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Martin Wolf: Why Globalization Works
Article added on August 1, 2004
  
As the title asserts, Martin Wolf, the chief economist commentator and associate editor of the Financial Times, successfully explains in his book Why Globalization Works. It is intended not as a work of academic scholarship, but as one of persuasion.
 
Unfortunately, with the collapse of the Soviet empire between 1989 and 1991, the enemies of liberalism have not all died. Martin Wolf's Why Globalization Works is one of the rare comprehensive books that convincingly oppose the rising tide of anti-globalization publications.

Martin Wolf considers the market "the most powerful institution for raising living standards ever intended... But markets need states, just as states need markets." The best marriage of the two is the contemporary liberal democracy. Today's problem "is not that there is too much globalization, but that there is far too little." States should just better understand "their long-run interest in a co-operative global economic order."

The central arguments of Wolf's book is that "[s]ocial democrats classical liberals and democratic conservatives should unite to preserve and improve the liberal global economy against the enemies mustering both outside and inside the gates."

The enemies of globalization are, according to Wolf, mainly single-issue non governmental organization, but also old-fashioned economic interests. Matters became more complicated after 9/11, which was another "assault on globalization".

After introducing the reader to the (anti-) globalization debate and the specific charges against market-driven globalization, the chief economist commentator of the FT defines economic globalization, makes clear why a liberal global market economy makes sense, examines what happens when markets cross frontiers and introduces the reader to the long history of globalization, which began well before the 19th or 20th century. In fact, in "some aspects the global economic integration is no more than it was a century ago, before the breakdown that occurred between 1914 and 1945." In fact, "there is too little [globalization]. Too many people are effectively outside the world market..."
 
Martin Wolf stresses that four interconnected features are of decisive importance for the modern market economy, especially in connection with the discussion of the global economic integration. First, he considers the private corporation, "hierarchical but embedded in markets", "the most extraordinary organizational innovation of the past two centuries." Second, the source of sustained growth of the last two centuries has been technological innovation. Competition forces companies to innovate, making innovation a central feature of capitalism. Third, intellectual property is the core of modern market economy, which only a powerful state can protect; contrary to what anti-globalization gurus pretend, the market relies on a strong state. Intellectual property protection should however be limited since over-liberal granting of it is a restraint on trade. Wolf mentions 'one-click' purchasing on the Internet as an example of a too freely granted protection. Fourth, financial markets are the "bloodstream" of the modern market economy. They are fragile and imperfect, but irreplaceable.

Wolf looks in detail at the charges of the critics of globalization. Most arguments by the anti-globalization adepts are wrong. They are wrong "about global impoverishment, corporate domination, the threat to the sovereignty of the democratic state and the so-called race to the bottom in environmental and social regulation." Chinese workers will not drive down German wages to their levels since they are so low because they are unproductive. Wages rise in line with productivity. This is what happened for instance in South Korea in recent decades. Today, the country has "largely left garment manufacture behind." Wolf concludes, taking also other factors into account, that "worries about de-industrialization and global competition from pauper labour are nonsense."

A combination of, among other things, strong trade unions and job protection is no solution either, as Wolf shows with the example of India, where exactly this combination has halted growth of employment in modern manufacturing at about five million employees in a country with over a billion people. There is little chance of unblocking Indian industrialization as long as the protection of workers continues. The result is no additional jobs at all. In Taiwan and South Korea, the opposite happened, with workers enjoying wages and working conditions Indians can only dream of.

Regarding environmental damage, Wolf takes the past examples of the Soviet Union and China, where Socialist regimes used resources inefficiently. Technological backwardness and self-sufficiency as a goal have produced terrible pollution. Absence of trade can directly harm the environment, as he exemplifies with the case of Switzerland, where the protected agriculture uses much more fertilizers, pesticides and energy per unit of output than does less protected agriculture; however, Wolf forgets to point to the fact that shipping agricultural goods from Argentina or Australia to Switzerland is not very ecological either, wasting large amounts of fuel. Still, the above examples of inefficient allocation of resources remains true.

Martin Wolf convincingly dismisses the advocates of localization as lunatics. Their "recipes" destroy trade and therefore devastate developing countries. Localization leads to impoverishment, as the examples of North Korea and Cuba show. Wolf dismisses import substitution. He is critical of infant industry-protection and industrial promotion, although he admits that South Korea and Taiwan developed without following the path of free trade, concluding that some special efforts such as infant industry promotion by developing countries can be necessary to create indigenous technology and growth.

