Globalization and Its Discontents Revisited Read online

  Globalization worsened trends that were already underway. With outsourcing, the separation grew even greater—workers and management didn’t even have to live in the same country. In this new era, labor was commodified—getting labor power was just like buying coal; one looked for the cheapest source. Never mind the consequences.

  Some communities prospered—those in which the well-educated and well-off lived; but others, especially those relying on manufacturing, decayed. Gary, Indiana, the steel-mill town in which I grew up, was part of the “scorched earth” that followed. Its history represented that of globalization. Founded in 1906 by U.S. Steel—and named after its chairman of the board—to host the largest integrated steel mill in the world, it reached its peak in the mid-1950s when I was growing up. The steel mills today produce the same amount of steel that they ever have, but with one-sixth the labor force. Without enough good jobs, the city decayed and the well-educated left.16 (The ultimate irony of globalization was that it was an Indian steel company that finally saved one of the plants in the region from closing.)

  When I went back to my fifty-fifth high school reunion in 2015, I got a glimpse of what globalization, deindustrialization, and the failure of America to deal adequately with these trends meant. When I was a student there in the 1950s, the students at Gary’s Horace Mann High School came from a wide swath of society—from the children of superintendents and executives in the steel mills and local businessmen to those of ordinary steelworkers, both skilled and unskilled. The school—and much of the dream for which it stood, a society which is economically integrated if not racially integrated—has now been abandoned.17 Some had wanted to get one of the jobs in the steel mill upon graduation, but the country was going into one of its episodic downturns. Many had aspired to go to college, but while America had provided college education for all who had fought in World War II under the GI Bill, that sense of generosity had waned by the time of the Vietnam War. There was among many a sense of bitterness. They saw others passing them up on the ladder of life. They had a feeling that the system was unfair, rigged. Even before Trump had appeared on the scene, it was clear that they could be prey to a demagogue. There was a smattering of teachers who had had rewarding careers, and they were among the few that did not seem angry and disgruntled. I saw in my former classmates in Gary what the statistics had been telling me for years.

  COMMON THEMES IN THE DISCONTENT WITH GLOBALIZATION

  Rereading GAID, it appears that the answers to the questions being posed about globalization today—and how we can reconcile the seeming benefits with the widespread discontent—were largely anticipated by my analysis nearly two decades ago. While in GAID I focused on the developing world, most of what I said was equally applicable to the developed countries. There are eight related themes in GAID:

  1. While globalization has benefits, the benefits were less than the advocates claimed. The advocates used simplistic models, which did not appropriately capture either the benefits or the costs. In some cases, for certain countries, the costs could even exceed the benefits, unless offsetting actions were taken—and the advocates of globalization typically did nothing to counter these adverse effects. If globalization is not managed well, it could thus lead to lower growth and more instability, with large fractions of the population worse off.

  2. Because globalization has been oversold, when reality differed from the promises—when there were job losses instead of job creation—confidence in globalization, the elites, and the institutions that had advocated it waned.

  3. Globalization has huge distributive effects on income and wealth—with large groups being worse off unless countervailing measures were taken to share the gains, but these measures were seldom undertaken.

  4. We must see the failures of globalization in part as arising from deficiencies in the governance of globalization—in the way that the crucial decisions about globalization are made, including whose voices are heard.18 That implies that if we are to hope for well-managed globalization, we have to reform global governance, giving more weight, for instance, to the newly emerging economies. GAID notes, for instance, the distorting effects arising from the fact that one country and only one country—the United States—has effective veto power in the IMF.

  5. But the problems of governance are deeper: the positions taken by, say, the United States reflect the special interests and the particular ideology of only a small part of the country, the financial and corporate interests. Thus, globalization was run, to too large an extent, by and for large multinational corporations and financial institutions in the large advanced countries. They were the winners. And much collateral damage occurred as they sought to maximize their winnings. Even if the United States as a whole was among the winners, many groups of American workers and workers in other advanced countries could be among the losers.

  6. The positions taken typically reflected the interests of these groups; but in some cases, they reflected as much the ideology—sets of beliefs that are not always perfectly congruent with interests. The zeal for deregulation and liberalization was central in bringing on the global financial crisis, which imposed enormous costs even on many of those who had been the advocates of these policies.

  7. Globalization can have and has had large effects on the distribution of power, both within and between countries. Some countries (poor developing countries) can become effectively dependent on the goodwill of others. Actions that could and should have been taken to prevent these changes in power relations were not taken. As globalization led to more inequality, in countries in which money matters a lot in politics—like the United States—the winners from globalization had increased power to shape globalization to benefit themselves, at the expense of others. There was a vicious circle—broken only by the popular uprising of the “new protectionism.”

