The Blessings and Challenges of Globalization

This article appeared on Cato.org on September 1, 2000.
Share

The evidence of globalization can be seen everywhere: in thehome, in the workplace, in the discount stores, in the newspapersand business journals, in the flow of monthly governmentstatistics, and in academic literature. The backlash was on displayin Seattle in November 1999, when thousands of protesters took tothe streets to demonstrate against the ministerial meeting of theWorld Trade Organization (WTO).

A short definition of globalization is "the growingliberalization of international trade and investment, and theresulting increase in the integration of national economies."Economist David Henderson of the Melbourne Business School expandsthe definition into five related but distinct parts:

* the increasing tendency for firms to think, plan, operate, andinvest for the future with reference to markets and opportunitiesacross the world as a whole;

* the growing ease and cheapness of internationalcommunications, with the Internet the leading aspect;

* the trend toward closer international economic integration,resulting in the diminished importance of political boundaries.This trend is fueled partly by the first two trends, but even morepowerfully by official policies aimed at trade and investmentliberalization;

* the apparently growing significance of issues and problemsextending beyond national boundaries and the resulting impetus todeal with them through some form of internationally concertedaction; and

* the tendency toward uniformity (or "harmonization"), by whichnorms, standards, rules, and practices are defined and enforcedwith respect to regions, or the world as a whole, rather thanwithin the bounds of nation-states.1

Globalization can be seen most clearly in the quickening paceand scope of international commerce. Global exports as a share ofglobal domestic product have increased from 14 percent in 1970 to24 percent today,2 and the growth of trade has consistentlyoutpaced growth in global output. In the United States, the ratioof two-way trade and investment income flows as a share of GDP hasroughly tripled since the 1960s. Annual global flows of foreigndirect investment surged to a record $ 400 billion in 1997, with 37percent directed to less developed countries (LDCs), up from 7percent in 1990.3 In the 1970s, daily foreign exchange transactionsaveraged $ 10 billion to $ 20 billion; today, the average dailyactivity has reached more than $ 1.5 trillion.4

The expansion of international trade and foreign investment hasnot been the result of some grand design imposed on the globaleconomy. It has been an ad hoc, decentralized, bottom-up processresulting from two developments of the 1980s: the collapse ofglobal communism and the demise of the Third World's romance withimport substitution. The fall of the Berlin Wall and the finaldisintegration of the Soviet empire two years later released 400million people from the grip of centrally commanded and essentiallyclosed economic systems. Meanwhile, the debt crisis of 1982 and theresulting "Lost Decade" of the 1980s imposed a painful hangover onmany Third World nations that had tried and failed to reachprosperity by shunning foreign capital and by protecting andsubsidizing domestic "infant" industries. Beginning with Chile inthe mid-1970s and China later that decade, LDCs from Mexico andArgentina to India more recently have been opening their marketsand welcoming foreign investment. The globalization of the lastdecade has not been the result of a blind faith in markets imposedfrom above but of the utter exhaustion of any alternativevision.

In contrast to those failed policies, certain countries havemanaged to dramatically improve their living standards byderegulating their domestic economies and opening up to globalmarkets. The Four Tigers of East Asia--Hong Kong, Singapore,Taiwan, and South Korea--are the most prominent examples. Fromtypical Third World poverty in the 1950s, each has achieved astandard of living today equivalent to that of industrializednations, with per-capita incomes in Hong Kong and Singaporerivaling those of the wealthiest Western nations.

The relative success of openness as a policy, compared withprotectionism, has spurred a global movement toward unilateraltrade liberalization. Since the mid-1980s, sixty LDCs haveunilaterally lowered their barriers to trade. LDCs have flocked tojoin the WTO. Today more than three-quarters of its members areLDCs, with another twenty waiting in line to join.5 The move totrade liberalization has been accompanied by investmentliberalization, with more than 90 percent of national policychanges in the last decade being in the direction of more opennesstoward foreign investment.6

THE BLESSINGS OF GLOBALIZATION

Beyond all the impressive numbers about the extent ofglobalization, what kind of impact is it having on nationaleconomies? There are at least three fundamental blessings ofglobalization on nations that embrace it: faster economic growth,reductions in poverty, and more fertile soil for democracy.

