Martin Wolf, the chief economics commentator of the Financial Times, has written a remarkable but flawed defence of the global market economy: Why Globalisation Works: The Case for the Global Market Economy (Yale University Press). Wolf conceives globalisation in essentially economic terms. The book says little about the political, social, cultural and environmental aspects of globalisation, although he does argue that nation states remain the locus of political debate and legitimacy and that the best way to combine economic globalisation with political stability is via liberal democracy. But it is economic globalisation – meaning greater openness of trade, free movement of capital, expansion of foreign direct investment – which is the focus because it is, in Wolf’s view, the key to boosting prosperity and the life opportunities of all.
Wolf’s mission is to dispel the illusions about globalisation promulgated by the forces of what he calls anti-globalisation.com, or the “new millennium collectivists.” The book is about the intellectual clash between liberal capitalism and its opponents. Wolf is on the streets fighting a new wave of dark forces. The stakes are high: disorder and the fragmentation of the global economy threaten unless they are defeated. And defeating them requires both showing them they are wrong and offering hope for a better future.
Wolf’s voice is clear, serious and didactic, and his book offers a carefully crafted account of the global market economy and the strengths and limits of his opponents’ views. Yet there is also something anachronistic about the book and the territory it covers: its agenda seems to have been set a few years ago when the anti-globalisation movement was at its peak and hundreds of thousands were marching against the forces of economic globalisation. These days, after 9/11 and the war in Iraq, it is seldom asked whether we are for or against globalisation. The ground has shifted to a debate about the type of globalisation we want. On these grounds, Wolf’s contribution is less impressive.
I have been thinking and writing about globalisation and global governance arrangements for over a decade, and have considered much of the material that informs Wolf’s book. It is therefore interesting to reflect on the points of similarity and difference in our background and approach.
Wolf begins his book with a brief autobiographical essay, describing his recent family history and its influence upon him. His father was an Austrian Jewish refugee who came to Britain before the second world war, and his mother was from a Dutch Jewish family. My parents were both Jewish and born in Germany, one in Leipzig and the other in Berlin. Both came to Britain in the early 1930s fleeing the Nazis. Wolf, like myself, was brought up with a strong sense of the menace of authoritarian dictatorships, and we both learned early about the importance of the values of an open society and of the forces, from the left and right, which might threaten it.
Both Wolf and I grew up in communities strongly committed to the Enlightenment ideals of freedom, democracy and the pursuit of reason – the impartial pursuit of truth – and with a strong sense of the fragility of the world’s commitment to them. But while he believes that the liberal market economy is the best means of embedding these ideals, and that markets and liberal states create a framework for humans to be free and equal, I consider that the Enlightenment ideals remain unfulfilled in important respects and that the neoliberal form of globalisation to which Wolf subscribes is a challenge to them.
We have both been influenced by Friedrich Hayek. Wolf takes him as one of the great champions of personal liberty, of the market economy as a necessary condition of democracy, and of the dangers of intrusive government. I, like Wolf, take Hayek as one of the great theorists of the market, and of its advantages over other systems. But I also think that Hayek failed to grasp the nature of markets as systems of power which can also threaten liberty and democracy. Wolf conceives of markets as powerless mechanisms of co-ordination, while I understand them as highly fluid and risk-laden – often generating damaging externalities with regard to health, welfare, income distribution and the environment.
This is not an argument for abandoning the market, but it is an argument – explored in my new book Global Covenant – for reframing it. If we want to guarantee personal liberty and the efficient and just operation of the market, we must build bridges between economic and human rights, between the commercial and the environmental, and between national and international jurisdictions. Hayek does not help here at all. For both Hayek and Wolf, at the feast of the global market, power is largely absent.
Nevertheless, both Wolf and I believe that globalisation has been much misrepresented. We agree, for example, that globalisation is more than Americanisation; that there has been no straightforward collapse in welfare, labour or environmental standards (although there are big challenges); globalisation does not mean the end of the state; it has not just compounded the globe’s inequities; the gap between the world’s richest and poorest states is greater than it has ever been and is growing, yet there is some evidence that the proportion of those living in extreme poverty is falling; global economic processes have not always reinforced corporate power; developing countries do not always lose out in world trade; and economic globalisation and the current structure of economic governance do not exclude the voice and influence of developing countries. Most of Wolf’s book is devoted to examining propositions such as these, and while he does not paint a wholly rosy picture of economic globalisation, the force of the book is to show that anti-globalisation.com has precious little to offer.
We agree on the need to dispel these myths, but Wolf’s portrait of economic globalisation does not get to the heart of the problems of globalisation in its current neoliberal form. I will stress three of them here: global market integration is not the indispensable condition of development; a “market first” political philosophy cannot provide adequate terms of reference for thinking about a range of transborder problems and the capacities of multilateral organisations to cope with them; and liberal market philosophy is the wrong philosophy for the age in which we live. We require, instead, a cosmopolitan social democratic philosophy to guide a world of overlapping communities.
