This sort of development won’t happen if only a few people dictate the policies a country must follow. Making sure that democratic decisions are made means ensuring that a broad range of economists, officials, and experts from developing countries are actively involved in the debate. It also means that there must be broad participation that goes well beyond the experts and politicians. Developing countries must take charge of their own futures. But we in the West cannot escape our responsibilities.
It’s not easy to change how things are done. Bureaucracies, like people, fall into bad habits, and adapting to change can be painful. But the international institutions must undertake the perhaps painful changes that will enable them to play the role they should be playing to make globalization work, and work not just for the well off and the industrial countries, but for the poor and the developing nations.
The developed world needs to do its part to reform the international institutions that govern globalization. We set up these institutions and we need to work to fix them. If we are to address the legitimate concerns of those who have expressed a discontent with globalization, if we are to make globalization work for the billions of people for whom it has not, if we are to make globalization with a human face succeed, then our voices must be raised. We cannot, we should not, stand idly by.
* J. M. Keynes, A Tract on Monetary Reform (London: Macmillan, 1924).
Afterword to the 2017 Edition
GLOBALIZATION IS DYNAMIC—it is ever-changing. Trump, the global financial crisis, the East Asia crisis, the rise of China and other emerging markets—these are among the things that have happened in the last two decades that have changed globalization forever. Globalization in 2020 is different from globalization in 2000. In Part I, I described the New Discontents. Twenty years ago, the complaint of the developing countries was that the developed countries were the winners from globalization—they were setting the rules for their own benefit. The simple but big insight, noted in Globalization and Its Discontents (GAID), is that it wasn’t the United States, or the advanced countries as a group, that was setting the rules, but corporate and financial interests within the United States. They were the big winners—larger markets and lower costs meant higher profit. As it turned out, the emerging markets as a whole were also among the winners. The countries in Africa were pulled by two opposing forces: China’s growth was increasing the demand for their resources, and China became an enormous provider of assistance. From this they benefited. But European and U.S. agricultural policies—maintaining massive subsidies in spite of all the free-market rhetoric—were depressing global agricultural prices, and from this the poorest people in the poorest countries, the farmers in Sub-Saharan Africa, suffered enormously.
I wrote GAID in the belief that the rules and institutions of the international order were biased against ordinary individuals in the developing countries and emerging markets. I also deeply believed, however, in the importance of an international rule of law and in international institutions to promote development and coordinate economic policy. Globalization meant that we were interconnected, that what one country did affected others, and that, therefore, the countries of the world had to work together. I wrote the book in the belief that we could construct a better globalization, a better, fairer set of rules and institutions, which would promote growth, development, and stability with equity. Trump has been working to destroy the international rule of law and the international institutions that are so important in making our global system work well. While he garnered a significant number of votes in the United States (though far less than a majority), globally his views are derided and despised.1 The ugly American—a feature of the global landscape for decades—has just gotten much uglier. And the distance between the views of the global economy of Americans, at least those in power, and the rest of the world has just gotten much greater.
In the original GAID, reprinted in Part II of this volume, I wrote about the East Asia crisis, the transition from communism to a market economy, and development—the big issues during the period I had served as chief economist of the World Bank (1997–2000). Since then, we’ve had more and bigger crises. How should we now look back at what seemed terrible crises at the time but were dwarfed by what happened in 2008? How have the central battles over policies and institutions that I described in GAID, so essential to the prosperity of the developing countries and the transition economies, played out?
In the introduction and chapters 1 to 4, I explain how GAID provides a lens through which we can better understand the New Discontents, those in the developed world. Here, I take a global view of globalization, on its effects on the developing countries and emerging markets which were at the center of GAID as well as on the advanced countries.
Fears More Than Realized
In 2002, I felt strongly that the deficiencies in the way globalization was being managed, guided in particular by the Washington Consensus policies, would eventually become evident. The policies would lead to low growth and more instability for those who followed them, in stark contrast with what was happening elsewhere, in for instance the East Asian countries that did not follow those policies.
In GAID, I also wrote much about the governance of globalization, about how the rules are made. With the share of global GDP in the developed countries decreasing, it was inconceivable that they continue to dominate global governance as they had for more than half a century after World War II. I worried, however, that before the deficiencies in the Washington Consensus became evident, enormous damage could and would have been done—there could and likely would be enormous suffering of the kind that I had seen wrought by these policies, as I described in GAID. I was particularly fearful of the consequences of unbridled financial market deregulation. I had spent much of my time in the Clinton administration trying to stop it there,2 only to find the battles even more intense at my next job as chief economist of the World Bank.