The greatest beneficiaries of globalization are thelong-suffering consumers in those nations that had been "protected"from global competition. Globalization expands the range of choice,improves product quality, and exerts downward pressure on prices.It delivers an immediate gain to workers by raising the real valueof their wages. It transfers wealth from formerly protectedproducers to newly liberated consumers, with the gains to consumersexceeding the loss to producers because the deadweight losses tothe economy are recaptured through efficiency gains.

Under autarky, consumers are often cursed with poor service andoverpriced and low-quality goods because there is no realcompetition to spur domestic producers to meet the demands of theirconsumers. This explains the poor quality of cars sold by protecteddomestic producers in such places as India, where the standardAmbassador car is based on the Morris Oxford, a make of car thatwent out of style in Britain four decades ago.

LDCs have the most to gain from engaging in the global economy.First, they gain access to much larger markets, both for importsand exports. On the import side, consumers gain access to adramatically larger range of goods and services, raising their realstandard of living. Domestic producers gain access to a wider rangeand better quality of intermediate inputs at lower prices. On theexport side, domestic industries can enjoy a quantum leap ineconomies of scale by serving global markets rather than only aconfined and underdeveloped domestic market.

Second, LDCs that open themselves up to international trade andinvestment gain access to a much higher level of technology. Thisconfers on LDCs a "latecomer's advantage": rather than bearing thecost of expensive, up-front research and development, poorcountries can import the technology off the shelf. They canincorporate new technology by importing capital equipment thatembodies the latest advances and computers with the latestsoftware. Subsidiaries of multinational companies also bring withthem new production techniques and employee training that bolsterthe host nation's stock of human capital.

Third, engagement in the global economy provides capital to fuelfuture growth. Most LDCs are people-rich and capital-poor. In a fewcountries in Asia, the level of domestic savings has been highenough to finance domestic investment, but typically the domesticpool of savings in an LDC is inadequate. Global capital markets canfill the gap, allowing poor nations to accelerate their pace ofgrowth. In 1998, $ 166 billion in foreign direct investment flowedfrom the advanced economies to the less developed. A poor countrythat closes its door or fails to maintain sound domestic policieswill forfeit the immense benefits this capital can bring.

Fourth, openness to the global economy can provide theinfrastructure a developing economy needs for growth. Foreigncapital can finance more traditional types of infrastructure, suchas port facilities, power generation, and an internaltransportation network, just as British capital helped to financeAmerica's network of canals and railroads in the nineteenthcentury. But just as importantly, multinational companies canprovide an infrastructure of what could be called "enablingservices," such as telecommunications, insurance, accounting, andbanking. As China and India have realized, a protected andinefficient service sector weighs down an entire economy, retardingthe development of manufacturing and other industries. LDCs need toshed the mistaken idea that opening their economies up tointernational service competition is a "concession" to be made togain access to farm and manufacturing markets in the advancedeconomies. In reality, liberalizing their service sectors byopening them to foreign competition is a favor LDCs can do forthemselves.

Fifth, engagement in the global economy encourages governmentsto follow more sensible economic policies. Sovereign nations remainfree to follow whatever economic policies their governments choose,but globalization has raised the cost that must be paid for badpolicies. With capital more mobile than ever, countries that insiston following antimarket policies will find themselves being dealtout of the global competition for investment. As a consequence,nations have a greater incentive to choose policies that encourageforeign investment and domestic, market-led growth. New York Timescolumnist Thomas Freidman, in The Lexus and the Olive, his 1999book on globalization, describes these progrowth policies as "theGolden Straitjacket." The increasingly manifest rewards ofengagement encourage nations to unilaterally restrict the scope ofgovernment action. As Friedman explains:

To fit into the Golden Straitjacket a country must either adopt,or be seen as moving toward, the following golden rules: making theprivate sector the primary engine of its economic growth,maintaining a low rate of inflation and price stability, shrinkingthe size of its state bureaucracy, maintaining as close to abalanced budget as possible, if not a surplus; eliminating andlowering tariffs on imported goods, removing restrictions onforeign investment, getting rid of quotas and domestic monopolies,increasing exports, privatizing state-owned industries andutilities, deregulating capital markets, making its currencyconvertible, opening its industries, stock, and bond markets todirect foreign ownership and investment, deregulating its economyto promote as much domestic competition as possible, eliminatinggovernment corruption, subsidies and kickbacks as much as possible,opening its banking and telecommunications systems to privateownership and competition, and allowing its citizens to choose froman array of competing pension options and foreign-run pension andmutual funds.7 While globalization may confront governmentofficials with more difficult choices, the result for theircitizens is greater individual freedom. In this sense,globalization acts as a check on governmental power, making it moredifficult for governments to abuse the freedom and property oftheir citizens.

