It is almost an article of faith among those who attend the World Economic Forum in Davos, Switzerland that "(the) problem today is not that there is too much globalisation, but that there is far too little".
They would also agree with the argument of a recent Financial Times column ("Globalization's future is the big long-term question", 9 January 2007) that the biggest economic threat to continually widening prosperity is a "protectionist" backlash in the high-income countries, slowing the pace of "globalisation" (understood as the further integration of markets in goods, services and capital). A protectionist policy shift may be driven by those in the working and middle classes who perceive - incorrectly - that "globalisation" is the cause of their income stagnation over the past decade.
Both the quotations above are from Martin Wolf. The first is from his book Why Globalization Works (2004), intended as a wake-up call against rising protectionist sentiment, especially in the United States. He describes its "central message" thus: "Social democrats, classical liberals and democratic conservatives should unite to preserve and improve the liberal global economy against the enemies mustering both outside and inside the gates."
Robert Wade is professor of political economy at the London School of Economics. He worked as a World Bank economist in the 1980s. He is the author of Governing the Market: Economic Theory and the Role of Government in East Asias Industrialization (Princeton University Press, 1990) and of Is globalization reducing poverty and inequality?, in John Ravenhill, ed., Global Political Economy ( Oxford University Press, 2005)
Also by Robert Wade in openDemocracy:
Inequality of world incomes: what should be done?
(14 November 2001)
"The invisible hand of the American empire"
(13 March 2003)
"Inequality of world incomes: what should be done?"
(14 November 2001)
"The invisible hand of the American empire" (13 March 2003)
US benefit, global risk
The underlying, widely shared, presumption is that trade has overwhelmingly benign effects. It leads the official development agencies and the bulk of economic commentators to fall over backwards to deny that trade can have less than desirable effects. It is almost as though belief in free trade is the marker between those who understand economics and those who don't.
The believers tend to identify exogenous threats to free trade - mounted by people labelled "protectionists" (the "ists" implying a belief system centred on protection) - as the explanation of first resort for undesirable economic outcomes (see the discussion of Wolf's Financial Times column, at www.ft.com/wolfforum, where the participants mostly agree with his identification of protectionism as the big threat to widening prosperity).
Taking a less faith-based approach, I nonetheless agree that there is some truth to the argument that rising protection in the high-income countries, especially the United States, could be a serious threat to world economic growth. The core reason is that the growth of the world economy since the mid-1970s has been fuelled by the growth of US current-account deficits. If a rise in protection in the US caused a substantial fall in the US current-account deficit, this would shrink global liquidity, and probably cause a rise in "excess capacity" (shortfall in demand); the cumulative result could be to precipitate a global recession or depression.
But I part company with Wolf (and Davos) in my assessment of the desirability of the global economic architecture which underpins the argument that the growth of the world economy over the past thirty years has been fuelled by growing US current-account deficits. I acknowledge the upside benefits of the post-Bretton-Woods architecture; but I also see the system - one with a national currency (the US dollar) operating as the main international currency, no supply-side limit on the creation of US dollars, floating exchange rates between the major currencies, and free private capital movement across borders - as containing serious downside risks.
Here I want to show how the "post-Bretton-Woods architecture" (including the neo-liberalism which sanctions it), has had a distinctly mixed record in terms of widely shared economic growth and economic stability, but a remarkably successful record as a class project to redistribute income upwards - remarkably successful, that is, for those (including the attendees at Davos) on the winning side.
It is true that the post-Bretton-Woods architecture has been very good for the US - in sustaining high levels of consumption and fairly high levels of investment, and enabling the US to shift the costs of its wars (like the invasion of Iraq) onto Asians and Europeans. It has also been good for China, for the US's propensity to import more than it exports - mostly with Asia - has enabled China to grow much faster than otherwise, and for hundreds of millions of Chinese to become vastly richer (if, after all, the US had run current-account balances, economic growth in the rest of the world, including China, would have been much slower).
The cracks in the edifice
But there are three at least major downsides. First, the system tends to generate high levels of financial fragility, followed by instability. The rapid growth of US deficits fuels the rapid growth of international exchange reserves (because the growth of reserves in the surplus countries is not countered by falls in US reserves, since the US can simply print the money with which to pay for the deficits). Rapid growth of international reserves tends to blow out rotating credit bubbles, as one country after another experiences a sharp run up in asset prices (properties, equities, works of art), followed by a crash.