So too, while it might be inevitable that emerging markets would eventually play a role in globalization commensurate with their growing economic power, there was a danger that before that happened, dissatisfaction with current arrangements would grow to the point that the emerging markets would go their own way. For a well-managed globalization, one needed global institutions. This kind of fragmentation would be bad, both for the developed and developing countries. But would the advanced countries like the United States recognize the dangers quickly enough? Or would they, fretting about their loss of power, stand in the way of the creation of a better-balanced globalization? Worryingly, during the East Asia crisis, the United States had stood in the way of the creation of the Asian Monetary Fund, which Japan was willing to support (described in chapter 8): so fearful was America about its potential loss of hegemony that it was willing to sacrifice the well-being of the countries in crisis—offering, instead of money, lectures on good policies and institutions, lectures which in the aftermath of the U.S. 2008 financial crisis looked increasingly misplaced. To use the old aphorism, it seemed that the pot was calling the kettle black.
I worried too that these failures, both in policies and governance, would give rise to a backlash against globalization, one in which there would be a wholesale retreat from globalization. To counter that, I repeatedly said, the problem was not with globalization, but with the way we managed it. There was a risk that years of failing to manage it well would lead to a widespread sentiment that globalization could not be managed well; globalization could not be tempered and tamed; one could not get the benefits without bearing at the same time the overwhelming harms.
What happened was worse than I ever could have anticipated—and the problems would become evident where least expected. The worst crisis in seventy-five years would originate in the United States, as a result of excessive financial sector deregulation,3 but globalization enabled the crisis and its aftershocks to spread quickly around the world. The crisis itself did more to discredit the Washington Consensus policies and those who had pushed
them than anything I or anyone else could have written or done. In the aftermath, the disparity in growth between the United States and China increased even more (reaching 12 percentage points in 20094), the share of America and Europe in the global economy diminished (to 32 percent in 2016, from 37 percent in 2009), and China and India (whose growth rate rose to 9.2 percent and 8.5 percent, respectively, in 2009) attained new confidence in themselves and their economic policies. And globalization began to be redefined: especially as China attained new prominence, dominating public investment in Africa, and exceeding trade with several countries in America’s backyard, Latin America, when compared to the United States.5 Yet, not surprisingly, America and Europe were slow to give up the power they exercised in global governance. And, again not surprisingly, the emerging markets began to develop their own institutions.
With the election of Trump, America’s soft power has, as I just argued, taken a big hit, as the United States has moved from the position of leadership in the creation of a rules-based international system to a position of leadership in its destruction and the creation of global protectionism. The best that can be said is that (as this book goes to press), America’s institutions have proven strong enough to at least temper the effects of a bigoted and severely uninformed president with autocratic leanings and no respect for the truth. The silver lining on this very dark cloud is that, at last, the world is likely to move toward multipolarity. Having excessive power in the hands of one country meant the fate of the world was too dependent on what happened there. This is now only too evident. The diminished economic role of the United States in the global economy meant that, eventually, political power too would have to become more dispersed and the world would become multipolar. Trump accelerated the inevitable.
What then is the future of globalization? This afterword provides some answers. The good news is that the institutions that have been created globally are working, in some ways much better than seemed to be the case twenty years ago when I wrote GAID. The IMF has reformed. The WTO prevented an outbreak of beggar-thy-neighbor policies in the Great Recession. Trump arrived on the scene as other fundamental forces were inevitably changing globalization. Trump, however, is pushing for an even more “unbalanced” globalization. He will fail. The world will be much the worse for his attempts. But before turning to globalization’s future, we need to look more carefully at what has happened to globalization in the years since GAID was published.
GLOBALIZATION THEN
Begin by recalling the world almost two decades ago, just a few years after the fall of the Iron Curtain.
World War II had set in motion the process of decolonization, which was almost completed by the mid-1960s. By the latter part of the twentieth century, old-style colonial domination was universally viewed as unacceptable. Besides, as I note earlier in this book, the United States and the former colonial masters discovered that they could get much of what they wanted—resources and economic gain—in more subtle ways. Having been stripped of much of their wealth, without receiving reinvestment in human capital or infrastructure, the former colonies were always on the brink. They became dependent on money from Western banks, and when they couldn’t repay, there was a bailout—called a bailout of the country, but really, a bailout of the Western banks that had recklessly lent to them. But then, as a condition of getting this money, the countries experienced a form of Western domination as bitter as the old colonialism—conditions would be imposed to get the loans, which typically included fire sale privatizations of the country’s assets, turning them over to Western companies at bargain prices. Seemingly, one didn’t need guns and armies to engage in massive exploitation: all one needed was clever bankers, gullible and sometimes corrupt domestic officials, and an international financial regime spearheaded by the IMF and the World Bank, acting as the lenders’ collection agency.