Any casual survey of the world today will confirm that nationsrelatively open to trade tend to be more prosperous than nationsthat are relatively closed. The wealthiest nations and regions ofthe world- -western Europe, the United States, Canada, Japan, HongKong, Taiwan, South Korea, Singapore--are all trade-orientated.Their producers, with a few notable exceptions, must competeagainst other multinational producers in the global marketplace. Incontrast, the poorest regions of the world--the Indian subcontinentand sub-Saharan Africa--remain (despite recent, halting reforms)the least friendly to foreign trade. And those countries that havemoved decisively toward openness--Chile, China, and Poland, amongothers--have reaped real (and, in the case of China, spectacular)gains in living standards.

Systematic studies confirm a strong link between openness andeconomic growth.8 A study of 117 countries by Jeffrey Sachs andAndrew Warner found that open economies grew much faster thanclosed economies. Specifically, the authors found that thedeveloping countries that maintained open economies throughout the1970s and '80s grew at an average annual rate of 4.5 percent,compared with an average growth rate of 0.7 percent for closedeconomies. As a result, the open developing economies tended toconverge toward the slower-growing rich economies, while relativelyclosed economies did not converge.9

A more recent study, by Jeffrey Frankel and David Romer,produced similar results. The authors found that trade exerts "aqualitatively large and robust E positive effect on income." Intheir study of 150 countries, they concluded that increasing theratio of trade to gross domestic product by 1 percentage pointraises income per person by between 0.5 and 2 percent.10 TheOrganization for Economic Cooperation and Development (OECD)concluded that nations relatively open to trade grew on averagetwice as fast as those relatively closed to trade.11

HOPE FOR THE WORLD'S POOREST

Globalization offers hope to the world's poorest. Just as moreopen trade tends to promote economic growth, growth in turn leadsto poverty reduction. A World Bank study found that periods ofsustained economic growth are almost always accompanied byreductions in poverty. Specifically, the study found that povertyfell in 77 of the 88 decade- long periods of growth covered by thesurvey.12

The greatest reductions in poverty in the last twenty years haveoccurred in nations that have moved decisively toward openness anddomestic liberalization. The most spectacular gains have beenrealized in East Asia. Between 1993 and '96, the number of peopleliving in absolute poverty--what the World Bank defines as lessthan $ 1 per day-- declined in the region from 432 million to 267million. In China alone, the number of poor people so defined fellby 150 million between 1990 and '97.13 The 1997--98 financialcrisis that began in East Asia brought a temporary halt to thisprogress, but poverty rates in the hardest-hit countries--Korea,Thailand, and Indonesia--have begun to decline back toward theirprecrisis levels. Globally, the number of people living in absolutepoverty has declined in the 1990s to an estimated 1.2 billion in1998.14

Globalization facilitates the spread of modern medicine, whichhas helped to extend life expectancy and reduce infant mortality inrich and poor countries alike. On average, life expectancy indeveloping countries rose from 55 years in 1970 to 65 years in1997. This good news is tempered by the fact that life expectancyhas actually fallen in thirty-three LDCs since 1990, in large partbecause of AIDS epidemics, and remains far behind the OECD averageof 78 years. Infant mortality rates in Asia and sub-Saharan Africahave fallen by about 10 percent since 1990.15

Opponents of globalization try to blame poverty in the world onthe spread of trade and investment liberalization. But thoseregions where poverty and inequality have been the most visible andintransigent for decades--Latin America, sub-Saharan Africa, andthe Indian subcontinent--for most of that time self-consciouslyfollowed policies of economic centralization and isolation.

