A False Alarm: Overcoming Globalization’s Discontents

Jagdish Baghwati believes that globalization is unambiguously a positive phenomenon and aims to prove it in his recent book, "In Defense of Globalization." According to this review, Baghwati's book also aims to enlighten globalization's critics. Baghwati tackles two major criticisms of globalization: that it causes poverty, and that it depresses wages. He cites data that proves growth through open markets, rather than wealth redistribution, fights poverty best. He also shows that, historically, the influx of cheap imports has caused only a fraction of wage decline. Baghwati also criticizes Western non-governmental organizations (NGO's) for their lack of transparency in funding, policy prescriptions often at odds with developing country NGO's, and dubious adherence to democratic processes. Two areas where Baghwati appears flat-footed, the reviewer says, are in his analyses of the financial crises of the 1990's and in some of his policy suggestions. When properly analyzed, the reviewer argues, the financial crises of the 1990's show a slew of independent causes, making it difficult to prove that blame lies with the "Wall Street-Treasury Complex" that Baghwati would hold culpable. – YaleGlobal

A False Alarm: Overcoming Globalization's Discontents

Richard N. Cooper
Thursday, January 29, 2004

Globalization is a buzzword that has no precise definition. It takes on many meanings, drawing both fervent support and fervent opposition. Indeed, the term is so imprecise that it is possible to be simultaneously for and against globalization.

In Defense of Globalization focuses on its economic dimension, defined by Bhagwati as "diverse forms of international integration such as foreign trade, multinational direct foreign investment, movements of 'short-term' portfolio funds, technological diffusion, and cross-border migration." His main thesis is that economic globalization is an unambiguously good thing, with a few downsides that thought and effort can mitigate. His secondary thesis is that globalization does not need to be given a "human face"; it already has one. A thoughtful and objective evaluation, Bhagwati believes, will make this clear, and that is what he sets out to do.

The book addresses a slate of charges against globalization: that it increases poverty, encourages child labor, harms women, threatens democracy, imperils culture, lowers wages, erodes labor standards, worsens the environment, and gives full reign to predatory corporations. Bhagwati also discusses capital market liberalization and international migration, before turning to fixes for globalization's downsides: improving governance, accelerating social agendas, and managing the speed of transitions. He concedes a few points to globalization's critics but, wielding logic and fact, demolishes most of the allegations made against it. His conclusion: that the world, particularly its poorest regions, needs more globalization, not less.


Bhagwati was born in India and has settled in the United States. He was educated in those two countries and at Oxford and is now professor of economics at Columbia University. He maintains strong and active ties with his country of origin (where his brother was chief justice of the High Court) and with his adopted country (where his daughter is in the Marine Corps). In truth, he is a world citizen casting a critical eye, tongue, and pen on bad policies and bad arguments wherever he finds them -- a vocation that keeps him fully occupied.

Bhagwati began his career as a theorist and made seminal contributions to the study of international trade and migration. Over time, his attention shifted to the realm of policy. He was long a senior adviser to the director-general of the General Agreement on Tariffs and Trade (GATT, now subsumed into the World Trade Organization, or WTO). His compulsion to address shoddy arguments has resulted in prodigious production: in the past 15 years, he has authored or edited at least 23 books and many scholarly papers (many of which he distills for a general readership in this book).

Bhagwati divides critics of globalization into two basic categories. The first is made up of incorrigible enemies of market capitalism, constitutionally anti-establishment and not open to serious argument. The second consists of well-meaning but ill-informed critics. Bhagwati addresses his book to the latter group -- and takes their charges seriously.

To this end, he offers a thoughtful analysis of the role of nongovernmental organizations (NGOS) in international decision-making. He chides American and European NGOS on two points: their lack of transparency (of their funders and choice of issues) and their tendency to speak on behalf of the world's poor without consulting them. Western NGOS and developing-world NGOS often hold diametrically opposed views on issues such as the extension of WTO authority to global labor and environmental standards. Yet, thanks to better funding and media savvy, wealthy NGOS based in Europe or the United States get most of the attention and often make their cases directly to intergovernmental organizations, bypassing national constitutional processes set up to facilitate compromise among diverse interests in pluralistic societies. Granted, different considerations apply when governments are not democratic, but Western NGOS that purport to speak on the behalf of poor people should receive special scrutiny.


