The Globalization Gamble

What can developed countries do to prevent the radicalization of developing countries?

October 5, 2001

What can developed countries do to prevent the radicalization of developing countries?

The global system rewards — and penalizes — its participants by economic criteria. But, for the public, these criteria are far too esoteric to evoke loyalties and commitments. In a crisis, the population will turn to its political leaders to ease the impact of the economic penalties.

This is all the more true because even periods of expansion take their toll on parts of the population. That is why in most countries — and especially in the developing world — there exists a near permanent minority ever waiting in the wings to act out the validity of its resentments.

To achieve global competitiveness, political leaders in developing countries are obliged to use up political capital by restructuring their economies, eliminating waste and reducing overhead. This frequently implies massive dislocations and unemployment — all for the sake of long-range benefits not demonstrable at the moment sacrifices are being demanded. Such an equation is often anathema to political or economic leaders if the promised benefits will arrive only long after they have themselves left the scene.

The massive changes in the structures and procedures of most of the societies participating in globalization are strongly encouraged, and frequently insisted upon as a condition of assistance, by the U.S. government — as well as by leading international financial and economic institutions. Yet, the advocates of the new gospel often seem oblivious to the historical record, which shows that the practices of reform took many decades to evolve in their own countries.

Adopting the American model is not primarily a technical challenge. For most developing countries, it implies nothing less than a revolutionary upheaval in familiar patterns. Only a very few nations have ever managed to combine conservative fiscal and monetary policy, government intervention through regulation (rather than through ownership or control), deregulation of financial institutions, encouragement of flexible labor markets and a widely accepted and transparent legal framework.

The American model presupposes that capital is relatively cheap and labor is relatively expensive. Competitive success in the end depends on improvements in productivity sustained by constant technological progress. Comparative advantage is achieved by reducing the labor content of most productive processes to the greatest extent possible.

The American experience demonstrates that, when all these factors combine, early dislocations will be justified by dramatic improvements in the standard of living. During the 1990s, the United States — almost alone in the world — solved the problem of how to create jobs while revolutionizing its industrial technology.

But the experience of most other countries has also shown that it is not easy to make the American model work rapidly. Continental Europe is still struggling with major domestic obstacles to the necessary structural reforms (especially in the labor market and agriculture) — though it now seems well launched on the process of adjustment.

Ten years after the defeat of Communism, Russia — despite all Western exhortations and many billions of dollars in aid — is no closer to a normally functioning market economy than it is to democratic institutions.

China’s rate of growth is extraordinary, but it has been achieved at the price of giving governmental stability priority over democratic reform. Even in countries with a less inhibiting past — in Southeast Asia and Latin America, for example — globalization has proceeded in fits and starts.

All developing countries have faced the challenge that industrialization, by drawing people from the countryside to the cities, brings with it — the weakening of traditional political and social support systems. The urban working and lower middle class becomes a fertile recruiting ground for radical politics or religious fundamentalism.

This phenomenon was familiar even before globalization. It contributed to the emergence of Marxism in the 19th century — and to the Iranian revolution in the 20th. Even when material conditions of the poor and lower middle classes improve in absolute terms, the migrants become increasingly conscious of the gap between rich and poor. The early stages of modernization magnify these gaps — and television and other media bring them graphically into the homes and consciousness of nearly everyone.

Political and economic indices therefore frequently slip out of phase with one another. Even when the aggregate economic data indicate growth, benefits may not reach the urban population sufficiently rapidly — or on a large enough scale — to remove the sense of rootlessness and dependence at the core of contemporary unease.

Of course, these phenomena are not entirely novel. Displacement by technology has probably occurred since the invention of the shovel. And migrations have taken place in every economic revolution. What is unique in our age is the scale of the global impact and the rate of technological change.

The challenge of humanizing the process is, therefore, unprecedented.