The complaint that corporations, not governments, rule the world, is without fundament since governments (and behind them intellectuals) pushed for liberalization and privatization. "Corporations would be happier with monopolies and cartels." Above all, in liberal regimes, the power of corporations is limited by the market.

Their is also competition among states. Globalization forces governments to be more open and to provide value for the taxes they charge their citizens. Therefore, predatory states have no future in a globalized world. A liberal economy needs a strong state since failed, disorderly, weak and corrupt states are shunned by capital and corporations - "they are the black holes of the global economic system."

Martin Wolf convincingly demonstrates - in an important part of the book, touching many more areas than the ones exposed here - that almost all accusations by the enemies of globalization are false. According to Wolf, the biggest failure of globalization so far is the lack of transfer of capital and ideas to the developing world.
 
He acknowledges that the critics are not wrong on all points. He criticizes "the hypocrisy of the developed world on liberalization." Agricultural and labour-intensive products such as textiles, where developing countries have their comparative advantage, have been largely locked out of liberalization so far. Tariffs and other protectionist barriers especially in these fields are a disgrace, since the hurt the poorest. - Last weeks WTO talks in Geneva, which may lead to a liberalization of agricultural trade, would probably have been commented by Wolf as an encouraging sign, although the outcome is far from sure yet.

Wolf agrees with critics who deplore the fact that "the institutions set up to manage the global economy do not work as well as they might, particularly in finance." He states that "the IMF has been secretive and arrogant", more so in the past than today. Time and again, it has lent to incompetent countries. Despite its weaknesses, it is needed. Wolf also admits that the WTO is imperfect and needs to be formed too. But he adds that "complaints [about the WTO] are generally wrong and, where not wrong, exaggerated."

Martin Wolf comes to some obvious conclusions that are rarely considered: The market for labour is "the world's most unintegrated". The answer would be "free migration". A large part of humanity is locked "into failed states and economies". "The poorest regions (countries) were not hurt by globalization. They just failed to be part of it." Their problem "is not that they exploited, but that they are almost entirely unexploited..."

Regarding Africa, Wolf states that the root of the continent's economic disaster is the "failure of the state to provide almost any of the services desperately needed for development..." A country such as Nigeria has been "ruined by the abundance of oil." Natural resources do not bring prosperity if the political elite is corrupt and the society rent-seeking. A successful way of countries towards development has been the export of labour-intensive manufactures, e.g. in the cases of Hong Kong, Singapore, Taiwan and South Korea.

Wolf acknowledges that many important reformers were not liberals, but include people such as Jacques Delors in Europe, Deng Xiaoping in China and Roger Douglas in New Zealand. "The Democrats under Bill Clinton agreed to the World Trade Organization". Tony Blair's Labour government "made the Bank of England independent." Lionel Jospin's Socialists privatized more than any other French government.

Still, globalization "remains remarkably limited." However, the steps towards a global economy, especially by China and India in the last twenty respectively ten years, have "reduced global inequality". The "some 1.5 billion people that lag even further behind" live in societies locked out of the globalization process.

In Why Globalization Works, Martin Wolf concludes that "the market economy is the only arrangement capable of generating increases in prosperity, providing the underpinning stable liberal democracies..." It is not the limited economic integration, but the political fragmentation of the world that is the chief obstacle to globalization. It is the institutional quality (rule of law, level of corruption, ability of political leaders, etc.) of the state one lives in that determines the prospects of one's economic future and not one's class or profession. According to Wolf, the world needs better states in order to ensure better globalization. Bad politics is currently the main threat to a better economic integration.


Martin Wolf: Why Globalization Works. Yale University Press, 2004, 398 p. Get it from Amazon.co.uk, Amazon.de. Other edition: Amazon.com, Amazon.ca, Amazon.co.uk, Amazon.de.

Suggested further reading:
- Ian Little and Maurice Scott, Tibor Scitovsky: Industry and Trade in Some Developing Countries: A Comparative Study. London, OUP, 1970.
- Friedrich Hayek: The Road to Serfdom. London, 1944.
- Friedrich Hayek: The Constitution of Liberty. Chicago, 1960.

Check also our biography of Martin Wolf.







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