  8. Globalization has put a greater burden on governments to offset its adverse effects on so many at the bottom. But at the same time, it reduced their capacity to deal with the problems; globalization set off a race to the bottom among countries offering low taxes to corporations and individuals. As if that weren’t bad enough, rich individuals and corporations then took advantage of globalization to avoid paying taxes—even corporations that prided themselves on being good citizens with a strong sense of corporate responsibility couldn’t resist. Clever firms like Apple avoided billions of dollars in taxes. The failure to stop the use of globalization for tax avoidance is itself a manifestation of the mismanagement of globalization and an illustration of the power relations underlying writing the rules of globalization. It would have been no more difficult to have international agreements circumscribing global tax avoidance than to have international agreements over trade. But it was in the interests of corporations to have global trade agreements, and so we had them; and it was in the interests of multinational corporations to avoid taxation, and so we didn’t have agreements to circumscribe tax avoidance. In the end, in the United States, corporate tax receipts fell from 5 percent of GDP in the 1950s to 2 percent today.

  Even with all of these constraints, even with the rules of globalization that were far from ideal, globalization could have been managed better, especially by the advanced countries. It could have been managed in ways that could have prevented large segments of the population from suffering from the effects of globalization—ways which simultaneously could have led to more growth, stability and equality. Most of the advanced countries (including the United States) didn’t do so—and for much the same reason that the rules of globalization were “distorted.” Corporate interests that had shaped globalization in a way which led to lower wages were not interested in “correcting” this problem: they liked the lower wages, and they disliked the taxes that would have to be imposed to prevent workers from having significant income losses.

  If one grasps these eight ideas, one understands the discontent with globalization, and one even has some notion about what should be done. But this analysis also provides some insight
s into why it’s so difficult to make changes, to make the changes that would enable globalization to work: the corporate forces that have created a globalization that works for them, but not for the rest, are not going to easily and willingly give up their power.

  The Failures of Globalization Are Not Inevitable

  There is one underlying theme I want to emphasize: The failures of globalization were not inevitable. These failures were not, for the most part,19 failures of economic science. The adverse effects were predictable—and predicted. Economists had explained that, without government assistance, trade liberalization would result in unskilled workers in the advanced countries actually being worse off.

  Of course, some economists forgot their role as analysts and became cheerleaders of globalization, emphasizing the potential benefits but not mentioning the downsides. Too many economists used simplistic models that led them to overestimate the benefits and underestimate the costs. And, of course, politicians turned to economists who said what they wanted to hear.

  But still, the economics literature provided clear warnings. The fault lay with our politicians, who were responding to where the money was: finance and corporate America, in particular, were pushing a self-interested form of globalization through both political parties. It was called “free trade,” but it was really managed trade—managed for corporate and financial interests. Under these agreements, knowledge moved less freely, but short-term capital more freely. Agricultural subsidies for rich farmers were allowed in the developed countries, but subsidies to help the poor developing countries to catch up with the advanced countries were frowned upon.

  So the problem was not with globalization itself, but with the way we managed it. The story of globalization could have been written differently—and in a few places, it was. The Scandinavian countries realized that as small countries they had to be open—they could only survive if they were globalized. But they understood too that market forces alone might result in there being winners and losers; and if the losers were too numerous, opposition to globalization would grow. So they created a system that provided a modicum of protection—they showed that there could be social protection without protectionism.20 They put in place policies that reduced inequalities in both market income and in income after tax and transfers: they have shown that inequality is not just a result of the laws of economics, but of the policies that countries put in place to respond to economic forces, including globalization, that have been pulling countries apart.

  As a result, the Scandinavian countries enjoy the highest living standards in the world—and shared prosperity.21 Of course, these are relatively small countries, with a certain degree of homogeneity (though immigrants still make up 15 percent of the population in Norway and 17 percent in Sweden), but there is nothing about the policies that they used to achieve these outcomes that makes them inapplicable elsewhere. The problem is not the policies, it’s the politics. These countries understood what was in the collective interest of their people. Other countries, most notably the United States, seemingly have not. Their experience shows that inequality is a matter of choice, and that if globalization has detrimental effects, those effects are not inevitable or immutable. It is the wrong choices made in the United States and most of the other advanced countries that have fed the discontent with globalization.22

  Had domestic policies been more attentive to the effects of globalization and the growing inequality within their borders, countries could have undertaken policies that would have prevented there being so many losers. Had globalization been better managed globally, the outcomes too would have been better—indeed, the positive outcomes asserted by its advocates could have been achieved. But the kind of globalization that would have worked is markedly different from that foisted on developing countries by the IMF and the World Bank back in the earlier era of globalization described in GAID. This collection of policies is referred to as the “Washington Consensus” because it emerged in the 1980s as a consensus between 15th Street (home of the U.S. Treasury) and 19th Street (home of the IMF) in Washington, DC.23 While it was supposed to be a consensus of what constituted good development policies, in fact it was not a consensus forged in the developing countries—among those that were living through the consequences of those policies. It was only a consensus among those who imposed the policies, not among those who experienced the bulk of their effects, especially the negative ones.

