The Inevitability of the Global

Why Globalisation Works
by Martin Wolf
(Yale University Press, 2004;  400 pages;  $56.95)

Anyone who has enjoyed and been stimulated by Martin Wolf's incisive analyses of international economic events in The Financial Times over the past 20 years or so, will not be surprised by the quality and scope of this fluent and comprehensive volume.  One might say that this is the last word on the economics of globalisation.  Indeed, quotations by eminent economists on the dust jacket of this book say exactly that:  "... a definitive statement of the case for market-based globalisation" (Lawrence Summers);  and "... a deeply reasoned and cogently explained case for [globalisation's] inevitability" (Kenneth Rogoff).

The book is divided into two roughly equal parts:  "Why a global market economy makes sense" and "Why the critics are wrong".  It concludes with a short chapter on the way to a better world.  While reader-friendly, the volume is extensively referenced and well-supported with explanatory notes for the inquiring reader.

Wolf's justification of globalisation is impressive and flawlessly expressed.  He defines globalisation as "the integration of economic activities, via markets, driven by technological advances and policy changes".  Prosperity depends on the balance between markets and the state;  that is, the institutions and policies provided.

He describes the rise and fall, and rise again, of international economic integration over the past 150 years, using carefully assembled statistics and charts to support his arguments.  The confrontation with anti-globalisation forces since late in the 1980s has educed concerns about another retreat.  Though less ominous than the nationalism, backed by communism and fascism, that destroyed global integration in the twentieth century, this threat from anti-globalisers is persistent, becoming organised on a global scale and employing alarmist propaganda.

The first half of the book explains why liberal economic strategies make sense.  History reveals that market competition, the rule of law and stable governance promote economic development, prosperity and political security.  Since the time of Smith, Locke and Hume, market economics and liberal policies have faced strong hostility from non-economists (see W.O. Coleman, Economics and Its Enemies (2002)).  The revival of anti-economics in the past decade or so, however, is surprising because economic growth, stability and decreasing poverty in many countries have been unprecedented.

Liberal national economic systems depend on trans-border transactions (trade and investment flows, transfers of technology and migration) to optimise benefits, and that depends on policies in other countries too.  International institutions have supported inter-governmental co-operation since World War II.  Wolf focuses attention on the Bretton Woods twins -- the IMF and the World Bank -- and the WTO (formerly the GATT).  These institutions set rules and promote international economic relations using the authority of negotiated inter-governmental agreements.  These agencies have become targets for critics of globalisation who believe that their constitutions should be changed to increase the influence of non-government organisations (NGOs) and supplicant developing countries' governments.

The criticisms of globalisation are examined in the second half of the book.  Overtly disparate and contradictory groups believe that government and international policies should be directed to achieving "desirable" social and political objectives, rather than leaving progress to markets.  These anti-globalisers divide into two types:  old-fashioned, anti-market groups comprising labour unions, trade protectionists and nationalists;  and single issue, idealistic, NGOs pursuing environmental protection, human rights, consumer interests, lobbying for social and economic development in poor countries, etc.  They are united only by their desire to achieve changes in the management of economic forces and to redistribute the benefits of economic progress according to their designs.  Some of the first group would revert to local or national self-sufficiency and forgo economic prosperity altogether;  these troglodytes include old-fashioned socialists, neo-Marxists and "localisers" opposed to international commerce of any kind.  These sentiments have widespread support where the search for "egalitarianism" remains strong, in spite of rising prosperity in most parts of the world.

Many NGOs want to establish new forms of global governance, to replace "representative democracy", where government representatives sit on international councils, with "participatory democracy" where any party can attend.  The aim is to by-pass national administrations and to increase the role of unelected, self-appointed, non-transparent NGOs in the administration of international agreements on the environment, the financing of development programmes, trade relations, etc.  All contain the prospect of collectivism, with little hope of decisions being reached by consensus.  Unfortunately, few democratic governments are prepared to confront or contradict NGOs.

