While protectionism won’t solve the problems posed by globalization—they’ll get even worse—there are many policies that can be used systematically to achieve both lower fiscal and trade deficits, sustain the economy at full employment, and reduce the volatility in trade deficits that has contributed to the hardships facing workers in the manufacturing and other traded-goods sectors. Here are some examples.
• Expansionary fiscal policy—with spending used for investments in people, infrastructure, and technology and to facilitate the restructuring of the economy. The 2008 crisis made clear the limitations of monetary policy. For countries like the United States that can borrow at a low interest rate (negative in real terms), the failure to borrow funds to make these investments was a lost opportunity.
• Balanced budget expansions—where taxes are increased in tandem with expenditures. Even in countries that cannot borrow at low interest rates, there is a role for expansionary fiscal policy. By increasing spending and taxes together, the economy expands. This is called the balanced budget multiplier, and if the taxes and expenditures are chosen carefully (say a tax on land or on the very rich and expenditures on education), the impetus to the economy can be very large.
• Encourage domestic savings, especially through programs that “nudge” individuals to save for the future by having retirement programs with high savings rates. If aggregate demand is sustained so the economy remains at full employment, the effect is to change the structure of the economy in ways which advantage export industries, including manufacturers.18
• Create a global reserve currency. U.S. dollars are held in reserves around the world. This drives up the value of the dollar. A global reserve system would accordingly lower the value of the dollar, implying that, at any level of income, both consumption and investment would be shifted toward domestic content and American exports of goods and services would increase. To maintain full employment, government expenditures could then be reduced. Hence, both fiscal and trade balances would improve.19
• Implement the “Buffett” plan to improve the trade balance through trade chits. Much of the volatility associated with the exchange rate arises from volatile cross-border capital flows, as I noted earlier in the chapter. Warren Buffett has proposed an ingenious way to attain stability in trade flows while maintaining freedom of capital flows, while still relying on market mechanisms.20 Whenever a firm exports a dollar’s worth of goods or services, it would get a trade chit; whenever a firm wants to import a dollar of goods, it would need to buy a trade chit. There would be a market for trade chits. By definition, this system would result in exports equaling imports. (Variants of this proposal can be used to keep the trade deficit within any desired set of bounds.)21
In short, if the government makes use of the full panoply of instruments at its disposal, it can smooth the transition from the manufacturing economy to the service sector economy, maintaining full or close to full employment along the way, and enhance macrostability. It is important, though, to see these government interventions as part of a strategy to facilitate the transition, not to block it. Large adjustments in economic systems can be costly and typically occur slowly. This makes it especially important not to succumb to ideologies, such as the “deficit fetishism” described earlier.22
The process of globalization sometimes does have a depressing effect on the economy, as I note in chapter 1, with job destruction far outpacing job creation. While there is a variety of ways to offset these effects, a quick remedy is to run a temporary fiscal deficit. The problem is that the ideologues of globalization denied or ignored the adverse short-run effects of globalization and simultaneously tried to circumscribe the ability of governments to respond. It was not just globalization itself that was to be blamed: the fault really lay with the constraints that were imposed on how countries could respond.
Some of the constraints countries face today, though, are themselves the result of globalization, or in any case, are deeply affected by globalization. In the nineteenth century, military might gave the European powers the ability to enforce their rules of the game over the rest of the world. There weren’t then (and still are not now) rules governing what happens when a country can’t pay back what is owed. The creditor countries decided what happens—often simply by sending troops and taking over the country. In the twentieth and twenty-first centuries, rich countries have figured out how to get what they want in more subtle ways. They have the bargaining power when it comes to global trade rules: developing countries and emerging markets desperately need (or want) access to the markets of the advanced countries, and they need the technology that comes with investments of the multinational corporations. This power—combined with the lack of unity among the developing and emerging countries—has resulted in rules that advantage the rich countries.
But even the advanced countries have had their hands tied by the rules of globalization: a commitment to full capital market liberalization (allowing money to flow freely in or out of the country—see chapter 2) means that any country that goes against the will of the financial markets may find itself buffeted, its exchange rate hammered, its interest rates soaring. Political leaders may well ask themselves: under this rampant globalization, where are decisions really being made: In their capital? Or on Wall Street? Luiz Inácio Lula da Silva ran for president of Brazil three times in the 1980s and 1990s; he was the leading candidate in two of the elections. But he was too far to the left for Wall Street, so they hammered the country, taking their money out. The exchange rate fell, and voters panicked just as investors did—and Wall Street’s will was done. Voters decided it was simply too risky to elect him. Of course, while Wall Street may act as if it has 50 percent of the votes, it really doesn’t, and sometimes voters rise up against financial markets. On Lula’s fourth try, in 2002, he succeeded—and during his eight-year tenure he helped Brazil reduce poverty (the poverty head count ratio fell from 23 percent in 2002 to 11 percent in 2011)23 and economic growth occurred at a robust 4 percent annually. Wall Street’s fear had been unfounded.
