. Singaporeplanted the seeds of self-destruction. Nobel Laureate acted out of fear of violence. The IMF and World 5
  6. 6. Bank urged the Singapore government to reverse support for its farmers. Brazil should go beyond itsthe decision to bar individuals who had been ac- pledge to reduce its tariffs on industrial goods to acredited, and eventually some were allowed to at- maximum of 50 percent. India should respond bytend. But Singapore has a low tolerance for political lowering barriers to service imports.protests and unruly behavior, and public protests In the developing world, transport costs in thewere largely banned. form of cargo shipping rates can be ten times the Let me turn to the proposals Gordon Brown has costs of tariffs as barriers to trade. Brown hopesmade, at the Singapore meeting and since then, to to increase support from the United Kingdom, theimprove prospects for globalization. United States, Japan, and Europe to do more to im- He proposes championing the benefits of free prove the infrastructure for trade in the developingtrade by reviving the stalled Doha round of world world, demonstrating that by complementing opentrade talks, which were supposed to achieve reduc- flexible markets and free open trade, globalizationtions in agricultural subsidies in developed countries can be made fairer to developing countries. Invest-that would open their markets to agricultural exports ment in infrastructure there, education, and equip-of less developed countries. Developed-country ping unskilled workers and poor ones will also beconcessions would be balanced by the opening of in services and manufactured goods in less Brown says that the greatest damage to globaliza-developed countries. The chief barrier to a success- tion today has not been inflicted by the demonstra-ful Doha round was developed-country agriculture. tions and running protests that have marked tradeThe failure of the Doha round in July 2006 has negotiations in past years, but is self-inflicted by theencouraged anti-free trade and anti-Americanism failure of the world’s wealthiest countries to agreesentiments. Brown believes pro-trade leaders need to trade defend more globalization, not less, as the best Conclusionroute out of poverty for poor countries, not the iso-lationist route. The world has experienced several eras of expan- World trade has grown at six percent a year since sion of global trade, flows of capital, and migration1975, and is the main source of the three percent of workers to countries promising job opportunitiesannual rate of world economic growth since then. and improved living standards. Each era has pro-Further trade liberalization could lift 95 million voked opposition as workers blamed cheap importspeople out of extreme poverty. The key players in for destroying the competitive strength of domesticthe Doha round are the United States, Europe, India, firms that employed them; as workers blamed for-and Brazil. Each of them should be pressured to eign-born immigrants for lowering wages of andreverse the collapse of the trade talks. Europe must taking jobs from the native-born; and critics blameddo better than its initial offer of a 39 percent cut in capital imports for creating booms that ended withagricultural tariffs, and even the 51 percent recently a bust when foreign owners capriciously withdrewproposed. The United States must do better than the their capital. The question that time will answer is,proposed 53 percent cut in trade-distorting domestic will today’s anti-globalization forces prevail? Economic Education Bulletin (ISSN 0424-2769) (USPS 167-360) is published once a month at Great Barrington, Massachusetts, by American Institute for Economic Research, a scientific and educational organization with no stockholders, chartered under Chapter 180 of the General Laws of Massachusetts. Periodical postage paid at Great Barrington, Massachusetts. Printed in the United States of America. Subscription: $25 per year. POSTMASTER: Send address changes to Economic Education Bulletin, American Institute for Economic Research, Great Barrington, Massachusetts 01230. 6