FERTILE SOIL FOR POLITICAL FREEDOM

By raising the general standard of living, free trade helpspeople achieve higher levels of education and to gain access toalternative sources of information. It helps to create a larger andmore independently minded middle class that can form the backboneof more representative forms of government. The wealth created fromexpanded trade can help to nurture and sustain civil institutionsthat can offer ideas and influence outside government. Engagementin the global economy exposes citizens to new ideas and new socialand business arrangements. In his book Business as a Calling,Michael Novak explains the linkage with what he calls "the wedgetheory":

Capitalist practices, runs the theory, bring contact with theideas and practices of the free societies, generate the economicgrowth that gives political confidence to a rising middle class,and raise up successful business leaders who come to represent apolitical alternative to military or party leaders. In short,capitalist firms wedge a democratic camel's nose under theauthoritarian tent.16

The wedge theory seems to be working in practice: As a generalrule, the citizens of nations that are more open economically tendto enjoy other liberties as well. The relationship can be confirmedby comparing cross-country data measuring economic openness andpolitical/civil liberties. For the political and civil data, I haveused recent ratings from Freedom House, which classifies thenations of the world as free, partly free, or not free.17 Then Icompared the Freedom House scores with international economicfreedom as measured in the study Economic Freedom of the World:1998/1999 Interim Report, written by James Gwartney and RobertLawson. The authors rated nations according to their level oftaxation on trade, the size of the trade sector, exchange ratecontrols, and restraints on capital mobility, with a rating of 10representing maximum openness.18

Comparing these two sets of data confirms that nations thatrespect human rights tend to be relatively open to commerce withthe rest of the world. Nations that are classified by Freedom Houseas being free scored an average of 7.9 on the scale of economicopenness. Those that are partly free scored a less open 6.7, andthose that are not free scored the lowest, 5.4 (see fig. 1). If westart at the other axis we find that, of those countries in the topthird of the Gwartney-Lawson scale of economic openness, 84 percentearned a political/civil ranking of "free." Of those in the middlethird according to economic openness, 57 percent were free, but inthe bottom third, only 22 percent were free. In other words,citizens who enjoy the freedom to engage in international commerceare about four times more likely to be free from political andcivil oppression than those who do not enjoy such freedom.

Globalization and the growth it spurs have contributed toexpanded political and civil freedom in a number of countries.Taiwan and South Korea were essentially dictatorships two decadesago, but they are now governed by elected legislatures andpresidents. Political debate in those countries is robust, andcivil liberties are more secure than ever. A share of the creditfor political reform must be given to economic liberalization andthe educated middle class it helped to create and nurture. In LatinAmerica, the movement toward economic liberalization has beenintertwined with a flowering of representative government. Chile, aleader in economic reform, now enjoys one of the region's moststable democracies. A decade of dramatic economic reform in Mexicohas helped lay the foundation for a more open political system,including Mexico's first competitive presidential primary withinthe Institutional Revolutionary Party.

Skeptics of the link between economic and political reformroutinely point to India and Singapore to refute the thesis. Thesecountries are clearly outliers in the scatterplot: Singapore is oneof the world's most open economies but its government remainsauthoritarian, while India remains relatively closed economicallyyet is ruled by democracy. Exceptions, however, do not negate aclear trend. And even these two notable exceptions seem to bemigrating toward the trend line, with India opening up to trade andforeign investment since its balance of payments crisis in 1991,and the Singapore government gradually loosening its controls oncivil society.

THE CHALLENGES OF GLOBALIZATION

The advance of globalization has not been a smooth or apain-free process. The changes it has caused, or is perceived tohave caused, have spurred a political backlash--dramaticallyevident in the street protests that plagued the WTO ministerial inSeattle. Two of the most common complaints against globalizationare that it has undermined labor and environmental standards, andthat it has exacerbated the gap between rich and poor, both amongand within countries.