Globalization constrains what governments can do in other ways. Global agreements restrict the kinds of help countries can give to firms and industries as they seek to advance the structural transformation I’ve described as being at the heart of responding to the challenges of globalization.24
But there is much that they can do within those constraints to make globalization work. This section has argued that, to paraphrase Shakespeare’s famous line, the fault lies not in globalization, but in ourselves—that is, in the domestic policies. In the case of the United States, the problem is with its tax and expenditure programs, its monetary policies and legal systems, all too often designed to benefit corporations and the 1 percent at the expense of the rest, to benefit the winners of globalization and to do little to help the losers.25
CONCLUDING REMARKS
Things are changing. As I noted, China is now, by some measures, the largest economy. It is the largest trading economy. It is inevitable not only that the rules of the game will change, but also the system under which the rules are made. China will have more influence. America less. The Obama administration recognized this, but stated that, though China might be the largest trading country, especially in Asia, the United States should continue to write the rules of trade, even for trade in Asia, for the twenty-first century. But in practice, China was already writing the rules, with trade agreements with fifteen countries in Asia alone.
Citizens in the advanced countries may well ask themselves, how will these changes affect them? They didn’t fare so well even when the rules were made by the United States and other advanced countries. In some ways, matters could get worse: some worry that China will be just as domineering, just as much devoted to pursuing its “corporate” interests as the old colonial powers, but perhaps even less concerned with environmental and labor standards than the West. The Western rules of globalization at least made concessions here and there to concerns about the env
ironment and labor. The worry is that in the future, even less attention will be paid to these important dimensions of globalization. In Western democracies, civil society has played some role in tempering commercialism, though far less than one would have hoped.
The prospects of America’s workers, though, could get better as the developing countries and emerging markets grow. They will want to buy more services from the United States and Europe—send their children to their schools, send their sick (who can afford it) to their hospitals, and take vacations in their cities and national parks. The growth of the emerging markets has also led to their wages increasing faster than those in the advanced countries, so the relative advantage they have in labor costs will diminish. Moreover, improvements in technology have meant that cheap unskilled labor is less important than it was before. This doesn’t, of course, solve the problem of those in the advanced countries without skills.
The ultimate irony of globalization, as it has been managed, is that the New Discontents that I have discussed in this part of the book come from the advanced countries—the countries that had written the rules for their own benefit. But as I have repeatedly explained, the rules weren’t written on behalf of the ordinary citizens in the United States or other advanced countries, but on behalf of large corporate and financial interests. The adverse effects on workers may not even have been just collateral damage—weakening workers’ bargaining power, and thus their wages, was an anticipated part of what would happen and from the perspective of the 1 percent, it was one of the benefits of globalization. When I wrote GAID fifteen years ago, most citizens in America had not realized this. In Europe, many had, which helps explain how the book became a best seller in so many countries outside the United States. Indeed, on issues of trade, there was (and is) in France and many other countries an anti-globalization movement whose central message was that another world was possible. We could restructure our economy and our society in ways consonant with our values, with social justice, with protecting the environment, and even with increasing standards of living.
The big change is that now, fifteen years on, these anti-globalists have been joined by the New Discontents in the United States and other advanced countries. There is a big difference, though, between the “New” Discontents and the Old. Many of the New Discontents are nativists, who emphasize the distinction between us and them. They are not concerned with social justice or the environment.
Don’t be fooled by the frequent use of slogans like “free but fair trade,” suggesting that all they want is a fair agreement. I have emphasized that in the ordinary use of language, the trade agreements were not fair, but were rather tilted markedly toward the interests of the United States and other advanced countries. The New Discontents in America want an even more tilted managed trade regime.
For now, the New Discontents have put their faith in the Trump administration, dominated by plutocrats and those from global finance, to rewrite the rules of globalization.
I have on several occasions written that if the 1 percent pursues its self-interest too narrowly, there is a risk of a backlash. For the moment in the United States, under Trump, the 1 percent is—in the short term—winning again, through tax cuts and deregulation which benefit them at the expense of the rest of society. But when the New Discontents realize that they have been betrayed, that they are in fact even worse off with Trump policies, they may turn to even more extreme leaders. The growing inequalities are simply not politically or socially sustainable. And besides, the wealth of the 1 percent depends on a healthy economy—and as the IMF keeps reminding the world, economies with high inequality perform more poorly.26 At the very least, the selfish strategy which ignores the discontent, or even worse, takes advantage of it for its own purposes, is extraordinarily risky, even for the 1 percent.27
If the 1 percent must pursue its own self-interest, it should at least be an enlightened self-interest.28 And an enlightened self-interest means that not only must globalization be tempered, but domestic policies must also be formulated in ways that ensure a modicum of social protection for those left behind and a modicum of shared prosperity as the economy moves forward.