Among the examples are: the Japanese bubble of the 1980s, followed by decade-long recession; the east Asian bubble of the 1990s, followed by the severe crash of 1997-99; the blowback into the US asset bubble of the late 1990s, followed by the stock-market crash (the Nasdaq fell by 70% between 1999 and 2002) and the recession of the early 2000s. There have also been many other bubbles and crashes in a "musical-chairs" sequence around "emerging markets" over the 1990s and 2000s (the frequency of financial crisis, especially in "emerging markets", was much higher in 1980-2005 than in 1945-1970).
Second, the system has not produced higher world growth than in the Bretton Woods era (of fixed exchange rates, a dollar-gold link, and publicly-controlled international capital movements). The growth rate of world Gross Domestic Product (GDP) per capita fell by almost half between 1960-78 and 1979-2000, from 2.7% to 1.5% (see Branko Milanovic, Worlds Apart: Measuring International and Global Inequality, ). From 1980 to 1998, a majority of the world's countries (56%) experienced a level of GDP growth that was less than population growth. Martin Wolf presents a table which shows the sharp slowdown in growth of GDP per head between 1950-73 and 1973-98 in every one of the world's seven regions except "Asia (excluding Japan)". Strangely, he makes no comment on the generalised slowdown or its significance for his argument that "globalisation works".
For the OECD as a whole, and for the US, Europe, and Japan separately, the rate of growth per head fell in each of the last five decades (1960-73, 1973-79, 1979-90, and 1990-04). The fall in 1990-04 is especially telling, because by this time the 1980s policies of squeezing inflation, deregulating, privatising, liberalising trade and capital movements had worked themselves through into macroeconomic stabilisation and free markets; yet the promised upturn in economic growth did not appear.
Since 2000, the growth rate of world output has risen to 2.3% for 2001-03 and higher for 2003-06. Some commentators say the rise is a long-delayed pay-off from twenty-five years of liberalisation and will continue for long into the future ("the end of history"). The rise may also be a cyclical swing from a long period of low growth. Most likely it is an unsustainable boom propelled by the American consumer drawing on Japanese, German and Chinese trade surpluses, and the wealth created by asset bubbles in equities and then housing.
The third downside is that a majority of developing countries has experienced little or no growth in average incomes over the past quarter century. Sub-Saharan Africa's economic performance has been dire; its average real income today is below the level of twenty years ago, despite most states having implemented Washington consensus-type structural-adjustment programmes for many years.
Latin America's economic performance has been poor; its average income is about the same as in the mid-1980s, notwithstanding its generally diligent adoption of Washington consensus-style policies. Eastern Europe's has also been very poor.
By contrast, south Asia's has improved since the 1990s from a very low base. China's has excelled through the 1980s and 1990s, also from a very low starting-point. The rest of east and southeast Asia (apart from Japan) has grown fast from a higher base, the severe crisis of 1997-99 excepted.
If the regional averages are weighted by regional population, the result is a "1:3:2" world:
- roughly 1 billion people in the high-income countries
- 3 billion people in countries where growth rates have been and remain substantially faster than in the high-income countries over the past two decades (though they both started from and remained at very low income levels)
- 2 billion people - some living in middle-income countries, others in low-income - where growth rates have been lower than in the high-income countries.
The large majority of developing countries are in the non-catch-up category. Less than 10% of developing countries (containing more than 1 million people) sustained real GDP per-capita growth of even 3% or more from 1960 to 2000.
The brutal fact is that after decades of self-conscious development and market liberalisation, the average income for the south is still only around 15% of that of the north in purchasing-power-parity (PPP) terms, and more like 5% in foreign-exchange-rate terms. Also, growth in the south is typically much more erratic than in a typical developed country, with periods of relatively fast growth followed by deeper and longer recessions.
Another way to see the same trends is to turn the question around, and ask not about relative growth rates but about who receives the growth. Of the increase in world consumption over the 1990s, a majority accrued to those already in the top 10% of world income distribution, the fast growth of countries with 3 billion people notwithstanding.