Critics of globalization warn of a destructive "race to thebottom," as advanced nations are forced to weaken labor andenvironmental standards to compete with less-regulated producers indeveloping nations. This theory rests on the assumption that lowerstandards give LDCs a significant advantage in attracting globalcapital and gaining export markets at the expense of more developedcountries. The OECD has found that, in practice, a lack of corelabor standards plays no significant role in attracting foreigninvestment or in enhancing export performance. The OECD did findstrong evidence "that there is a positive association over timebetween sustained trade reforms and improvements in corestandards."19

In other words, trade liberalization encourages higherstandards, not lower standards. If anything, the real race may betoward the top. For reasons of internal efficiency as well aspublic perceptions, multinational companies tend to impose higherstandards on their overseas production plants than those prevailingin local markets, thus raising average standards in the hostcountry. Free trade and domestic liberalization--and the fastergrowth they create--are the best ways to encourage higherstandards. As per capita incomes rise in less developed countries,so does the domestic political demand for higher standards, and theability of the productive sector to pay for them. Punishing LDCswith trade sanctions would only cripple their long-term ability toraise domestic labor and environmental standards.

Some environmental activists complain that the global tradingsystem, as embodied in the WTO, favors free trade at the expense ofenvironmental protection. But WTO rules place no restraints on theability of a member government to impose any environmentalregulations determined to be necessary to protect its ownenvironment from domestically produced or imported products.Article XX of the General Agreement on Tariffs and Trade 1994, thebasic charter of the WTO, plainly states that members may imposetrade restrictions "necessary to protect human, animal, or planthealth." The Sanitary and Phytosanitary Agreement of the UruguayRound does require that such restrictions be based on soundscientific evidence--a commonsense requirement necessary todiscourage the use of health and safety issues as a cover forprotectionism.

If WTO members are found to be in violation of theircommitments, they remain free as sovereign nations to simply ignoreany adverse WTO rulings against domestic regulations that impacttrade. A prominent example is the European Union's ban on the saleof beef from cattle treated with growth hormones. The EU hasrepeatedly lost in the WTO, but it has no plans to lift its ban,even though it has produced no scientifically sound evidence thatthe banned beef poses any hazard to public health. The UnitedStates retaliated against the EU in May 1999 by imposing sanctionson $ 117 million worth of imports from Europe, but retaliation as aweapon of trade disputes existed long before the WTO.

Antitrade environmental activists complain that severaldecisions by the WTO have undercut U.S. environmental regulations.In the so-called Shrimp-Turtle case, the WTO ruled against a U.S.ban on shrimp from countries the United States judged were notadequately protecting sea turtles from being caught and killed inshrimp nets. In an earlier, similar case, the WTO had ruled againsta U.S. ban on tuna from Mexico that the United States claims wascaught through a process that endangers dolphins. Environmentalcritics of the WTO point to these two cases as proof of theirclaim.

In both these cases, however, the United States remains free tosimply ignore the WTO ruling and continue enforcing the law as is.The affected nations could in theory retaliate with traderestrictions of their own if the United States refuses to comply,but that option would always exist even if the WTO did not. And inthe case of the Shrimp- Turtle decision, it was not the law itselfthat ran afoul of WTO rules but the discriminatory way the UnitedStates went about implementing it, for example giving LatinAmerican suppliers more time than Asian suppliers to comply withthe law.

Expanding trade is not merely compatible with high standards ofenvironmental quality but can lead directly to their improvement.As a country sees its standard of living rise through economicliberalization and trade expansion, its industry can more readilyafford to control emissions and its citizens have more to spend onthe "luxury good" of improved environmental quality, above whatthey need for subsistence. And as economic growth creates agrowing, better- educated middle class, the political demand forpollution abatement rises. Today the most restrictive environmentallaws are maintained in developed countries that are relatively opento trade.

This helps explain the so-called Environmental Kuznets Curve,where environmental quality in a developing nation initiallydeteriorates as the economy begins to industrialize but thenimproves after its citizens reach a certain standard of living.Research by Alan Krueger and Gene Grossman indicates that theturning point occurs at about $ 5,000 per capita: "We find noevidence that environmental quality deteriorates steadily witheconomic growth. Rather, for most indicators, economic growthbrings an initial phase of deterioration followed by a subsequentphase of improvement." By $ 8,000 per-capita income, the authorsfound, almost all the pollutant categories had begun toimprove.20

