News
October 1
One of the unfortunate consequences of the process of "globalization" _ the increase in information, trade, investment, culture flows _ has been the proportional increase of "globaloney" _ nonsensical or nonfactual analysis of the world and its inhabitants that passes for intellectualism. Tufts Daily readers were served a hearty helping of it in yesterday's paper, courtesy of the column loU.S.A.(Viewpoints, 9/30.02).
The piece had a lot in common with other globaloney (if you're still hungry for more, read The Case against the Global Economy by Ralph Nader and others or The Development Dictionary, edited by Wolfgang Sachs). It used very little actual evidence and a whole lot of rhetoric and anecdote to make arguments that seem convincing but under inspection hold little water.
I made my own version of a globaloney sob story. Here goes; I hope you like it. It's a story about country X, a country that I actually lived in for a while when I was younger. Like so many other countries more developed countries have rampaged through, country X began as a colony. After two hard-fought and costly wars to gain its independence, the country found itself wounded, burned, and indebted. In fact, throughout its "development" and even today, foreigners have owned much of the country. This has produced periodic xenophobic backlash among the population.
After World War II, Europe extracted unbalanced trade concessions out of Country X. As a result, country X ended up with large trade deficits, which now amount to nearly $1,000 per person annually. Speculation on its currency, again from Europe, brought price and exchange rate instability in the 1970s. But instead of using government to fix the problem, country X only privatized and deregulated more, to the delirious glee of international investors.
The result has been disaster. Country X now finds itself with less than half as much of a share of world GDP as it had after World War II. Unemployment is once again on the rise. The trade deficit shows no sign of letting up, even as country X's currency has depreciated significantly.
Who is Country X? Country X, as you should all know by now, is the United States. Everything I said is true, I just wrapped in some globaloney. I blamed everything on nameless "international investors" (the "gnomes of Zurich"), generally tried to give business and developed countries a bad name, and managed to slip in a little colonialism. But of course, my analysis was flat-out wrong. Capital and trade flows, free labor markets, and a relatively unregulated economy (along with political stability and incredible natural resources) are what have made the US an economic juggernaut.
The IMF and the World Bank push liberalization and privatization on developing countries because free market capitalism based on property rights is so overwhelmingly the most successful economic system that it would be irresponsible to suggest anything else. All others have been spectacular failures. Communism is essentially dead. European socialism is looking as sclerotic as ever, with unemployment climbing ever-higher. The nationalistic import substitution policies have produced only disappointment (ok, well maybe some graft and corruption, too).
If openness to foreign investment and trade were an impediment to growth, as Esparza suggests ("it can have disastrous effects"), then Canada would have to be the poorest country in the world. A large part of Canada's capital is owned by Americans and British. Yet Canada, not despite but because of these investments, is one of the richest countries in the world.
Of the several serious studies I've seen, most conclude that more "globalized" countries grow faster; the rest conclude that there is no significant effect. I have read no serious study that concludes that increased trade and investment with the outside world is a drag on growth. It is undoubtedly the case that more economic freedom and property rights domestically lead to higher growth. The success of market reforms in the last two decades in India and China show how powerful the force of capitalism can be.
It would be irresponsible not to include conditionality for IMF and World Bank loans. Yesterday's column hit on this, stating "Some [countries] are in debt because international financial institutions lent money to their country when the political system was undemocratic. In these cases, the political leader would take out a loan, keep the money, and leave the country in debt." This is actually pretty funny.
Not only are most countries that apply for IMF and World Bank loans still very undemocratic, but democracies are not particularly good at curbing corruption either.
Giving these countries money as grants (as was suggested towards the end of Esparza's column) only makes the problem worse because it allows inefficient governments to stay in power longer, or even worse, give them an incentive to cause economic crises because it would mean getting IMF funds. Reforms are politically difficult because they disrupt inefficient, but entrenched, economic organizations. This may be the bankruptcy of a large firm that is uncompetitive in international markets, or a small farmer selling his land to a larger farmer or corporation.
Development is a dynamic process, and dynamism involves dislocation. Governments are usually unwilling to incur the political costs of dislocation for a long-run benefit. In order to avoid throwing good money after bad, conditionality needs to be attached to loans.
