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A Globalization Balance Sheet

How do countries benefit from an economy open to trade and a mindset open to the free exchange of ideas?

January 7, 2003

How do countries benefit from an economy open to trade and a mindset open to the free exchange of ideas?

In some ways it is quite surprising that globalization lately has become such a god — or a devil. After all, it is hardly a new phenomenon.

Consider the sweep of human history. Did Islam become the dominant religion from Senegal in Africa to Mindanao in the Philippines in an era before globalization?

How did paper, gunpowder and spaghetti arrive in Europe from China? Was the Atlantic trade of the 17th century — which brought slaves to the Americas, agricultural goods to Europe and some manufactures to Africa — something that developed before globalization?

And before we conclude that globalization has been an unmitigated disaster for Africa, we might inquire how maize, potatoes, Asian rice, bananas and even Zebu cattle came to be the staple of so many Africans' lives.

How did a common language family take root from Bengal in India to Iceland in Europe, from Vladivostok to Lisbon?

Of course, all of these reflect trade patterns, migration and the introduction of exotic ideas. They have sometimes enriched and sometimes disrupted every region of the world. There are few things more natural to humans than globalization.

Needless to say, when demonstrators take to the streets of Seattle or Genoa, they are not raging against the 14th century introduction of pasta to Italy — or the 18th century sale of ceramics from China to Eastern Africa.

They are enraged by modern globalization: the introduction of McDonalds to Italy — or the production of sports shoes in Thailand.

Economists generally agree that there have been two waves of modern globalization, the first from 1870 to 1913 and the second from 1945 to today. In between, from 1913 to 1945, there were two great wars, a crisis of capitalism — and the rise and fall of fascism.

Economists also agree that globalization is driven by two forces: first, developments in technology and second, developments in policy. In technology, modern globalization has been spurred by the rapid decline in the cost of communication and transport.

In communication, the greatest single breakthrough was probably the telegraph, followed closely by the telephone, satellite relays, the internet, the mobile telephone and email.

As a result of these inventions, communication around the world has been transformed from something that cost hundreds of dollars and took hundreds of days to an instantaneous process that can be almost free.

Television and movies have similarly made the spread of cultural influences much cheaper than ever before.

In transportation, the steam engine, then the diesel engine, the railroad, shipping, highway transport and the airplane, as well as refrigeration and containerization, have all driven down the price of delivering goods and people. This has occurred to the point that distance hardly matters for much of the world's population.

But technical change does not make globalization inevitable. Between 1913 and 1945 — a period of shrinking trade, shrinking migration and the drive for economic self-sufficiency — technology was not forgotten or lost.

It was government policy that changed: protectionism, capital controls — and barriers to human migration spread from country to country.

In the post World War II period, the capitalist world took measures that we hope will prevent another such retreat from international cooperation.

The Bretton Woods institutions — the World Bank and the IMF — and the United Nations, as well as the GATT and now the WTO, all were created to ensure cooperative outcomes, in which all parties benefit, rather than combat in which all parties lose.

In the view of the great majority of economists, these institutions have been successful. World trade has grown faster than world output almost every year. International capital movements have allowed countries with low saving rates to have higher investment rates.

Foreign direct investment also has brought new technology and new management ideas for factories and finance to almost every corner of the world — with spillovers to other businesses.

For me, there are two bottom-line benefits. First, a number of countries — Japan, Korea, Taiwan, China, India, Chile and Mexico among them — have been able to specialize in production of manufactured goods and services for export. That has allowed them to grow much faster than if they depended on domestic demand alone.

More than half the people who lived in desperately poor countries in 1945 now live in prosperous or rapidly growing countries that have managed to use the global marketplace to their great advantage.

Second, on a personal level, I have access to cheaper goods and services, as well as to cuisines and other cultural assets that I never would have without globalization. My life is richer because goods and ideas are exchanged around the world.

Critics of globalization point to its destructive features. New ideas do indeed displace established ideas and beliefs — and new competition threatens existing economic interests. In some cases, these forces can be very destructive.

There is a vigorous debate about whether international trade and capital flows lead to greater inequality. If it does — which I do not believe — that certainly is a cost of globalization.

But even in the best circumstances, some businesses will fail and some cherished beliefs will be toppled in the course of time, whether or not external goods and ideas come to a country.

Technical change alone is a constant source of "creative destruction." It is no accident that many in the anti-globalization movement also fight against technical change, longing for a better life that they invent for the past.

These traumas, including those that result from trade, call for a secure safety net for innocent people hurt by rapid change — not for a policy that tries to stop or reverse change.

Global connections — through trade, financial flows and migration — can be part of the solution to these problems. But they also could become a distraction — or a scapegoat.

Regarding the thorny problem of industrial competitiveness, it is easy to try to stir popular resentment toward foreign countries or foreign firms.

In every country, there are demagogues who try to divert attention from the real problem. Tough economic times can help such a message find listeners.

By the same token, the opposite is also possible — that people use globalization as a deliberate distraction, as if some external connection could solve the economic problems. Greater openness alone is not a magic key that can open the door to prosperity and security.

Participation in multilateral agreements can help assure access to foreign markets — which, in turn, can make it easier for new export industries to grow.

Participation also requires real commitments to policy reform, which will make a country a better trading partner and a better host for new investment — by domestic investors as well as by foreigners.

Beyond this, the exchange of ideas, technology, and other aspects of culture may be the greatest benefit of all, for the rest of the world as well as the country choosing the path to greater openness.

International commitments, like membership in the WTO, can make it a bit easier to undertake enormously difficult policies.

Negotiations to join the WTO can help erect targets for reform, reform that should be undertaken in any case. Membership in international bodies also will strengthen those bodies, which need broad participation.

I have tried to put the backlash against globalization in some historical perspective. One final humbling insight: Despite all of our amazing technological progress, for many vexing problems, the world does not have easy solutions.

The world community offers bad ideas and good ideas. It offers new markets to enter and new competition to face. Any attempt to avoid these challenges — profound as they are for any country — will at best postpone them.

Better to pursue constructive interactions than to look for a solution alone. Globalization can neither explain the world's problems nor offer an easy solution, but constructive interaction is part of the solution.