The United States itself is a classic example of the benigneffect of trade and growth on the environment. It hassimultaneously one of the most open economies and one of thecleanest environments in the world. In the past decade, the UnitedStates has continued to open its economy further, signing the NorthAmerican Free Trade Agreement and shepherding the creation of theWorld Trade Organization. Meanwhile, two-way trade and foreigninvestment continue to climb as a percentage of GDP. Thisliberalization of international trade and investment has beenaccompanied by ever-rising environmental standards. According tothe President's Council on Environmental Quality, mean ambientconcentrations of both sulfur dioxide and carbon monoxide in theatmosphere of the United States have dropped by nearly 40 percentsince 1988. During that same period, the annual number of "bad airdays" in major U.S. cities has dropped by two-thirds. The directdischarge of toxic water pollutants is down dramatically as well.Since the early 1970s, during a time of growing globalization ofthe U.S. economy, real spending by government and business on theenvironment and natural resource protection has doubled.21

Despite the rhetoric heard on the streets in Seattle, expandingglobal trade has not spurred a race to the bottom on environmentalregulation or quality. In fact, the evidence points in the oppositedirection.

THE GAP BETWEEN RICH AND POOR

Another challenge of globalization is the perception thateconomic liberalization has exacerbated the gap between rich andpoor countries, and between the rich and poor within countries thathave liberalized. The perception that the gap has been growing,both among and within nations, is broadly true. The connection withglobalization is much less clear.

While some previously poor countries have managed to close thegap with the more advanced economies, a disturbingly large numberof countries have fallen further behind. According to the WorldBank, the ratio of income per capita in the richest countriescompared with that in the poorest rose from 11 in 1870 to 38 in1960 to 52 in 1985.22 Concern about the "marginalization" of poorcountries in the global economic system has rightly focused onsub-Saharan Africa. Since 1976, the region's share in world tradehas fallen from 3 percent to slightly more than 1 percent in the1990s.23 While the flow of foreign direct investment to LDCs hasrisen dramatically in the 1990s, sub-Saharan Africa has been almostentirely overlooked. But the phenomenon of marginalization has notbeen a random event.

Poor nations that have fallen further behind the rich nationsare almost uniformly those that have clung to state-directed andinward- oriented economic policies. Sub-Saharan Africa has laggedbehind the rest of the world in economic growth in significant partbecause its markets remain among the most closed in the world. Itsgovernments have neglected domestic infrastructure such as roadsand have distorted their domestic economies with subsidies, hightaxes, and regulations. Granted, many African nations must alsobear the burden of civil and tribal strife, poor soil, andinaccessible geography. But domestic economic policy must beconsidered a key variable in explaining the region's failure todevelop. Those African nations that have implemented more open,stable, and market-friendly policies in the last decade--such asUganda, Botswana, and Mauritius--have achieved growth ratesexceeding those of the advanced nations.

The most obvious variable that separates countries that areclosing the gap from those falling further behind is their owndomestic policy choices. Simply put, nations that adopt the "GoldenStraitjacket" begin to catch up with the advanced economies, whilethose that reject it become increasingly marginalized. In theirEconomic Freedom of the World: 1997 Annual Report, Gwartney andLawson found strong empirical evidence linking growth rates toeconomic freedom. The authors measured seventeen categories ofeconomic policy for each of 115 countries-- covering monetarypolicy, property rights, government spending and regulation, andrestraints on foreign trade. They found a strong correlationbetween economic freedom and both economic growth and per- capitaGDP. The authors found that each quintile of greater economicfreedom corresponded with faster growth and higher per-capita GDP.Nations in the top quintile in 1995 grew almost three times faster(2.9 percent annually) on average than those in the middle quintile(1.1 percent). Those in the bottom quintile saw their economiesshrink an average of 1.9 percent.24

There is nothing inherent in the process of globalization thatwould cause the gulf between rich and poor nations to expand. Infact, the access to capital, new technology, and larger marketsthat comes with global integration should be expected to acceleratethe convergence of less developed regions of the world and to makeglobal trade and wealth less concentrated across countries. Thisdynamic has been at work inside the United States, which has itselfbeen a continent-sized free- trade area for more than twocenturies. At the turn of the last century, in 1900, per-capitaincome varied widely across the four major regions of the UnitedStates. While incomes in the Midwest were close to the nationalaverage, at 103 percent, incomes in the Northeast were 139 percentabove the national average and those in the West were 153 percentabove. In contrast, income levels in the South were only 54 percentof the national average. One century later--thanks in large measureto the free flow of goods, capital, and people within U.S.borders--regional disparities have shrunk dramatically. Today,income levels in the Northeast are only 117 percent above thenational average, incomes in the Midwest and West are within 2percentage points of the national average, and incomes in the Southas a share of the national average have risen to 90 percent.25