Wolf’s main argument is that “a successful move to the market, including increasing integration in the world economy, explains the success stories of the past two decades.” Developing countries which have prospered, notably in Asia, have all followed this path. But his argument needs questioning in a number of respects.
First, the experience of China and India – along with Japan, South Korea and Taiwan earlier – shows that countries do not have to adopt liberal trade or capital market policies in order to benefit from enhanced trade and faster growth. All these countries have grown relatively fast behind protective barriers. It is true that as these countries have become richer, they have tended to liberalise their trade policy, but there is not a simple causal relationship at work. As Dani Rodrik, the Harvard economist, has shown, the only thing that can be said with certainty is that countries become more open as they become richer.
Furthermore, recent research has found that one of the main factors limiting the capacity of the poorest countries to develop is the liberalisation of capital. Geoffrey Garrett, a professor of political science at UCLA, has shown that what hurts developing countries faced with a broad liberalisation programme is not the pursuit of free trade per se, but the free movement of capital. While tariff liberalisation can be broadly beneficial for low-income countries, rapid capital liberalisation in the absence of sound domestic capital markets can be a recipe for “volatility, unpredictability and booms and busts in capital flows.” Countries that have rapidly opened their capital accounts have performed significantly less well in terms of economic growth and income inequality than countries that have maintained tight control on capital movements but cut tariffs. An IMF study published in March 2003 found that there is no consistent support for the theory that financial globalisation per se delivers a higher rate of economic growth.
Economic protectionism does not work as a general strategy, but there is evidence to suggest that a country’s internal economic integration – the development of its human capital and national market institutions, and the replacement of imports with national production where feasible – can be stimulated by state-led industrial policy. The evidence indicates that the development of state regulatory capacity, a sound public domain, the ability to focus investment on job creating sectors in competitive and productive areas and the protection of infant industries are more important priorities than integration into world markets. This finding should not come as a surprise, since nearly all today’s rich countries began their growth behind tariff barriers and only lowered them once their economies were relatively robust.
The argument here should not be taken, as Wolf might suspect, as a simple endorsement of old leftist, state-centred development. Public objectives can be delivered by a diversity of actors, public and private. And the development of civil society is an indispensable part of national development. Although there can, of course, be conflicts between economic development and the strengthening of civil society, all countries need sufficient autonomy to work out their own ways of managing this conflict.
Developing nations need the latitude to create individual polices and institutions which may depart from the orthodoxy of global market integration. Similarly, organisations such as the WTO need a broader range of policies to encourage the different national economic systems to flourish within an equitable, rules-based global market order.
Wolf acknowledges elements of these arguments throughout his book, especially in his discussions of the work of Dani Rodrik and Ha-Joon Chang (see Michael Lind’s essay in Prospect, January 2003). He accepts that there is much more involved in successful development than trade liberalisation, and that financial liberalisation carries risks. He does concede some ground to the critics of market liberalisation and global economic integration. But he never allows that these concessions have implications for the very basis of his liberal market approach – for its explanatory power and prescriptive value.
There are many ways of conceiving and categorising the global challenges that we face. Jean-François Rischard, vice-president for Europe of the World Bank, usefully thinks of them as forming a triumvirate of problems, concerned with sharing our planet (global warming, water deficits, biodiversity and ecosystem losses), our humanity (poverty, global infectious diseases, conflict prevention), and our rulebook (intellectual property rights, unsustainable debt, trade, finance and tax rules). Wolf seems to think that global challenges such as these can be addressed by the current interstate order, even if it does require reform (notably in relation to the IMF and the WTO). But how urgent global problems might be resolved is far from clear, for the problem-solving capacity of the international system is not effective, accountable or fast enough. There are three main difficulties.
To begin with, there is no clear division of labour among the many international governmental agencies: functions overlap, mandates conflict, and aims and objectives get blurred. This is true, for example, in the area of health and social policy, where the World Bank, the IMF and the World Health Organisation often have competing priorities.
A second, related set of problems surrounds those issues which have both domestic and international dimensions. These are often insufficiently understood or acted upon. There is an ultimate lack of responsibility for problems such as global warming and the loss of global biodiversity. Institutional fragmentation means that these issues fall between agencies. This latter problem is also manifest between the global level and national governments.
A third set of difficulties relates to an accountability deficit in the international agencies which stems from power imbalances among states. Multilateral bodies need to be more representative of the states involved with them. Developing countries are under-represented in many international organisations. There must also be arrangements in place to ensure consultation and co-ordination between state and non-state actors, and these conditions are seldom met in multilateral decision-making bodies.