There has been much ado about labor standards in developing countries, particularly in factories owned by MNCs (multi-national corporations). What's important to remember is that the comparison should not be between labor standards in the US and in India (or any other LDC), but between Indian-owned factories and US-owned factories in India. Out of all I have read, they seem to be about the same or maybe a little bit better in the US owned factories.
Economics is the art of the feasible. We cannot expect India to have US labor standards tomorrow. This argument reminds me of Marie Antoinette, the famous queen of King Louis XVI of France. With the entire Parisian population in bread riots at the dawn of the French revolution, the Madame declared, bewildered and confused, "let them eat cake."
But Parisians cannot have cake, what they really want is for the land and agricultural markets to be freed up so that prices on grain will come down. The same is true in developing countries. If you have been following trade negotiations recently, LDCs consider labor and environmental standards hidden protectionism and encroachment on their internal politics. And they have good points on both counts.
LDCs need low wages and standards in order to compete. But even though these wages and standards are low in Western terms, they are high in LDC terms. Imposing Western wages in LDCs without near the productivity would result in massive unemployment. Furthermore, MNCs don't just invest where the wages and standards are the lowest. MNCs invest in growing LDCs, where productivity and political stability is high, and the investment environment is good. Nobody invests in Somalia, even though I am sure wages and standards are plenty low there.
Many LDCs are growing using their comparative advantages in labor-intensive industries, where they can compete with the big industrial powers. This has been true of much of the export-led growth in Southeast Asia. Economists have repeatedly used logic and empirical evidence to debunk silly arguments like the "let them eat cake" argument. Marie Antoinette died by virtue of a guillotine only a short while after uttering her infamous statement. But the "let them eat cake" argument has proved somewhat of a hydra. For as many times as economists decapitate it with intellectual guillotines, it seems to sprout still more mouths to disseminate globaloney.
As Jairam Remesh, the Indian Congress Party's top economic adviser, said, "I just spent a week in Germany and had to listen to all these people there telling me how globalization is destroying India and adding to poverty, and I just said to them, `Look, if you want to argue about ideology, we can do that, but on the level of facts, you're just wrong.' (quoted in "Globalization, Alive and Well" by Tom Friedman in The New York Times, 9/22/02)"
Moreover, all this growth has not been as a result of foreign aid, which has dried up over the last few years and was always fairly ineffective anyway, but because of "morally impoverished" individuals and corporations, who while pursuing their own self-interest have given rise to incredible progress in economic growth. The hidden piece, then, of the international economic puzzle is not a fifth column but the "invisible hand", guiding economies towards greater efficiency.
There is no doubt that yesterday's column was right in that there is room for reform. The WTO convened in Doha, Qatar, last year, to address many of these issues. First, industrialized countries should lower their tariffs on goods that many LDCs produce _ more specifically, agricultural goods and textiles.
Also, intellectual property rights should be respected internationally and equally. Small communities in LDCs should be able to patent their local medicines before an MNC comes and steals it. LDCs need to increase the protection of property rights in their countries, especially for the poor. Small farmers should be able to sell their land, but they should not be forced off it, as has happened often in Brazil and India. Some studies (Hernando de Soto's The Mystery of Capital) have shown that limitations on property rights have a huge effect of economic efficiency.
These issues are of huge importance to America and the rest of the world. I am pleased and proud that so many people of my generation are interested in these issues. But they warrant a real inspection and analysis. I know it is really easy to hop on a bus and go rally against the suits for a weekend in Washington because you heard that the IMF does bad stuff and it seems like a cool thing to do, but it is also really very irresponsible.
As a citizen, it is your responsibility to form an opinion of your own based on real evidence and logic. Go looking for more information. A good place to start would be the IMF and World Bank's own websites. Contrary to what was indicated in the loUSA column, both institutions are very transparent and put all their research on their website. You can also ask them questions through the website. Amartya Sen (Development As Freedom), Paul Krugman ("In Praise of Cheap Labor", available on his website), and Jagdish Bhagwati have written great things on development and free trade. Dani Rodrik and Joseph Stiglitz have been opposed to IMF and World Bank policy, and have written some good critique using solid economic analysis. So read up a little bit. Then you'll start eating globaloney for lunch.
