Grading globalization: trade up, but…

by Simon Rosenblum

For more than the past 25 years, economic globalization has taken off like wildfire. A “mid-term” assessment of its successes and failures is important for anyone interested in appropriate global economic governance.

Let me acknowledge at the outset that I am not a professional economist. Thirty-six years ago, after completing a liberal economics undergraduate degree,
I entered an economics graduate program and immediately was confronted with the orthodoxy of mainstream university economics. Within a week I had my fill and switched over to another social science. That said, I have maintained a lifelong interest in economic theory and practice and have equal suspicions of the radical alternative to neo-liberalism. Economics, I have increasingly found, is best examined on a practical case-by-case results-based basis.

 There have been two diametrically opposed views of what the prospects were for economic globalization. The first was that of orthodox economics and, based on the law of comparative economic advantage, it foresaw a ‘win-win’ outcome where one and all benefits. The contrary view came from the anti-globalization movement which predicted a dismal ‘race to the bottom’ future for everyone because, in a corporate-dominated global economy, wages and social benefits would be continually reduced as businesses and governments worldwide fiercely compete to win market share.

So who was right? As we will see in this brief overview, neither side was particularly good in its forecasting. This is especially true of anti-globalization ideologues as the international
economy is on course for its fastest-ever decade of growth in GDP per capita, which has been running along at an annual rate of 3.2 per cent since 2000. Led by China and India, we have seen a big decline in the proportion of people from developing economies living in extreme poverty. It is interesting to note that when America and England were industrializing in the 19th century, they took 50 years to double their real incomes per capita; today China is doing that in nine years!

It seems clear that substantially increased international trade has been a major contributor to the success of those emerging economies that have enjoyed success. Indeed, the share of world exports for emerging economies has jumped to 43 per cent from 20 per cent in 1970. Driven by vigorous economic growth in China and other Asian countries, many developing economies have enjoyed a boom in their commodities trade. Globalization is not a zero-sum game; the success of developing countries has not come at any substantial expense of more developed economies.

Before waving the free trade banners, please keep in mind that the link between trade and economic growth does not necessarily mean that there is a significant direct link between tariff reductions and economic growth. A number of successful emerging economies have, at least in the early stages, combined increases in international trade with tariff protections.

The free trade proponents – who not surprisingly can be as ideological as the anti-globalization crowd – have indeed a good deal to crow about but with some very serious qualifications. In no particular order let’s look at a few:

–  Free trade remains asymmetrical in that access to agricultural and textile markets in developed economies remains highly restrictive to developing nations due to both tariffs and subsidies. With the recent collapse of the WTO Doha Round, the so-called development round, this is likely to remain the case for some time and the economic consequences for many developing economies is considerable.

–  A number of prestigious mainstream economists have challenged whether free flows of capital (as opposed to goods) and laissez-faire setting of currency parities actually optimize economic outcomes. Rampant speculation on short-term capital has led to unnecessary economic instability in quite a few developing nations. Free capital movement has, of course, been one of the cornerstones of the neo-liberal Washington Consensus as practised especially by the International Monetary Fund.

–  As Harvard development economist Dani Rodrik has noted, “the rules for admission into the world economy not only reflect little awareness of development priorities, they are often completely unrelated to sensible economic principles.” As noted above, many of the most successful developing economies – the Asian tigers China and India – made their launches without following rigid neo-liberal rules. It is important for the WTO, IMF and World Bank to have a better appreciation of this and act accordingly.

–  Wages in developed countries have fallen back to their lowest share of national income in decades and the profits share soared accordingly. This probably should not be a great surprise given the large increase in the ratio of global labour to global capital. Nevertheless, those who have previously noted that wages over time rise at the pace of productivity (myself included) have had their views challenged. The stagnation in wages, though by no means a race to the bottom, is very real.

Interestingly, the last point was highlighted in a recent special report on the world economy in The Economist magazine’s mid-September issue. The Economist is very much a neo-liberal publication but a thoughtful one. It concluded that as a result of the wage problem “more controversially, governments may need to redistribute the benefits of globalization more fairly, through the tax and benefits system.” This is most interesting because the anti-globalization movement would have us believe that countries seeking to redistribute the benefits with high taxes would price themselves out of the global marketplace. Fortunately, there is very little truth in this; the Scandinavian nations in particular have shown us that it is quite feasible to have a successful progressive adaptation to globalization.

Nation states and global economic institutions have much to chew on with these mid-term globalization results. The time for adjustments begins now.