World 3.0

by Pankaj Ghemawat

  These are all explanations of why our biases against foreigners run deep and must be taken into account. But that doesn't mean xenophobia or ethnocentrism is still generally adaptive or useful today. As UCLA anthropologist Dan Fessler explains, “We often respond to today's world with yesterday's adaptations. That's why, for instance, we're more afraid of snakes than cars, even though we're much more likely to die today as a result of an encounter with a car than a reptile.”32 Sociologist William F. Ogburn coined the term cultural lag to help explain such phenomena. Ogburn wrote, “A cultural lag occurs when one of two parts of culture which are correlated changes before or in greater degree than the other part does, thereby causing less adjustment between the two parts than existed previously.”33

  While it is beyond the scope of this chapter to chart the benefits and costs of wariness of foreigners, there are reasons to suspect that the benefits have declined over time and the costs have risen. With today's more integrated disease pools, vaccines, disinfectants, and so on, foreigners no longer pose much of a threat to our health. Barbarians no longer sneak in and loot our encampments during the night, and if thefts do occur we can call the police instead of rounding up a posse. Furthermore, most violent crimes occur between people who know each other, and the most intense conflicts tend to be among those who are close (who have more to fight about) rather than far apart, which casts doubt on whether it really makes sense for trust to decline monotonically with distance. And we have seen the tremendous economic gains we enjoy from international trade and investment (chapter 4), which would be very costly to reverse.

  For all these reasons, it is worth trying to reduce the fear factor. The next section discusses how.

  Toward a More Harmonious World

  By digging deeper into patterns of how trust and fear vary among populations, we can identify drivers that may help allay fear of foreigners. The Eurobarometer survey data, described above, have been mined extensively toward this end.34 One group of scholars has concluded that trust falls as the populations of any two countries grow more different in terms of their languages, religions, genes, body types, geographic distance, and incomes, and if they have a more extensive history of wars.35 The fact that England and France were at war for 198 of the years since 1000 probably helps explain why the United Kingdom trusts France less than any other EU-16 country (8%), and why the French trust the United Kingdom. only marginally more (10% versus an average of 17% for the remaining EU-15).

  Factors like language, religion, and body type, cannot readily be adjusted to improve trust, but others are more flexible. The more pleasant people in country A perceive people in country B to be, the more they trust people in country B. But more news coverage tends to reduce how much people in a given country trust people in another country, probably because of the negative bias in news about overseas.36

  Research has also confirmed that several other factors have the potential to influence the prevalence of cultural chauvinism and related fears. Higher education levels in a country cause levels of nationalism and suspicion of outsiders to decrease; one study found this to be true across the board in ten countries with quite different educational systems.37 The extent to which an individual participates in the network of global economic, social, and cultural relations and of inclusive social identification with the world community seems important as well.38 Traveling and living abroad seem to broaden individuals' perspectives while also improving creativity.39 Finally, scholars have found that security of property rights and the role of law serve as prerequisites for trust to emerge, rather than what they often seem—vital substitutes for trust. Scholars have also emphasized the importance of private and public-private initiatives aimed at building and sustaining public trust, or at least mitigating its absence.40

  Based on these findings, we can identify several concrete steps for reducing the fear factor and smoothing the way toward increased openness under World 3.0. These steps include more education; monitoring of negativism in the media and in political discourse; encouraging more interpersonal contacts across cultures, and ensuring that they are as “pleasant” as possible; and building a more cosmopolitan global social identity (something chapter 15 describes). We might also try to focus on building cross-cultural understanding among countries where economic potential exists yet political and cultural relationships are strained (India-Pakistan and Israel-Palestine come to mind), prioritize support for the rule of law, and encourage the private sector to become involved in building bridges across cultures.

  Of course, when all is said and done, the factor with probably the greatest influence on public perceptions about foreigners—and of cultural and political arrangements generally—is how well a country is faring economically. It's interesting that in 2010 nine out of ten Chinese reported feeling happy and optimistic about where their country was headed—a higher percentage than almost any other country, despite China's relative lack of political freedom.41 One scholar put it this way: “As respondents became more resentful of modern life, more suspicious of consumerism and the free market, and believe that their traditional way of life is disappearing, they are consistently more likely to have negative opinions of globalization, regardless of whether we are talking about economic or cultural globalization.”42 We thus return to a point made in previous chapters: despite the short-run pressures that we are experiencing, and the inevitable questioning of free trade and the turn toward World 1.0, the best way of dealing in the medium to long run with the issues discussed in this chapter is to generate economic results. And the best way to do that is to focus on the steady growth of World 3.0 rather than either the stagnation of World 1.0 or the higgledy-piggledy growth of World 2.0.