  Those policies, for instance, restricted government assistance in helping firms adapt to globalization, helping new industries develop through what are called “industrial policies.”24 They proscribed interventions in financial markets that would have made it more likely that firms in expanding export sectors got access to credit. They paid no attention to the danger of excessive risk taking by banks. After all, it was argued, private firms know better than government. By the same token, the policies’ backers argued for opening up markets to volatile short-term capital flows—of the kind that wreaked havoc during the East Asia crisis, plunging the countries into deep recessions and depressions as hot money suddenly left. Education was emphasized—but only primary education, not the kind of education that could have closed the knowledge gap separating advanced countries and developing countries. They paid little or no attention to inequality—the effects of which have proven to be the major political impediment to the sustainability of globalization itself.25

  While the Washington Consensus policies were directed at developing countries, the same economic philosophy predominated the response to globalization among the elites in the developed countries. At Davos, in January 2017, as these elites finally had to confront the mounting opposition to globalization and the growing inequality, the policy responses still—remarkably—focused on lowering corporate income taxes and deregulation, accompanied by a dose of better retraining. Their belief in trickle-down economics was unshaken: the best way to deal with the discontent was to get the economy to grow faster, the best way to do that was another dose of deregulation and tax cuts for the rich. If we could only make the economy grow faster, the disgruntled laid-off Rust Belt workers’ problems would be solved.

  Key Differences of Globalization’s Impacts on Developed and Developing Countries

  While the eight themes are relevant to both developed and developing countries, there are two fundamental differences between globalization as it affects a country like the United States and how it affects, say, a small African country. The first is, as I have noted, that the rules of the game have been largely set by the United States and other advanced countries. This means that globalization should be of benefit to these countries—or at least to certain influential groups within them. By contrast, developing countries may face an impossible choice: agree to the terms of globalization as they’ve been set, or be ostracized, excommunicated. And even the latter is often not really a choice: many of the developing countries have large amounts of debt. They are effectively in a debtor’s prison. The creditors can demand what they will as a condition for the country getting the funds it needs to function. For some of the developing countries in Africa, globalization has been at best of ambiguous benefit—no matter how they handle their internal affairs.

  Indeed, for some of the poorest countries, globalization as it has been managed may be—and as GAID points out, often is—a raw deal. For instance, U.S. cotton subsidies have driven down the global prices of cotton significantly, pushing those in India and Africa already near the point of starvation closer to the verge of it. Tariff structures were designed to encourage African countries to produce raw materials—and not to produce the higher value-added products, which were supposed to be the province of the developed countries.26

  The second is that the advanced countries have the resources and capabilities to ensure that almost all within their borders benefit. The developing countries typically have less capacity to raise taxes, to generate the revenues necessary to compensate those who are hurt by globalization. They also have less institutional
capacity; for instance, developed countries have stronger financial institutions that can provide finance to export industries that benefit as a result of a trade agreement, putting them in a better position to create new jobs even as jobs in import-competing sectors are destroyed.

  CHANGES IN GLOBALIZATION IN THE TWENTY-FIRST CENTURY

  I wrote GAID just at the dawn of the new millennium. We live in a fast-changing world. In the last quarter century we’ve had the Argentine crisis, the Russian crisis, the East Asia crisis, the global financial crisis, and the euro crisis. We’ve had wars in Iraq, Syria, and Afghanistan. Many countries have already begun to feel the consequences of climate change. Confidence in globalization and the market economy has been volatile. There have even been wide swings in economists’ views of the world. While the standard model a quarter century ago was based on rational households and firms interacting in competitive markets in ways that achieved efficiency and stability, each of the underlying assumptions has come to be questioned: firms and households often act in a far-from-rational manner;27 markets are often not competitive; and the outcomes often seem far from efficient or stable.

  Not surprisingly, globalization today is different from what it was like when I wrote GAID. In the afterword, I describe how the changes have affected developing countries. Here, I want to provide a broad overview, with a simple message: While globalization has changed over the past quarter century, giving more voice, for instance, to emerging markets, the changes are less than one might have hoped. Corporate and financial interests of the advanced countries still predominate. The conflict is not so much between workers in developing countries and those in developed countries, but between workers around the world and corporate interests. The backlash against globalization that the world is now experiencing should not, accordingly, come as a surprise. Globalization can be a positive-sum game, with workers in both developed and developing countries gaining. As it is, corporate and financial interests in the advanced countries have been the big winners. But the “reforms” proposed by Trump and the other protectionists are negative-sum: everyone is likely to lose, including the workers in the advanced countries whom Trump and his likes supposedly speak for. There are other ways of reforming globalization that can ensure that all, or at least most, citizens benefit. But these reforms will only be successful if they are part of broader progressive reforms, which achieve shared prosperity and inclusive growth.