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WHY GLOBALIZATION WORKS

IN DEFENSE OF GLOBALIZATION

By Jagdish Bhagwati

Oxford University Press, $28, 320 pp

By RICHARD N. COOPER

Globalization is a buzzword that has no precise definition. It takes on many meanings, drawing both fervent support and fervent opposition. Indeed, the term is so imprecise that it is possible to be simultaneously for and against globalization.

In Defense of Globalization focuses on its economic dimension, defined by Jagdish Bhagwati as "diverse forms of international integration such as foreign trade, multinational direct foreign investment, movements of "short-term' portfolio funds, technological diffusion, and cross-border migration." His main thesis is that economic globalization is an unambiguously good thing, with a few downsides that thought and effort can mitigate. His secondary thesis is that globalization does not need to be given a "human face"; it already has one.

His conclusion: that the world, particularly its poorest regions, needs more globalization, not less.

Bhagwati was born in India and has settled in the United States. He was educated in those two countries and at Oxford and is now professor of economics at Columbia University. He maintains strong and active ties with his country of origin (where his brother was chief justice of the High Court) and with his adopted country (where his daughter is in the Marine Corps).

Bhagwati divides critics of globalization into two basic categories. The first is made up of incorrigible enemies of market capitalism, constitutionally antiestablishment and not open to serious argument. The second consists of well-meaning but ill-informed critics. Bhagwati addresses his book to the latter group _ and takes their charges seriously.

To the claim that globalization increases poverty, Bhagwati's response is, Rubbish. As a young economist at the Indian Planning Commission 40 years ago, he observed that redistributing wealth is not an effective way to reduce poverty; far more effective is to create more wealth. And engagement with the rest of the world facilitates growth. During the three decades that Bhagwati's India was a relatively closed economy, for example, the economy grew at 4 percent a year, and the poverty rate hovered around 55 percent. But in the two decades since it opened its economy to foreign trade and investment, economic growth averaged 5 percent; by 2000, the poverty rate had fallen to 26 percent. China's experience was similar: With liberalization came spectacular growth, and poverty declined from 28 to 9 percent between 1978 and 1998. Although India and China provide the most dramatic examples, the rule applies more broadly: Openness brings growth, which reduces poverty.

Critics also charge that globalization brings a flood of cheap imports into developed countries, thus reducing the relative wages of unskilled workers who are suddenly forced to compete with inexpensive labor in the developing world. There is some weak theoretical validity to this claim, but the empirical evidence is ambiguous. For example, during the 1980s and 1990s, the price of clothing rose relative to the price of other manufactured goods despite an increase in imports from low-wage countries. In the United States, the wages of unskilled workers did decline, but much academic research suggests that only a fraction of this drop (perhaps 10 percent) was attributable to an influx of cheap imports. Bhagwati suggests that even this figure may be too high. Since globalization delivers new capital and technology to developing countries, it may actually raise wages and shift production away from labor-intensive goods.

Bhagwati is less keen on the free movement of capital across national borders. He attributes the financial meltdowns of the 1990s to a "Wall Street-Treasury Complex" that pressured developing countries to liberalize capital flows. His discussion of financial crises, however, is uncharacteristically sloppy and naive. Although Washington did fight for capital liberalization (and misguidedly continues to do so in bilateral trade negotiations), other countries can resist if it goes against their interests (as both Singapore and Chile did successfully).

There was also tremendous variation among the countries that suffered crises, which Bhagwati's simplistic account overlooks. Indonesia had accepted the free movement of capital more than 20 years prior to its financial meltdown. Thailand and South Korea accepted only limited capital liberalization in the early 1990s and carried it out in ways that clearly invited trouble. Brazil and Russia maintained some capital controls throughout (although not on foreign purchases of government securities), but such measures offered little protection. And Malaysia's much-touted restrictions on foreign capital flight were not introduced until a year after the crisis broke and thus do not explain that country's shallower recession, as critics of capital liberalization often claim.

A look at history reveals that financial crises are not unique to the 1990s. In the 19th century, long before the U.S. Treasury and the International Monetary Fund became influential on the international stage, rapidly growing countries _ the United Kingdom, France and the United States _ experienced financial crises at least once a decade. Successful industrialists and financiers, caught up in the euphoria of growth and unimpeded by regulation, drove a dramatic boom-and-bust cycle. That pattern has repeated again and again and seems to be an inherent part of development. If there is any lesson here, it is that governments should learn more from the unpleasant experiences of other countries in other times.

Spouting facile criticism of globalization is easy, especially when unconstrained by fact, and so is refuting it. Bhagwati's defense of globalization is persuasive. He is less successful, however, in his attempt to offer feasible policy alternatives that are likely to improve on existing arrangements. He suggests that the World Bank finance adjustment assistance with respect to trade liberalization in developing countries, showing no awareness that the World Bank must borrow most of its funds in capital markets at market interest rates (and hence must be repaid by its borrowers) or that adjustment assistance has worked poorly in the United States. He suggests a retroactive tax on carbon dioxide emissions over the past century, the proceeds of which would go to help developing countries reduce their own greenhouse gas emissions. He recommends that multinational corporations operating in developing countries follow the same labor and environmental standards as they do at home, without acknowledging that such advice may contradict local law and could discourage some multinationals from expanding to developing countries, thus denying them the many benefits, well expounded by Bhagwati, that foreign companies can bring.

Overall, however, Bhagwati combines the hard-nosed perspective of a liberal on trade and investment with the soft-hearted sensitivities of a social democrat on poverty and human welfare. He thus has an admirable ability to address patiently and sympathetically globalization's well-meaning but wrongheaded critics. This book offers a cogent, erudite and, indeed, enjoyable discussion of economic globalization and its discontents.

Richard N. Cooper is Maurits C. Boas Professor of International Economics at Harvard University. He is co-editor of What the Future Holds: Insights from Social Science. This is an excerpt from an article that appears in the January/February issue of Foreign Affairs.

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