Of course, the policies foisted on these developing countries were described to be in the country’s own interests, and sometimes more than a little ideology got mixed up with the economic interests of the advanced countries. Often, the policies didn’t work. Africa experienced a lost quarter century. Latin America grew, but its growth was marked by huge volatility, and what growth occurred was not shared—it went mainly to the top. Of course, the IMF and the World Bank did everything they could to blame the victims—arguing that if only these countries had really done what they were told to do, the outcomes would have been totally different. Like medieval bloodletters, rather than questioning the efficacy of their prescriptions as their patients languished, they doubled down on their policies.
GAID showed what was already obvious to many of those in the developing world—what they knew but could not themselves say to their former colonial masters: the Washington Consensus policies were not only not working, they could not work. GAID showed that “the emperor had no clothes.” The policies were a far departure from what at least the center-left argued for in their own countries. Having moved directly from being chairman of the Council of Economic Advisers in the United States to the World Bank, I was keenly sensitive to these discrepancies.
For instance, the Clinton administration strongly opposed any form of privatization of Social Security (the public retirement program), and yet the World Bank was advising countries to have a retirement scheme in which the private sector played a central role even for middle-income individuals. The Clinton administration also strongly opposed a value-added tax (VAT), since it was regressive (with poor people paying a larger fraction of their income in taxes than the rich), and yet the IMF was recommending the VAT to countries around the world.
While the IMF claimed that its recommendations were based on the best of economics, a combination of research and experience, in reality that was not the case. The policies being sold as being in the developing countries’ and emerging markets’ best interests were often nothing but the perpetuation of the pursuit of Western interests and Western ideologies.
But while much of what I said may have seemed self-evident, especially to those in the developing world, it mattered who was saying it: these countries were given a new sense of confidence in themselves and their leaders, new confidence in the alternative policies that they were pushing.
A Less Enthusiastic Response to GAID from the IMF
Not surprisingly, the very factors that made the book so well received in the Third World resulted in an almost unprecedentedly hostile reception from the IMF. The chief economist of the IMF at the time the book came out, Ken Rogoff, engaged in a vitriolic ad hominem attack, accusing me of selling snake oil when I advocated capital controls (restrictions on the free movement of capital across borders). Just a few years later, the IMF itself started supporting capital controls.6
The consequences of the attack illustrated the great divide in globalization at that moment: it helped propel the book to be a global bestseller, with forty official translations and two pirated editions, and over a million copies sold worldwide. The fact that the attack contained more venom than analysis—and that the IMF responded with such force—was telling: it reinforced the message of the book. The IMF realized that I had seriously undermined their credibility and, more important, that of the set of policies which they were foisting around the world and the ideology on which those policies rested.
Love That One Could Do Without
One of the most disturbing aspects of the response to GAID was how some of the arguments were picked up selectively by those opposed to globalization, by protectionists, old and new. Donald Trump had his antecedents. Ross Perot was another billionaire presidential candidate. He ran for president of the United States in 1992 as an independent and the centerpiece of his campaign was to claim that jobs would go to Mexico because of NAFTA. Lou Dobbs, an anti-Mexican CNN anchor (whose antipathies, though, look mild in comparison to those of Trump), would frequently invite me on his show. He picked up that I was critical of NAFTA. But I was critical because I thought it wrong and hypocritical that the United States h
ad kept its corn subsidies, hurting the incomes of some of the poorest people in North America. And I used the platform he gave me to get this message out more broadly.
There is a moral dilemma that academics often face. The defenders of globalization have suggested that I keep my critique to myself, lest my arguments be abused. But they use that argument in a one-sided way: they never say to be silent about the virtues of globalization, lest praise of globalization lead to ignoring the downsides, leading in turn to policies that would leave large segments of the population worse off.
The only response is to be as transparent and clear as one can: I am criticizing globalization with the belief that we can make it work better for all. I have been equally critical of the special interests that take advantage of protectionism and those (like the financial sector) which seek to gain from mismanaged globalization and deregulation.
NEW THEORIES FOR A NEW WORLD
I approached globalization from perspectives that were often markedly different from others engaged in these discussions in two important ways. The first l have already noted: I came from being President Clinton’s chief economic adviser (as chairman of the Council of Economic Advisers)7—which was committed to putting into place progressive policies, often distinctively different from those the World Bank and IMF were advocating for developing countries. The second was my background as an economic theorist. Economic theory involves examining the logical conclusions from certain assumptions. It tests for robustness: will small changes in assumptions lead to large changes in conclusions? It looks for hidden assumptions, things we take for granted which may or may not be correct. It is grounded in empirics, in looking at the world; but sometimes, in detailed statistical studies, the forest is lost because of the focus on the trees. Thus, one doesn’t need complex statistical studies to see that most firms and households pay a higher interest rate than the U.S. government, presumably because there is a risk of default; or that in many circumstances, individuals or firms cannot borrow as much as they would like at the “market” rate of interest—sometimes even at any interest rate.
Globalization and Its Discontents Revisited Page 46