  To summarize, then, this chapter has focused on a final fear about globalization: that it would destroy traditional cultures and leave us with a bland, homogenized cultural experience. We began by discounting a number of the negative effects that have been attributed to cultural openness. In the process, a brighter picture emerged—that of real gains that might still be realized from more cultural contact between diverse peoples. The chapter concluded by examining a potential barrier to more globalization—negative reactions driven by irrational xenophobia—and considered some measures that might help neutralize it.

  Having explored the several market failures and fears associated with more openness, we're now in a better position to focus on the problem we've been tackling all along: how we might move forward from the current unsettled state of the world. That is the topic of Part III.

  Part Three

  The Choices

  Chapter Twelve

  Toward World 3.0

  SO FAR WE'VE EXPLORED the potential gains from further globalization, and we've also spent seven chapters taking an extended look at globalization's suspected or supposed problems. None of these problems turned out to be a show-stopper, and some even revealed themselves as blessings in disguise. Nevertheless, the sheer number of pages I've spent on market failures and globalization might suggest a belief on my part that the problems outweigh the potential. Nothing could be further from the truth.

  One way I can stake out my position more clearly is in relation to the thought of John Maynard Keynes. Writing after the onset of the Great Depression, Keynes offered a concise, useful appraisal of globalization and cross-border exchange: “Ideas, knowledge, art, hospitality, travel—these are the things which should, of their nature, be international. But let goods be homespun whenever it is reasonably and conveniently possible; and, above all, let finance be primarily national.”1

  I would agree with two-thirds of that—the parts concerning cross-border information and capital flows. Joining many of Keynes's otherwise devoted students, I'd take a much more optimistic view of trade in goods and services, although I do worry about chronic trade deficits. And I've argued in chapter 8 for allowing more immigration into many rich countries, a point consistent with Keynes's arguments elsewhere.2

  Beyond offering specific views o
n these subjects, the previous chapters have started to sketch a different way of thinking about globalization and market failures, what I've called World 3.0. We've seen in area after area that World 3.0 yields a distinctive set of recommendations about cross-border integration that account not only for market failures but also for semiglobalization, the underlying differences between countries, and the law of distance.

  Resetting our worldviews to World 3.0 is urgent because we desperately need more prosperity and more security. The rich world faces its toughest economic recovery in decades while dealing with unprecedented demographic change. But that doesn't mean those of us fortunate enough to be in rich countries should entertain any perverse envy of our counterparts in the “developing” world. Alleviating poverty and closing the gap in living standards demand faster, more reliable economic growth even more desperately there.

  Although integration across borders isn't the perfect growth tonic—Part II is all about its alleged side effects—it is almost undoubtedly the best one out there. In an environment where a 1 percent increase in GDP growth or employment is to die for in many countries, opening up further offers the potential for net gains that are much larger, as we saw in chapter 4.

  So what's stopping us? It's not just the specific market failures and fears covered in the previous chapters. Rather, the representation of our policy choices as a tug-of-war between World 1.0 and World 2.0—between regulation and integration—has short-circuited discussions of how to pursue additional cross-border integration while managing any side effects. Envisioning World 3.0 requires unbundling this representation into two related but distinct domains of choice. Instead of repeating the arguments advanced in chapter 1 about the desirability of doing so, this chapter deals with the implications of shifting to a World 3.0 mind-set. It focuses, in particular, on what we can say about the management of integration and regulation. The chapter begins with a broad intellectual history of the debate about regulation and how it has and hasn't been globalized. It then builds on the discussions earlier in this book to articulate six core propositions about how to jointly manage the regulation of markets and their cross-border integration—that is, what to do in World 3.0.

  This chapter—and the rest of Part III—then pushes further on the integration-related dimensions of World 3.0, because those are where the potential gains seem to reside, not in the realm of regulation, even though regulation is required in certain situations. This chapter concludes by supplying some broad guidelines about how to redraw our mental maps of the world to better represent the realities of World 3.0. As we shall see in the coming chapters, these guidelines are useful whether we are thinking about countries, businesses, or individuals in World 3.0.

  Harvard Versus Chicago

  The most direct antecedents of the worldview developed in this book are provided by academic work on market failures and their regulation—which is what I focused on thirty years ago when I was a graduate student at Harvard specializing in industrial organization (IO) economics. Because that was how Harvard defined IO. My thesis chairman, Richard Caves, served as the intellectual custodian of a scholarly tradition that, beginning with the early work of Harvard's Edward Mason and Joe Bain, had focused on the possibility that concentrated industry structures might permit firms to exercise market power, raise prices, and impair social welfare (the concern addressed in a globalization-related context in chapter 5). This tradition also devoted considerable time to investigating possible remedies, principally regulation.

