Comment & Analysis: The Best Path to Prosperity

By Samuel Brittan
This article originally appeared in the Financial Times on February 14, 2002.

Supporters and opponents of global capitalism tend to assume that it is an almost irresistible force, leading one side to cheer and the other to gnash its teeth. This belief totally underplays the role of politics and human choice.

The weaknesses of the conventional wisdom are well exposed in a new book by Brink Lindsey. Mr Lindsey says the friends of globalisation “started all the hype about the powerlessness of government in the new world economy”. Thomas Friedman for instance wrote of a golden straitjacket constraining governments. Both sides wrongly regard the computer revolution as chiefly responsible.

If developing countries spurned foreign investment today, as they did a generation ago, these technical advances would make no difference. Mr Lindsey asks: how computerised was China when Deng Xiao Ping decollectivised agriculture? Or what did the microchip have to do with Margaret Thatcher’s victory over the miners’ union?

The author brings back politics and argues that partial liberalisation is a deliberate response to the worldwide failures of central control. “In fact the triumph of the market is nowhere in sight.” Market competition continues to be hindered by top-down controls and state favouritism and is at the same time undermined by a lack of supporting institutions. Throughout much of western Europe government spending is around 50 per cent of national income. Chinese state enterprises still employ 80m people. He should have also mentioned the severe immigration restrictions applied by most countries, which are the most illiberal aspect of all.

Opponents of globalisation take advantage of the triumphalist rhetoric and talk about market fundamentalism. Lindsey asks: where are the governments today, or even the opposition parties, that toe a strictly laisser-faire line? Ideologues not now in office, such as Reagan, Thatcher and Vaclav Klaus in the Czech Republic, have been the exception.

Brinkley is by background an international trade lawyer, who now works for the free market Cato Institute in Washington. He attributes recent Third World financial crises to the persistence of illiberalism. He puts a lot of blame on the banks for lending so much to politically favoured enterprises, which in turn reckoned on local or international bail-out. In east Asia a combination of artificially pegged exchange rates and politicised financial sectors proved catastrophic.

The author is too sensible to suppose that governments should do nothing. He ascribes many problems in emerging economies to the failure to provide reliable security for property and contract rights. He is in favour of social safety nets, which richer countries can better afford. But much of what passes for social policy is nothing more than the old illiberalism - for example, subsidies for loss-making state enterprises, the protectionism symbolised by the European Union common agriculture policy and limitations on labour mobility - all of which he describes as a cruel fraud.

Unfortunately most of the participants in the globalisation debate talk past each other. The free market school is talking about advances in absolute living standards and the globalisation sceptics are concerned with income differences between rich and poor. One of the most serious studies purporting to provide ammunition for the latter school comes in an article “True World Income Distribution” by B. Milanovic published in the January 2002 Economic Journal.

But, believe it or not, the Royal Economic Society now has its own spin doctors, who delight in any study that can be used to rebut the charge that economists are pro-free market. They regard as sensational the increase in “inequality” discerned by Mr Milanovic when he moves from comparisons within single countries to worldwide comparisons of households; and they add for good measure some tub-thumping rhetoric about “the rich living in gated communities” while the poor roam the world outside. Surprise, surprise. If you put together different countries with different income ranges, it is indeed likely that the world as a whole will show a larger range than if you look just at individual countries.

The author himself emphasises that the biggest contributor to these widening differentials is the relatively slow growth of income in rural China and rural India; and future trends in world income distribution will largely depend on how successfully these areas can catch up.

What is basically an interesting analysis is spoilt at the end by a series of the tub-thumping comparisons so beloved by the anti-globalisation protesters. For instance, the total income of the richest 25m Americans is equal to the income of almost 2bn of the poorest people. These comparisons should make western citizens feel guilty only if it can be plausibly shown that the plight of the poor is in some sense due to their own comparative wealth. And they are only helpful for policy purposes if there were a government-to-government way of transferring incomes from the richer to the poor countries that actually made the poor better off instead of disappearing into prestige projects, inflated arms expenditure and Swiss bank accounts.

There is a long-established hypothesis that economic development comes in phases: income disparities first increase as development occurs and the pioneering sectors move ahead but then narrow as the mass of the population begins to catch up. This hypothesis is strongly supported by an article in the January issue of Foreign Affairs by two World Bank economists with a similar background to Mr Milanovic. They take a much broader historical approach rather than concentrating on changes in the short period 1988-1993 on which Mr Milanovic concentrates.

Supporters of competitive liberalised markets are, however, selling themselves short if they rest their case on controversial and changing inequality measures. Only the last is a valid ground for concern. The acid test of whether or not those who protest about inequality are moved by jealousy and envy is whether their concern is with the plight of the poor or the wealth of the rich.

Ultimately, Winston Churchill’s ideal of a ladder and a safety net is more inspiring both within nations and between them than the goal of equal opportunity to compete for equal prizes. True equality is to be found only in the grave, if there.