Underlying these institutional difficulties is a lack of symmetry or congruence between decision-makers and decision-takers. The point has been well articulated recently by Inge Kaul and her associates at the UNDP in their work on global public goods and what they term the “forgotten principle of equivalence.” At its simplest, the principle suggests that those who are significantly affected by a global development, good or bad, should have a say in its provision or regulation. Yet all too often there is a breakdown of “equivalence” between decision-makers and decision-takers. For example, a decision to permit the “harvesting” of rainforests may contribute to ecological damage far beyond the borders which formally limit the responsibility of a given set of decision-makers. A decision to build a nuclear plant near the frontiers of a neighbouring country is likely to be taken without consulting that country, despite the risks for it.
Systematising the provision of global public goods requires extending and reshaping multilateral institutions. Pressing issues include the need to develop criteria for fair international negotiations; strengthen the negotiating capacity of developing countries; create advisory scientific panels for major global issues (following the example of the intergovernmental panel on climate change); create negotiating arenas for new priority issues (such as access to water), together with appropriate grievance panels (such as a world water court); and expand the remit of the UN security council to examine and, where necessary, intervene in the full gambit of human crises – physical, social, biological, environmental.
Liberal market philosophy offers too narrow a view, but clues to an alternative strategy can be found in an old rival – social democracy – which Wolf explicitly rejects. Traditionally, social democrats have sought to deploy the democratic institutions of individual countries on behalf of a particular national project – a compromise between the powers of capital, labour and the state. They have accepted that markets are central to generating economic wellbeing, but recognised that in the absence of appropriate regulation they suffer serious flaws – especially the generation of unwanted risks for their citizens, and an unequal distribution of those risks.
Social democracy at the global level means pursuing an economic agenda which calibrates the freeing of markets with poverty reduction and the protection of basic labour and environmental standards. What is required is not only the enactment of existing human rights and environmental agreements and the clear articulation of these with the ethical codes of particular industries (where they exist or can be developed), but also the introduction of new terms of reference into the ground rules or basic laws of the free market and trade system. Precedents exist: in the social chapter of the EU’s Maastricht treaty, for example, or in the attempt to attach labour and environmental conditions to the Nafta regime.
Social democratic globalisation requires three interrelated transformations. The first would involve engaging companies in the promotion of core UN principles (as the UN’s global compact does at present). To the extent that this led to the entrenchment of human rights and environmental standards in corporate practices, it would be a significant step forward. And to avoid these principles being sidestepped, they need to be elaborated in due course as a set of mandatory rules. The second set of transformations would thus involve the entrenchment of revised codes, rules and procedures – concerning health, child labour, trade union activity, environmental protection, stakeholder consultation and corporate governance, among other matters – in the terms of reference of economic organisations and trading agencies.
But this cannot be implemented without a third set of transformations, focused on alleviating the harshest cases of economic suffering. This means that development policies must challenge unequal access to the global market, and ensure that global market integration, particularly of capital markets, happens in sequence with the growth of sustainable public sectors, which guide long-term investment in healthcare, human capital and physical infrastructure, and the development of transparent, accountable political institutions. Moreover, it means eliminating unsustainable debt, seeking ways to reverse the outflow of net capital assets from the south to the north, and creating new finance facilities for development purposes. In addition, if such measures were combined with a (Tobin) tax on the turnover of financial markets, and/or a consumption tax on fossil fuels, and/or a shift of priorities from military expenditure (running at over $950bn a year globally) to the alleviation of severe need (direct aid amounts to $50bn a year globally), then the developed world might really begin to accommodate those nations struggling for survival and minimum welfare.
This is a big agenda, which cannot, of course, be realised all at once. Yet, as I argue in Global Covenant, it is feasible, and can be pursued on a step by step basis. And unless we move in this direction, and make social justice a priority alongside liberty, then tens of millions of people will continue to die unnecessarily every year of poverty, disease and environmental degradation.
The shift in the agenda of globalisation I am arguing for – a move from liberal to social democratic globalisation – would also have payoffs for today’s most pressing security concerns. If developed countries want rapid progress towards global legal codes that will enhance security and ensure action against the threat of terrorism, then they should also participate in a wider process of reform that addresses the insecurity of life experienced in developing societies. Across the developing world, human rights and democracy are seldom perceived as legitimate concerns in the abstract. They must be connected with humanitarian issues of social and economic well-being, such as education and clean water.
To be concerned today with the Enlightenment ideals of freedom, democracy and reason, one needs to think about their entrenchment in an era in which political communities and states matter, but not solely and exclusively. States are hugely important vehicles for aiding the delivery of effective public regulation, equality and social justice, but they should not be thought of as occupying a privileged level of politics. They can be judged by how far they deliver these public goods and how far they fail. The question is not why globalisation works, but rather how it can be made to work better to bridge the gaps between liberty and social justice, economic and human rights concerns, the accelerating affluence of some and the continuing poverty of many. Liberal economic philosophy does not equip us adequately for this task. End of the article