  An appreciation of market failures and the problems that concentration, in particular, could create had dominated discussions of public policy in the United States for decades. But by the time I got to graduate school, the Harvard School's hegemony was threatened by sustained attack from the Chicago School, which championed free market solutions. As Nobel Prize winner Milton Friedman, a leader of the Chicago School, once remarked, “‘Chicago’ stands for a belief in the efficacy of the free market as a means of organizing resources, for skepticism about government intervention into economic affairs.”3 In macroeconomics and financial markets, this meant that the government should set and sustain a stable rate of growth of the money supply and enforce property rights, but otherwise keep its hands off the economy. By contrast, Harvard took a more activist, Keynesian view of governmental policy options.

  In the realm of microeconomics, the Chicago School was far less impressed than the Harvard School with market failures. Chicago School economists generated ingenious arguments about why the standard kinds of market failures—market power, externalities, and uncertainty, the topics of chapters 5, 6, and 7, respectively—might not matter much. In their view, competition to be the monopolist might solve even the natural monopoly problem—the most extreme manifestation of market power. Externalities didn't necessarily pose a problem either, since unrestricted bargaining among all interested parties could lead to efficient outcomes. And the price system was the way to transmit and coordinate information of the sort uncovered over time in uncertain environments, and therefore not to be tampered with.4

  What the Chicago School was much more exercised about was the cost of market failures and distortions imposed by governments, not businesses. I've explored many of these governmental failures in the context of globalization at some length (see, in particular, the discussion in chapter 5 of the myriad ways governments help create and sustain market power). Add in a belief in the innate selfishness of regulators (like all individuals), which renders them vulnerable to “capture” by the industries they are supposed to regulate, and you arrive at the Chicago School's visceral antipathy to trying to regulate private-sector market failures, on the grounds that intervention would just make things worse.5

  In effect if not in intent, then, the Chicago School had a probusiness bias compared to the Harvard School's proconsumer focus. Harvard was willing to contemplate governmental interventions to rein in business, particularly big business, and Chicago wasn't. The Harvard School did not take any specific position on the extent of such intervention; it simply rejected the extreme Chicago School position of always shying away from such regulation. See table 12-1 for a more structured comparison.

  Table 12-1: Comparison of the Harvard and Chicago Schools of economic theory

  The Harvard School

  The Chicago School

  Market outcomes

  Market failures are common and can, in the absence of governmental intervention, persist

  Market failures are rare or self-correcting, with exceptions mostly due to governmental meddling

  Role of government

  Room for beneficial governmental intervention in a variety of ways, ranging from regulation of private enterprise to public ownership

  Should focus on money supply, enforcement of property rights, but otherwise laissez-faire

  Performance orientation/type of surplus effectively emphasized more

  Consumerist/consumer surplus: e.g., ban on horizontal mergers that raise prices, regardless of whether they increase producer efficiency

  Corporatist/producer surplus: conduct meant to maximize profits must, in principle, be regarded as lawful

  Globalizing the Debate

  The Harvard-Chicago debate originally had little in the way of international content. In my core subject of IO, linkages across national markets were discussed as one of several dozen elements of industry structure, conduct, and performance. It wasn't that my IO professor and thesis chairman, Richard Caves, was unaware or uninterested in international content: he happened, very unusually, to be a distinguished international as well as IO economist. But beyond evidence that import competition typically improved domestic market performance, there were few points of contact then between these two subfields of economics.6

  Developments in international economics actually appeared to provide a more promising path forward at the time. Research in that subfield had traditionally assumed perfect competition, thus ruling out most categories of market failure. But that
started to change in the 1980s, with the development of “new trade theory”—which was even described by one of its key contributors, James Brander, as the “industrial organization (IO) approach to trade theory.”7

  New trade theory mostly focused on research into monopolistic competition: a slightly less perfect form of competition that involves limited economies of scale and (as a result) a large but finite number of differentiated producers, each with a very limited amount of market power. Such models had first been developed in IO back in the 1930s; international economists such as Paul Krugman now began to use them to study industries marked by intraindustry trade in variety, with different varieties produced in different locations due to fixed set-up costs but then traded internationally to satisfy within-country preferences for diversity. Given the salience of intraindustry trade, work on monopolistic competition has taught us a great deal. However, as I argued in chapter 4, such models are very limiting from an IO perspective since they do not allow for concentrated industry structures featuring just a few competitors.

  Other lines of work aimed at incorporating insights from IO into international economics proved less fruitful. Thus, in the early 1980s, amid heated debate over U.S. international competitiveness, there was a surge of excitement around models of “strategic trade policy” in which a governmental precommitment to particular policies (e.g., subsidies) could, in the presence of a small number of competitors, improve one country's welfare at the expense of others.8 But the excitement faded once economists realized that small changes in assumptions could reverse this conclusion and, even more significantly, that letting multiple governments precommit rather than just one could trap countries in a prisoner's dilemma (e.g., a subsidy war), threatening to leave all of them worse off. By the 1990s, much of the excitement had shifted—largely thanks to pioneering work by Paul Krugman, once again—to the incorporation of geography instead of IO into trade theory, as discussed in chapter 3.9