Most NGOs' proposals for correcting perceived "injustices" ignore their "second round" consequences.  For example, raising tariffs to protect industry X in a developing economy may encourage development, but it raises the price of X to domestic users and consumers, draws resources from elsewhere in the economy and reduces real incomes.  It has ramifications across the economy that are not taken into account by advocates of reviving the ill-reputed "import-substitution strategies".  Similarly, writing off the outstanding debt of the poorest developing countries will do little to assist their long-term development if changes are not made to their domestic institutions and policies.  Permanent benefit depends on policy reform to remove civil unrest and corruption.

Wolf reduces the anti-globalisation arguments to five main topics (chapters 9-13).  He finds there is little justification for NGOs blaming globalisation for injustices, poverty, and failure of economic development or environmental damage.

• Poverty and inequality are alleged to be increasing, but analysis of relevant statistics does not show that.  Even using unsatisfactory indicators, the number of people living on less than $2 per day (a World Bank measure) has decreased sharply since 1980, because of rapid economic growth in China, India and other Asian economies.  When living standards are stretched to include life expectancy, health and education, the improvement is striking.
• Liberal trade and the WTO symbolise everything people dislike about globalisation.  Imports threaten jobs;  development programmes are blocked by WTO rules;  primary commodity exporters are exploited.  The WTO needs reform, but Wolf wonders whether so many differences can be reconciled.
• Critics of economic integration focus attention on multinational enterprises (MNEs), which they regard as the malevolent force behind globalisation.  Wolf explains that this misconception arises from misunderstandings and false propaganda.  MNEs facilitate globalisation because they integrate markets, but they remain subject to national laws and market competition too.
• Many NGOs believe that globalisation makes national social policies unworkable.  Yet governments' shares in gross national expenditures are little changed over the past 20 years and their tax collection powers are intact.  Moreover, governments have authority to provide public goods, such as property rights, the rule of law and security.
• The Asian financial crisis (1997–98) arose because of problems integrating emerging market economies into global capital markets.  Wolf acknowledges that there is a problem.  Like bankers, governments and academics before, he urges the IMF and the World Bank to find answers, but also adjures emerging economies' authorities to review their domestic banking regulations, deposit insurance and prudential requirements to counteract volatile, short-term capital flows.

Environmental issues are dealt with only briefly, in just ten pages in the trade chapter.  NGOs regard economic growth and increasing trade as polluting and environmentally damaging.  Hence, they regard the WTO as an institution in which they should be allowed to participate in decision-making.  In this context, Wolf rejects the use of trade restrictions as "second best" instruments.  His treatment of environment issues, however, is less complete than one might expect.  The Kyoto Protocol is mentioned only in passing and European attitudes to GM crops and "the precautionary principle" (relevant to WTO dispute-settlement processes) are not mentioned.

Unfortunately, NGO organisers and their supporters are unlikely to read Wolf's forthright and persuasive assessment of globalisation.  He is sympathetic to the goals of some NGOs, but sometimes he dismisses anti-globalisation arguments impatiently.  He recognises social and economic injustices, but he calls for rational analysis.  Financial assistance to developing countries -- however inadequate -- has little lasting benefit without an effective government and appropriate institutional support in the recipient economy (witness Sudan, Zimbabwe, Sierra Leone and many other African countries).  Strangely, development NGOs and many UN commissions express concern about such "marginalised" economies in Africa while ignoring the lessons from economic successes in Asia, where good governance and effective civil society have been crucial.

This thorough review of globalisation acknowledges that some NGO complaints should be taken into account:  removal of the "grotesque hypocrisy" of OECD protectionism;  permitting temporary "infant industry" protection in developing countries;  review of the conflict between pegged exchange rates and short-term capital movements;  re-assessment of the development role of international institutions (including more aid to deserving developing countries' governments);  and more research to establish effective agreements on the environment.  Future prosperity, however, will depend on strengthening globalisation, via competitive markets and the rule of law, and on the state as the centre of political debate and legitimacy.  Only governments can give authority to international institutions.