Against the Third Way:
the liberal case for economic globalisation
Article by Razeen Sally added on April 22, 2002
It is said that September 11th has changed the world. Has it changed the climate for economic globalisation?
True, prospects for an already slowing world economy have worsened, although this may be a blip on the screen. Much depends on how the international political situation evolves. “Crisis” interventions have multiplied, especially in the US. The extremist anti-globalisation camp has gone quiet, at least for a while.
Nevertheless, the era of globalisation is far from over. Like Mark Twain, rumours of its death are exaggerated. The reintegration of the world economy in the last half-century has created sufficiently robust linkages to withstand occasional crises. Moreover, the underlying debate on globalisation has not changed: the world is still confronted by the rival visions of globalisation clamouring for attention pre-September 11th.
The anti-liberal critique: Globalisation and the Third Way
Anti-globalisation sentiment has always been around, including a root-and-branch rejection of capitalism. Less easy to dismiss is a more mainstream critique, which could be termed Globalisation and Social Democracy. My colleague Robert Wade calls it the Third Way to Globalisation. This vision recognises some of the benefits of international economic integration. Nevertheless, it rejects the comprehensive liberalisation attributed to the so-called Washington Consensus, and advocates more-or-less radical change in the governance of the world economy, which sometimes travels under the label of “global governance”. Globalisation and Social Democracy is not street-theatre on the fringe; rather its champions are establishment figures – senior politicians, leading officials in international organisations (particularly within the UN family), large, well-organised NGOs, prominent CEOs, distinguished journalists and academics (including well-known economists such as Joseph Stiglitz and Dani Rodrik).
This vision was powerfully reiterated by Mark Malloch Brown, the Administrator of the United Nations Development Program, at a recent public lecture at the LSE. His core diagnosis is twofold. First, globalisation is an engine of inequity, creating minority winners and majority losers within and between countries, and particularly marginalising and excluding the poor in the developing world. Second, the nation-state is in retreat. The core prescription follows: “global solutions” are needed to provide “global public goods”. Global governance should take the form of partnerships involving governments, international organisations, NGOs, international business and organised labour, acting in concert across a very wide range of public policies.
A more systematic, economically literate treatment in this genre comes from Dani Rodrik, the brilliant Harvard economist. Professor Rodrik argues that as globalisation bites deeper into national social fabrics, conflicts emerge over domestic norms and institutions. What is needed, therefore, is a trade-off between the gains from globalisation, on the one hand, and domestic social stability (especially in developed countries), on the other. Developing countries should also be able to restrict imports and pursue industrial policies as part of their development strategies. This leads Mr. Rodrik to advocate a “social-cum-development safeguard clause” in the WTO, which would sanction considerable trade protection by both developed and developing countries.
The Malloch Brown/UNDP vision is typical of a certain style of thinking in international policy circles. No doubt it commands widespread appeal, especially among the armchair socialists and communists of old, transformed into the fashionable Third Way social democrats of today. The “global problems-global solutions” thesis is predictably laced with an emotive, intuitive Do-It-Yourself-Economics, with a false diagnosis of globalisation’s effects and the role of the nation-state (as I will argue below). Moreover, this is a profoundly illiberal vision, whose distrust of markets and faith in government command-and-control mechanisms (now at the global level) would, if put into practice, undermine the freedom of contract and restrict competition. This would be damaging to economic efficiency, and especially to the life-chances of the world’s poor, but one should not forget that these prescriptions erode the freedom of choice: they threaten individual liberty itself.
The Rodrik vision deserves to be taken more seriously. He raises crucial issues in international political economy concerning the distributional effects of globalisation and its political ramifications; the link between trade policy and growth (which is not necessarily simple or straightforward); and the importance of institutions and their variability over time and place. Above all, he warns against simplistic generalisations and “one-size-fits-all” blueprints, rather favouring policy choice tailored to local circumstances and institutional capacity.
