Is Globalization Sustainable?

The pundits writing about globalization sometimes call it inevitable, but historians remind us that there was an earlier period about a century ago when economic globalization (1) was damaged by World War I and then crashed in the Great Depression. This can serve as a warning that policy is important, and that globalization is a project that requires constant effort and leadership. As Great Britain weakened and the U.S. was reluctant to take its place prior to World War II, that leadership was lacking and the old system collapsed. Can that episode tell us anything about the future? Probably - for as Mark Twain said, history may not repeat itself, but it rhymes.

Given recent events in the global stock markets, one approach would be to ask if the stanza about the Depression is about to be repeated, and not for poetic effect. Of course, if there were to be a melt down in Japan, stagnation in Europe, and a double-dip recession of uncertain depth in the US, we could anticipate more flare-ups of protection and an increasing move towards interventionist economic management. Economic barriers would rise and trade and capital flows would slow. That is one possibility, but not the one focused upon here. Rather than focus on a short to medium term problem, it moves to a medium to longer-term question, posing as an argument.

The argument in this brief paper is twofold. One argument is that economic globalization creates many opportunities to improve the material well being of poor people, but may be politically unsustainable. This is especially true of the integrated supply-chain type of trade that is leading to unprecedented specialization of production. The second argument is that terrorism so increases the potential costs and vulnerabilities of globalization that it may, by itself, change attitudes towards this greater international specialization. Thus, it is argued, there is a likelihood that the current episode of globalization will exhaust itself well before it delivers many of the benefits that might flow from its fuller implementation.

It is not necessary to recount fully here the sometimes productive debate among those who support, support with reservations, or oppose globalization. Those who support it, relying heavily on a few Asian countries, argue that only by global integration can high growth rates that reduce poverty be sustained. The spectacular success of China and the real progress in India since 1980 mean that most people living in nations that are integrating are improving. (2) The second group, for example including Joe Stiglitz and Dani Roderick, argue that globalization can be good but not if nations slavishly follow the Washington consensus or American-style free-market capitalism. They tend to view a heavier state role, protection, and capital controls as being part of a successful response to the power the rich wield in international organizations and multinationals. Those who oppose globalization view the system as so biased that a top-to-bottom reform in rules is needed to make global integration attractive for most poor nations. Barring that, many seem to support some degree of isolation.

It is clear that most poor nations have not grown as fast as the rich ones in per capita terms in the last few decades. (3) Some of this can be attributed to geography. Much of this is due to more variable factors specific to those poor nations – bad governance, corruption, war, or other kinds of predatory behavior, often associated with economic transition. But the crash of Argentina’s economy, the frequent Latin American financial crises, and the Asian Crisis of 1997 - affecting even several better performing economies - do suggest something more systemic at work. Globalization as it now functions seems to work well for rather few nations and almost not at all for Africa and Central Asia or much of Latin America.

After acknowledging the many poor policy choices made by developing nations, there are legitimate points to be made about the basic rules of the game. Most rich nations do not want and will not allow legal immigration in any quantity from poor nations. Many immigrants who are economic migrants have to present themselves as refugees, or slip in illegally and live without legal protections and services. This restraint on the freer movement of people, some skilled professions aside, results in slower equalization of incomes, lower flows of remittances, and much less of a buildup in skills from returning workers. If the argument is freer movement of goods and capital, why not people? The reason is that no important interest group in the rich nations argues for this, and there is little popular support for immigration in the rich nations. Nations with high minimum wage levels and welfare payments are especially reluctant, as integration of less-skilled migrants is more difficult. But in all rich nations, migration aggravates the impact of technology, which is already reducing the demand for less educated labor.

In addition to this, there are well-organized constituencies that insist on protection and outright subsidy for their production, even when this competes directly with goods that the poor countries could produce more cheaply. Farm subsidies, recently increased by 80% in the US, and even higher as a fraction of value in the EU and Japan, are one famous example. In particular, $2 billion in cotton subsidies to US cotton farmers will reduce African exports by $250 million. (4) Further examples in steel, textiles, and other goods make it even more difficult for nations without very good endowments of education and other skills to find niches that help get growth deeply rooted. Why should protection and subsidies be so well entrenched in the rich nations? Perhaps their aging populations are less mobile and willing to change jobs. Perhaps the political systems are too well structured to allow special interest groups to get their own way. But without more flexibility on these goods, the poor nations are apt to move slowly themselves on lower protection in services or better intellectual property protection. This will further slow them down.

It has become commonplace to mention the rise of global communications. CNN can now be found in African villages, even if the TV is run off of a generator or battery. Does it seem likely that a world in which billions see affluence on the TV screen, but are denied the ability to migrate or the reasonable hope of even moderate gains at home, will be a peaceful one? Can the rich world continue to become even richer while a billion people live in absolute poverty and billions live in relative poverty and see no reason why their life should be the way it is? Is it enough to strengthen borders and barbed wire so that the flow of workers is only a trickle?

There has been some attempt to link poverty and terrorism, but the link is weak and unconvincing. Very poor people do not hijack airplanes or explode dirty bombs. Very angry, well-educated and moderately well financed groups do that, though sometimes their foot soldiers are selected from the poor or desperate. But surely a world in which there is so much inequality and frustration will lead to a feeling among many that the system is not worth defending. Would resentment be a fatal flaw to globalization if the rich found they did not need nor want to do very much for the poor?