Between 1993 and 2001 some 50%-60% of the increase in world consumption accrued to those living on more than $10,000 (PPP) in 1993, around 10% of the world's population; of this 10%, four-fifths lived in the high-income countries and most of the rest in Latin America. The remaining 40%-50% of the increase in world consumption accrued mostly to those living in 1993 on around $3,000-$6,000 (PPP), of whom the majority were in the burgeoning middle class of China. Hardly any of the increase accrued to those on less than $1,000 (PPP) a year ($2.73 a day). Most of the latter lived in South Asia, Africa, and China (see Peter Edward, "Examining inequality: Who really benefits from global growth?", World Development, 34/10, 2006).
No surprise then that the north is receiving an influx of legal and illegal immigrants as communications improve, for the quickest way for the average southerner to multiply their consumption many times is to hop across a border into the north. There are many borders to choose from.
A new architecture
In short, the Matthew effect is (still) operating with vengeance ("To him that hath shall be given, to him that hath not shall not be given"). There is a deep irony here, related to the impact of the post-Bretton-Woods architecture on the lives of the poor.
This architecture, and its associated neo-liberalism, presents itself as an emancipatory project, as the vehicle by which humanity may be liberated from closed communities and dependence on patron-client ties, and thus able to form communities of autonomous, self-reliant individuals capable of behaving morally towards each other.
I am sure that this emancipatory effect is real, and that probably billions of people have benefited materially from it (just as Adam Smith and Karl Marx would have predicted).
Yet for all the positive effects, the material benefits for poor people have probably been much less than is generally thought; for example, the fall in the number of people in extreme poverty is probably much less than the official World Bank numbers suggest (see Robert Wade, "Is globalization reducing poverty and inequality?", World Development, 32/4, 2004). Untold millions of people have been made worse off through dispossession of land and other assets in order to make way for "development" (see David Harvey, The New Imperialism, ).
Moreover, and in even sharper contradiction with the ostensible aims of the emancipation project, the system has generated a strong concentration of income and wealth at the very top of the pyramid, much stronger than is revealed by the figures given earlier.
In most countries for which we have data, after-tax income distribution has become much more unequal since about 1980. There, the top 1% of income earners has received a rapidly growing and hugely disproportional share of national income. All over the world - from New York and London to Beijing, Mumbai, and Lagos - a small section of the population is gathering vast personal fortunes. At the same time, the surge in income concentration at the top has gone with falls in social mobility in many countries.
The standard liberal escape-clause, "today's inequalities are undercut by tomorrow's social mobility", cannot therefore apply. It is illustrative here that the two OECD countries where neo-liberal norms have been most institutionalised - in the name of expanding market opportunities for all - have the lowest rates of social mobility, together with the highest (or almost highest) after-tax inequality. They are the United States and the United Kingdom.
In short, the post-Bretton-Woods architecture (and the doctrine of neo-liberalism that has accompanied it) has a mixed record on its central ostensible aim of emancipation and prosperity. It has a much clearer record of success on its much more concealed aim as a class project: to redistribute income upwards to the very top percentiles of the population and consolidate political power in the hands of the wealthiest sliver of society.
The tension between the two projects was well captured by Tony Blair in the run-up to the British general election of 2001. The British prime minister, asked if it was acceptable for the gap between rich and poor to widen, twisted and turned, dodged and weaved, and eventually spluttered: "I know it's not your question but it is the way I choose to answer it. If you end up going after those people who are the most wealthy in society, what you actually end up doing is in fact not even helping those at the bottom end" (see Stewart Lansley, Rich Britain, ).
Karl Marx said: "What the bourgeoisie produces, above all, are its own gravediggers". Only at times of serious social crisis do elites - including those at Davos - tend to become interested in structural changes which would weaken their superordinate position, precisely to ward off the fate Marx had in mind (think of the circumstances of the New Deal in the 1930s United States).The current wave of anxiety about climate change may be in part the global elite's displacement of worries that their galloping share of world income will provoke retribution. Those of us who have no appetite for social crisis should be working up alternative theories to neo-liberalism and practical ways to modify the post-Bretton-Woods architecture, so that the working of market forces within a modified framework would produce more equitable results.
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