The themes I stressed in GAID seem as relevant today as when I wrote the book fifteen years ago—in spite of all the changes in globalization and in our understanding of it. As we’ve become more interdependent, there is greater need for us to work together. And in democratic societies, that means working together democratically.
Governance matters, because economics and politics can’t really be separated. Poor governance leads to poor rules. As I’ve repeatedly written, markets don’t exist in a vacuum. They have to be structured. The rules of the game matter. And who writes the rules drives what the rules are.
There is now more widespread awareness of the deficiencies in our system of global governance. Global governance had been moving in the direction that GAID suggested would be desirable. In the afterword, I describe the enormous changes that have occurred, for instance, at the IMF. But now globalization’s New Discontents—those in the developed countries—have arrived. These New Discontents are different from the old ones. The old discontents, those in the developing world, could identify the precise aspects of globalization that had harmed them and to which they objected: the inequities, the hypocrisies, the inconsistencies with the insights of modern economic theory, the sources of the democratic deficits—by now, this is well-known territory.
The New Discontents in the advanced countries, as we have seen, observe the growth of globalization and the decline in their well-being. There must be, in their simplistic view, a causal relationship; and if so, reversing globalization must lead to an increase in the well-being of those middle-income workers in Europe and America. This “reasoning” has been seized upon by the populists (perhaps more accurately described as the extremists and nativists) of the right. I’ve explained why this is nonsense, and why the kind of deglobalization that these populists argue for not only won’t work, but will make many of those who have been injured by globalization worse off.
I’ve outlined a set of principles that should guide the reform of globalization. But without reforms within the countries themselves—including the set of policies that I’ve laid out here—there is no reform of globalization that will succeed in restoring prosperity to those that have been left behind.
This is true for both developed and developing countries. The impacts of globalization have to be seen in the context of domestic policies. With the right domestic policies, focusing on shared prosperity, globalization can lead to the kind of sustainable and equitable development to which countries aspire.
Part II
Globalization and Its Discontents
(2002 edition)
CHAPTER 5
THE PROMISE OF GLOBAL INSTITUTIONS
INTERNATIONAL BUREAUCRATS—THE faceless symbols of the world economic order—are under attack everywhere. Formerly uneventful meetings of obscure technocrats discussing mundane subjects such as concessional loans and trade quotas have now become the scene of raging street battles and huge demonstrations. The protests at the Seattle meeting of the World Trade Organization in 1999 were a shock. Since then, the movement has grown stronger and the fury has spread. Virtually every major meeting of the International Monetary Fund, the World Bank, and the World Trade Organization is now the scene of conflict and turmoil. The death of a protestor in Genoa in 2001 was just the beginning of what may be many more casualties in the war against globalization.
Riots and protests against the policies of and actions by institutions of globalization are hardly new. For decades, people in the developing world have rioted when the austerity programs imposed on their countries proved to be too harsh, but their protests were largely unheard in the West. What is new is the wave of protests in the developed countries.
It used to be that subjects such as structural adjustment loans (the programs that were designed to help countries adjust to and weather crises) and ba
nana quotas (the limits that some European countries impose on the importing of bananas from countries other than their former colonies) were of interest to only a few. Now sixteen-year-old kids from the suburbs have strong opinions on such esoteric treaties as GATT (the General Agreement on Tariffs and Trade) and NAFTA (the North American Free Trade Area, the agreement signed in 1992 between Mexico, United States, and Canada that allows for the freer movement of goods, services, and investment—but not people—among those countries). These protests have provoked an enormous amount of soul-searching from those in power. Even conservative politicians such as France’s president, Jacques Chirac, have expressed concern that globalization is not making life better for those most in need of its promised benefits.1 It is clear to almost everyone that something has gone horribly wrong. Almost overnight, globalization has become the most pressing issue of our time, something debated from boardrooms to op-ed pages and in schools all over the world.
WHY HAS GLOBALIZATION—a force that has brought so much good—become so controversial? Opening up to international trade has helped many countries grow far more quickly than they would otherwise have done. International trade helps economic development when a country’s exports drive its economic growth. Export-led growth was the centerpiece of the industrial policy that enriched much of Asia and left millions of people there far better off. Because of globalization many people in the world now live longer than before and their standard of living is far better. People in the West may regard low-paying jobs at Nike as exploitation, but for many people in the developing world, working in a factory is a far better option than staying down on the farm and growing rice.
Globalization and Its Discontents Revisited Page 16