Here we come to one uncertainty about the sustainability of globalization. Are the terrorists capable of so changing the balance of costs and benefits from greater flows of goods and, to some extent, people that fundamentally different modes of economic organization will be chosen? Many would argue no. Estimates by the OECD talk about delays at customs, a few percent higher costs of shipping, and adjustments in the insurance market. None of this is good, but it scarcely changes life as we know it. Moreover, as procedures and technology improve, these costs would shrink. Even if the 1-1.5% of GDP higher cost of public and private security is added in, it is only an irritant.

The problem, of course, with such estimates is that they look at existing responses to past and anticipated problems of a similar nature. To take just a few examples, what would happen to popular attitudes and levels of spending if smallpox were to spread around the world? Even if the US had enough vaccine doses for its population and were able to distribute them, what about the billions of others that might be infected? Would cities remain centers of commerce and society if dirty bombs were exploded in them? What would happen if an aggressive program of economic vandalism attacked pipelines, energy and utility infrastructure, or computer systems? In a recent statement, Warren Buffet suggested it was only a matter of time before an American city faced a terrorist nuclear bomb attack. Events well short of that would surely create a very different public attitude towards trade, migration, and even current production and location patterns common in modern industrial society. The question is whether such events are very likely, and if they are, what the societal response would be.

A society under attack of this kind will tend to emphasize safety. Risk taking would be discouraged. Trade and travel would certainly diminish, and with that incomes and production would drop. The public would accept greater intrusions on privacy and freedom in a quest for security. Dissent would tend to be silenced or heavily discouraged. At worst, such a world might usher in a kind of new dark ages. Less pessimistic people might see the chance for greater emphasis on support for basic needs. Some would argue that trade would prove robust in the face of such challenges, though the need for passenger jets would be less if tourism were curbed, and generators would be less in demand if electricity networks were subject to constant disruption. Even basics such as clothing and shoes - the mainstays of many poorer nations - might be easier to make with automated plants in rich nations rather than in the current manner. The technology is developing to replace many of the human operations, and if security for trading goods proved expensive, the balance could well tip towards self-sufficiency.

With some examples of terrorism and virtually all cases of reduced trade, a great deal of harm would be done to developing nations. These include India and especially China, which have increasingly chosen to integrate into the global economic system, but many other nations could be placed with them. The economic dislocation associated with the Great Depression is probably the only recent model we have for the likely damage that would be done to many poor countries. It would be a giant, backwards step.

To avoid such an outcome, or possible outcome, what is needed? Clearly, globalization would have to work better - and be seen to work better - for many more people. There would have to be a widely shared sense that we all had so much to lose from such economic vandalism and criminal terrorism that there would be a real alliance against these people and their activities. Is it likely that global policies will improve faster than the plans of the terrorists?

It is popular now to bemoan particular policies. There is the protectionism and unilateralism of the US in general and the Bush administration in particular. There is the inability of the Japanese to reorganize their system since it stopped functioning satisfactorily. And there is the unwillingness of the European political class to come to grips with many of the challenges the combination of demography, their welfare state, and technology pose for their societies. However, behind all of these failures lies a fundamental similarity. The best system we have is one in which there is representative democracy. But democracy is prone to being dominated or manipulated by special interest groups. Unless there is unusually energetic and perceptive leadership, the weight of special interests creates a shortsightedness that fits poorly with the increased complexity and vulnerability of an inter-related global system.

It is not at all clear in what direction those wanting the benefits of globalization without its vulnerability and imbalances can turn. It is almost certainly not the Euro-bureaucratic model, scarcely answerable even to its own citizens, much less to those not formally represented. It is not the multinational managers who seem to worry more about managing earnings for their oversized stock options than their shareholders, much less a larger group of stakeholders. It is not the unions or activists, who are protectionist while claiming to want to protect workers in the third world from “sweat shop” conditions that are many times better than their alternatives. It is certainly not the US political system that has been so captured by special and local interests that unwanted weapons systems are approved while a critically vulnerable energy situation is ignored.

It may be that the global system simply has no core of leadership and management to keep it together. Nor, perhaps, do the competing interests interact in a way to produce a result that is politically and economically inclusive. In other words, it may be that an economically efficient solution is not politically or socially viable. If this is so, it means that those able to decide such things will need to rethink the way production is organized, especially if we want our systems to be robust as well as efficient and our lives to be secure as well as opulent. Or perhaps we all, rich and poor, are likely to have cycles of globalization, with each cyclical swing containing within it the seeds of its own destruction, as institutions and interest groups fail to adjust adequately or quickly enough to the social and political strains that technology and open markets create.

(1) Economic globalization can be defined here as the greater international flows of trade, capital, and people. Naturally, there are intellectual and cultural implications of these movements, and ideas tend to follow movements of people and things. But the focus here is on economic variables.

(2) There is wide agreement that poverty in China has declined sharply. In India, there is a debate about the decline in rural poverty, but it is likely that more progress was made even there than some surveys show.

(3) Even counting very small nations such as Mauritius, Oman, Botswana, and Singapore, there are only 20 out of over 100 developing nations that grew at least 2.4% annually per capita from 1965-1999. The 2.4% rate is that of the rich nations. Of course, China, India, Indonesia, and Brazil are among the faster growing nations, so the proportion of population in faster-growing nations is more than the proportion of nations.

(4) This example was cited by Nick Kristof in the New York Times on July 5, 2002.