Nonetheless, one could and should take issue with some of his analysis and many of his prescriptions. He underplays the contribution of liberal trade policies and external openness to growth, and, arguably, overestimates the positive effect of dirigiste industrial policies in East Asia and elsewhere. His idea for a development and social safeguard clause in the WTO is open-ended (to put it mildly) and would gut the WTO of meaningful content. It would open the door wide to interest group capture and justify protectionism whenever foreign competition threatened domestic production. The chief result would be the wider restriction of cheap developing country exports made under conditions of lower labour and environmental standards than those prevailing in rich countries – a de facto extraterritorial imposition of rich country standards on poor countries with very different comparative advantages.
The case for a liberal international economic order
The case for a liberal international economic order is not new; it goes back at least as far as David Hume and Adam Smith. The point is to continually update the argument and make it relevant to modern conditions.
In this vision globalisation is essentially a positive-sum game, not an engine of marginalisation and exclusion. An international division of labour based on specialisation and exchange spontaneously integrates hitherto separated national economies into a world-wide co-operative system that caters for reciprocal wants, or, in the felicitous words of Edwin Cannan, “renders mutual service”. All-round material gain, for rich and poor countries alike, is the outcome of Smith’s “liberal system of free importation and free exportation”.
Basically, removing restrictions on trade, capital flows and the movement of people expands the freedom of individuals to choose how to dispose of their property rights and strike contracts with foreigners. This allocates resources more efficiently and, over time, through dynamic gains such as economies of scale and the transfer of technology and skills, feeds into productivity increases, a rise in real incomes and economic growth.
So much for the standard economic efficiency arguments. Often overlooked, there is also a moral case for a liberal economic order, which is based on individual liberty as a “good” in itself. The freedom of choice, including the freedom to engage in international transactions, animates what Hume calls a “spirit of industry”, the psychological motor of a vital, flourishing commercial society. This enables progressively better life-chances for individuals in the broad mass of society rather than for the select few. Put another way, people across the planet have the possibility to lead more varied and interesting lives compared with the vegetative and parochial societies of old. Free trade (broadly defined) expands life-chances by bringing about widespread and peaceful contact among nations and breeding a worldly cosmopolitanism.
In sum, Adam Smith’s “natural liberty”, the lifting of artificial restraints upon individual choice and action, is not only of intrinsic value; it is also the foundation of the “wealth of nations”. Freedom and prosperity, therefore, are intimately related; and it is impossible to think of either freedom or prosperity without the freedom to engage in international transactions.
Economic liberals would argue that the evidence of economic history is on their side. Over at least the past two centuries (and probably stretching back to the late Middle Ages), countries that have become more open to the world economy have grown faster, i.e. become richer, than those that have remained closed. One of Lord Bauer’s major insights is that economic advancement in the developing world, over a broad historical sweep, has occurred in countries and regions that have had the most contact with the outside world, and particularly with the advanced centres of the world economy in the West. Indeed, no country on earth has delivered a sustained rise in the living standards of its people without being open to the world.
The evidence from the post-1945 period points in the same direction. The gradual liberalisation of trade and capital flows in the OECD countries spurred West European reconstruction, recovery and catch-up growth. The outward-orientation of Japan and other East Asian countries played an important role in their catch-up growth. The gradual liberalisation of foreign trade and inward investment in China, despite continuing protection, has undeniably contributed significantly to spectacular and sustained growth rates over the past decade-and-a-half. Hong Kong and Singapore are the outstanding examples of long-standing free trade (earlier in the former than the latter) acting as a catalyst for dizzyingly high growth since the 1950s and 60s.
