The Myths, Risks, and Benefits of Globalization

NEWS & VIEWS: What are the basic features of globalization?

It’s probably one of the most misunderstood terms around. To some people it holds pernicious and frightening connotations, and to others it conjures up images of the promised land. To some it risks nothing less than the Marxist vision of armies of surplus labor and class warfare, while to others it promises the David Ricardo vision of comparative advantage where everyone benefits. So the most basic

What we do know is that the effects of globalization are terribly uneven and produce big winners and losers. And so the exaggerated claims that globalization is a universal, unequivocal good distorts both reality and policy decisions that are made.

feature of globalization is confusion and conflict over what it means. This said, globalization entails first the integration of trade through the removal of trade barriers. A second feature would clearly be the vastly increased mobility of capital, again through the removal of barriers. A third feature would be the speed of technological change and diffusion both as a cause and a consequence of the above two factors. A fourth feature involves a generalized rise in global consumerism, spurred by the power of information and communication technologies that are now penetrating small towns and communities even in quite poor countries. There are other features associated with globalization, but these are among some of the most basic ones that I would list at the outset.

NEWS & VIEWS: What are globalization’s most troubling features, and its most appealing? And how do these compare with its predominant public image?

I think the most troubling feature about globalization is all the hype about it. The lack of serious data that support the claims about the benefits of globalization and the relative absence of serious and nonpolemical questioning is troubling. Now, I am not saying that globalization should be viewed as negative or pernicious, but rather that it needs to be unpackaged and subjected to serious, nonideological scrutiny. What we do know is that the effects of globalization are terribly uneven and produce big winners and losers. And so the exaggerated claims that globalization is a universal, unequivocal good distort both reality and policy decisions that are made. The other troubling feature, as I see it, is that globalization has brought about a real shift in power; the nation-state has weakened, and with this has come a reduction in social accountability. Because globalization is exceedingly potent and complex it requires the kinds of especially strong social innovations suited to the nation-state. It seems to me, therefore, that we urgently need to deepen our understanding of the processes of openness and mobility and of the institutions and innovations that these require if social damage is to be minimized and gains maximized.

NEWS & VIEWS: Specifically, then, which countries are the winners and losers?

Not long ago, the experience of the Asian Tigers was cited as exemplary proof of the benefits of globalization. But as I was saying before, the situation has become much messier and the reality of globalization is far more complex. The positive examples tend to be less individual countries than specific groups within countries: those who possess specialized skills and those who hold or who have the ability to mobilize capital. The line between beneficiaries and losers is now less a matter of one part of the world versus another and more a messy mosaic that cuts across communities and draws new lines within what used to be discrete societies.

NEWS & VIEWS: What sorts of domestic and international mechanisms exist or need to be put in place to protect vulnerable groups as globalization proceeds?

The so-called “Washington consensus” about the management of development held full openness to capital movements as a good thing for all countries, including the most weak and vulnerable economies. As a result of the East Asian crisis, however, there is now a growing, although by no means universal, view that a whole set of institutional arrangements must be developed before countries embrace capital account

Because globalization makes the same goods available everywhere, it is creating a new situation where “process” is becoming more important than “product.”

liberalization. The antecedents may include strong, transparent, and accountable banking systems; policy instruments that help to restrain capital volatility; and possibly caps on certain types of capital flows such as hedge funds. There is also the matter of social safety nets. For most of this decade, the dominant conventional wisdom has championed personal security as the responsibility of the individual. The emphasis has been on people making their own social choices. Here again, East Asia, where public social spending ranged from 5 to 15 percent of national wealth, was held up as a desirable model for all to follow. Well, few are heralding that model today because when the trouble came in Asia, we saw the terrible effects that lack of adequate national safety nets can have on vulnerable groups. So it seems to me that we now need to rethink what the appropriate arrangement is for safety nets and how they are funded.

NEWS & VIEWS: Should anything further be done to protect national economies from the instability caused by the international capital flows resulting from globalization?

I have already mentioned that we are witnessing a significant shift in the conventional wisdom on this subject. One thing that seems obvious to me is that unless we come up with shared international mechanisms that help to moderate capital volatility and the dangers that go with it, nations will come up with their own uncoordinated solutions. The history of a previous move to globalization at the end of the nineteenth century and in the early years of this one shows very high levels of trade integration, financial integration, and mobility of people. It was all turned back before the outbreak of WWI, largely, I believe, because that effort at globalization produced within European states and North America a socially and politically unacceptable gap between rich and poor. Nation-states closed down borders when the costs of global integration were seen to exceed the benefits going to a broad segment of society. My view is that this will happen again if steps aren’t taken at the transnational level to avoid a repetition. One of the principal architects of our current international system for facilitating global economic order was John Maynard Keynes. His vision included the IMF (International Monetary Fund), the World Bank, and the WTO (World Trade Organization). But we never established the kind of global central bank that he envisaged as necessary to deal with capital volatility and to serve as the lender of last resort when the movement of capital created dangerous imbalances. Such a central bank now has new proponents, including the dean of the business school of Yale University and the financier George Soros. It must also be said that the idea of a global central bank was thwarted at the time of the creation of the IMF and World Bank by the same kind of strong opposition that exists now.

It seems to me that debate on this issue will become a major international battleground over the next few years.

NEWS & VIEWS: What can be done at the international and local levels to promote the benefits of globalization as broadly as possible?

Promoting the benefits requires mechanisms to prevent the excesses. So the first thing is to remove the defects of the international system along the lines I’ve been indicating. Other things include addressing what is called “the fallacy of composition,” which means giving the same advice to everyone. We’ve got to stop thinking that there’s a single universal solution that promotes the benefits of globalization to all people, in all locales, and at all times. There needs to be much more in the way of disaggregated, carefully constructed strategies geared to the needs and characteristics of individual communities if the benefits are to be widely known. I suspect that we are going to see a revival of a policy instrument that has been scorned over the past decade or so—namely industrial strategy. The broad macroeconomic instruments associated with globalization are likely to be increasingly complemented by industrial strategies that gear investment and comparative advantages to longer-term, more carefully constructed assessments of markets.

NEWS & VIEWS: Finally, what are the changing demands in agriculture as a result of globalization?

There are many things that are changing. I’ll give you two that are illustrative but by no means exclusive. First, because globalization makes the same goods available everywhere, it is creating a new situation where “process” is becoming more important than “product.” For agriculture the questions increasingly are: Were pesticides used? Were insecticides used? Was the product organically grown? Also labor issues, such as working conditions and the use of child labor, are increasingly important as a consequence of globalization. Thus, process issues are coming to the fore in the agricultural value chain as markets integrate. The second issue has to do with the proprietary nature of products. Much of our agricultural production today depends on the genius of science, including genetic breeding. The ownership of genetically modified products is a much more crucial issue as a consequence of globalization. Increasingly, agriculture has become a multibillion dollar global industry, and the stakes that go with intellectual property rights have exploded as a result. Not surprisingly, new agricultural technologies, including seed varieties, are being defined increasingly as matters of private ownership and corporate gain than as public goods. The issue of who has ownership and how far ownership extends will, I believe, define much of the international agricultural debate well into the next century.

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