To the claim that globalization increases poverty, Bhagwati's response is, rubbish. As a young economist at the Indian Planning Commission 40 years ago, he observed that redistributing wealth is not an effective way to reduce poverty; far more effective is to create more wealth. And engagement with the rest of the world facilitates growth. During the three decades that Bhagwati's India was a relatively closed economy, for example, the economy grew at 4 percent a year, and the poverty rate hovered around 55 percent. But in the two decades since it opened its economy to foreign trade and investment, economic growth averaged five percent; by 2000, the poverty rate had fallen to 26 percent. China's experience was similar: with liberalization came spectacular growth, and poverty declined from 28 to 9 percent between 1978 and 1998. Although India and China provide the most dramatic examples, the rule applies more broadly: openness brings growth, which reduces poverty.

Critics also charge that globalization brings a flood of cheap imports into developed countries, thus reducing the relative wages of unskilled workers who are suddenly forced to compete with inexpensive labor in the developing world. There is some weak theoretical validity to this claim, but the empirical evidence is ambiguous. For example, during the 1980s and 1990s, the price of clothing rose relative to the price of other manufactured goods despite an increase in imports from low-wage countries. In the United States, the wages of unskilled workers did decline, but much academic research suggests that only a fraction of this drop (perhaps ten percent) was attributable to an influx of cheap imports. Bhagwati suggests that even this figure may be too high. Since globalization delivers new capital and technology to developing countries, it may actually raise wages and shift production away from labor-intensive goods.

Bhagwati is less keen on the free movement of capital across national borders. He attributes the financial meltdowns of the 1990s to a "Wall Street-Treasury Complex" that pressured developing countries to liberalize capital flows. His discussion of financial crises, however, is uncharacteristically sloppy and naive. Although Washington did fight for capital liberalization (and misguidedly continues to do so in bilateral trade negotiations), other countries can resist if it goes against their interests (as both Singapore and Chile did successfully). There was also tremendous variation among the countries that suffered crises, which Bhagwati's simplistic account overlooks. Indonesia had accepted the free movement of capital more than 20 years prior to its financial meltdown. Thailand and South Korea accepted only limited capital liberalization in the early 1990s and carried it out in ways that clearly invited trouble. Brazil and Russia maintained some capital controls throughout (although not on foreign purchases of government securities), but such measures offered little protection. And Malaysia's much-touted restrictions on foreign capital flight were not introduced until a year after the crisis broke and thus do not explain that country's shallower recession, as critics of capital liberalization often claim.

A look at history reveals that financial crises are not unique to the 1990s. In the nineteenth century, long before the U.S. Treasury and the International Monetary Fund became influential on the international stage, rapidly growing countries -- the United Kingdom, France, and the United States, the developing nations of the day -- experienced financial crises at least once a decade. Successful industrialists and financiers, caught up in the euphoria of growth and unimpeded by regulation, drove a dramatic boom-and-bust cycle. That pattern has repeated again and again and seems to be an inherent part of development. If there is any lesson here, it is that governments should learn more from the unpleasant experiences of other countries in other times.


Spouting facile criticism of globalization is easy, especially when unconstrained by fact, and so is refuting it. Bhagwati's defense of globalization is persuasive. He is less successful, however, in his attempt to offer feasible policy alternatives that are likely to improve on existing arrangements. He suggests that the World Bank finance adjustment assistance with respect to trade liberalization in developing countries, showing no awareness that the World Bank must borrow most of its funds in capital markets at market interest rates (and hence must be repaid by its borrowers) or that adjustment assistance has worked poorly in the United States. He suggests a retroactive tax on carbon dioxide emissions over the past century, the proceeds of which would go to help developing countries reduce their own greenhouse gas emissions. He recommends that multinational corporations operating in developing countries follow the same labor and environmental standards as they do at home, without acknowledging that such advice may contradict local law and could discourage some multinationals from expanding to developing countries, thus denying them the many benefits, well expounded by Bhagwati, that foreign companies can bring.

Overall, however, Bhagwati combines the hard-nosed perspective of a liberal on trade and investment with the soft-hearted sensitivities of a social democrat on poverty and human welfare. He thus has an admirable ability to address patiently and sympathetically globalization's well-meaning but wrong-headed critics. This book offers a cogent, erudite, and, indeed, enjoyable discussion of economic globalization and its discontents.

Copyright 2003 by the Council on Foreign Relations, Inc. Reprinted from the January/February Issue of Foreign Affairs