As for the last two decades, a new World Bank study concludes that 24 developing countries, with a total population of 3bn, and with progressively more liberal trade policies, are increasingly integrating into the global economy. They have rising shares of manufactures in total exports; their ratios of trade to national income have doubled since 1980; and the growth of income per head in this group has increased from 1 per cent a year in the 1960s to 5 per cent in the 1990s. The bad news, however, is that about 2bn people live in 75 countries with stagnating or declining aggregate growth. These happen to be countries that have liberalised less, although they suffer too from other intractable problems, such as poor climate and geography, rampant disease, civil war and chronically corrupt governments.
Globalisation, then, is growth-promoting. Growth, in turn, reduces poverty. China is the emblematic example of the nexus between globalisation, growth and poverty reduction, with over 300 million people lifted out of absolute poverty since 1978. This reflects the wider East Asian experience of dramatic poverty reduction in tandem with external opening and high growth over the past three-and-a-half decades.
This is not to say that trade and other forms of liberalisation are a panacea. Other policy changes and thoroughgoing institutional reform are also vital. Only in interaction with domestic institutional change (such as improving the protection and enforcement of private property rights and contracts, and rolling out transport and communications infrastructure) does external openness deliver abundant, replenishing long-term gains – a point grasped by Hume and Smith over two centuries ago. On the other hand, huge political, financial and technical obstacles block the path of sustainable policy reform, especially in developing countries, and these constraints differ between countries and regions.
Bearing these caveats in mind, openness remains a handmaiden of growth. It contributes to growth directly through trade, and the movement of capital and people. Indirectly, it provides the spontaneous stimulus for domestic institutional improvement – not least through the expansion of political and economic freedoms as governments engage in a competitive race to liberalise. One can indeed conclude that the liberalisation of international transactions is good for freedom and prosperity. The anti-liberal critique is wrong: marginalisation is in large part caused by not enough rather than too much globalisation.
The retreat of the state?
“Global governance” advocates are also wrong in saying that the nation-state is in retreat. Quite the reverse: the core functions of law and public policy continue to be performed primarily at the national level by governments, not by IGOs, MNEs or NGOs. These functions of national governance – defence of territory from external threat, internal law and order, the protection of private property rights and contracts, and the provision of other public goods -- are as vital as ever. Not least, national trade, exchange rate, capital market and migration policies determine how integrated the national economy becomes with the global economy. Globalisation, then, continues to depend fundamentally on law-governed nation-states and the exercise of national policy choice, “from below” as it were. It is quite misleading, indeed damaging, to think of the governance of globalisation as a Cartesian construct “from above”.
This is not to deny the importance of well-designed international co-operation where necessary, as a helpful auxiliary to national governance rather than as a substitute for it. Unfortunately, most international organisations have been meddlesome, bureaucratic failures. The GATT, on balance, was an exception, with a relatively clear mandate – to progressively liberalise international trade through non-discriminatory rules. These rules on the whole limited rather than expanded the ability of governments to intervene in markets in an arbitrary and discretionary manner. The present WTO has a wider rule-base for further liberalising international trade in goods and services, but it also has cumbersome regulations (such as on intellectual property protection) that hinder rather than promote market access. The new Doha Round holds out the prospect of refocusing the WTO on its core market access mission, but it also threatens to introduce burdensome regulations (especially on environmental standards) that may work in the other direction.
September 11th has not fundamentally altered the debate on globalisation, but it does reinforce the need for more, not less globalisation. Market freedoms enable the progress out of poverty to prosperity, and are vital to civilised life across the world. Their expansion in the poorest countries on earth is arguably the best long-term insurance policy against religious fundamentalism and international terrorism.
Razeen Sally is Senior Lecturer in International Political Economy in the London School of Economics/LSE’s International Relations Department and head of its International Trade Policy Unit. His main research interests concern the WTO and trade policy in developing and transitional countries, and the history of economic ideas. He is the author of Classical Liberalism and International Economic Order: Studies in Theory and Intellectual History (Routledge, 1998). Dr. Sally will be based at the LSE’s Centre for the Study of Global Governance in 2002/3, where he will be working on WTO-related issues.