Evidence of a similar trend exists among countries that havechosen to join the global economy. A 1998 study sponsored by theWTO found that global trade and investment flows have actuallybecome less concentrated in the last two decades when adjusted forthe growth in world trade. Moreover, the authors found that theconcentration of trade and financial flows has fallen amongcountries that have more rapidly liberalized, whereas it hasincreased among those that have integrated more slowly. "We arguethis shows that marginalization of individual countries from worldmarkets can be mostly explained by inward-looking domesticpolicies," they concluded, "and therefore that marginalization isnot inherent to the globalization process."26

Of course, the advanced economies have not always been helpful.Despite progress in the post-war era, advanced-economy tradebarriers remain stubbornly high against clothing, textiles, andagricultural goods, the very products in which LDCs have a naturalcomparative advantage. A recent study by Thomas Hertel of PurdueUniversity and Will Martin of the World Bank found that the averagetariff that rich countries impose on manufacturing goods from poorcountries is four times higher than the average tariff richcountries impose on each other's goods.27 One of the manydisappointments left in the wake of the failed WTO talks in Seattlehas been the indefinite postponement of negotiations to lowerbarriers to poor-country exports. It would be wrong, however, toblame advanced-country trade barriers for the lack of economicprogress in so many LDCs. After all, the Four Tigers of East Asiamanaged to hop on the income-convergence conveyor belt in the faceof advanced-country trade barriers that were even higher than theyare today.

For poorer nations, the global economy has become like one ofthose giant conveyor belts that speed passengers through airportterminals. Globalization can accelerate a country's development,but only if its policymakers allow its citizens to hop onboard byopening the economy to international trade and investment. Thisconveyor belt of growth provides new technology, investmentcapital, domestic competition, expanding export markets, andpowerful incentives for further domestic policy reform. The resultis faster growth and dramatic improvements in living standardswithin a generation or two--as we have seen most strikingly in theFar East. The fact that some nations insist on walking their own,uphill, isolated, and often dead-end path is not the fault ofglobalization but of their own policymakers.

The story of income inequality within nations is morecomplicated. The trend within the United States and other developednations has been toward a wider earnings gap between the lowest-and the highest-paid workers. The gap has been driven primarily bya difference in worker skills rather than by international trade.An information-based economy will naturally produce jobs thatrequire more specialized and technical skills than a less developedeconomy, which is more weighted toward agriculture and industry. Asa result, in the United States in the last twenty-five years, thegap in income has been increasing between workers with collegedegrees and those with only high school diplomas.

International trade has probably contributed something to thistrend in the United States, because trade should in theoryaccelerate the transition toward industries that rely moreintensively on high-skilled labor. But the primary engine of changein the U.S. economy during that time has been technologicalinnovation.

The relatively larger importance of technological changecompared with trade can be seen in recent trends of jobdisplacement. U.S. Labor Department surveys show thatthree-quarters of Americans displaced from their jobs in 1995--97were working in sectors of the economy that are relativelyinsulated from trade.28 Even in the more trade-intensivemanufacturing sector, technological change rivals trade as theprincipal engine of labor-market change. International trade isoften blamed for job displacement in manufacturing when in fact thecause is rising productivity. This explains why the number ofworkers employed in manufacturing in the United States has remainedstable in the 1990s at slightly more than eighteen million, at atime when manufacturing output has been rising an average of 3.8percent a year in the decade (and 5.5 percent a year since1994).

As with employment, technology is also the chief explanatoryvariable of changes in income inequality. William Cline, in a studyon the impact of trade on wages, concluded that international tradeand immigration "are unlikely to have been the dominant forces inrising wage inequality."29 After surveying the literature andemploying his own Trade and Income Distribution Equilibrium model,Cline concludes that skills-based technological change is by farthe largest identifiable contributor to the growth in incomeinequality. International trade and immigration together"contribute only about one-tenth of the gross (total) unequalizingforces at work over this period."30

If curbing inequality is the aim, trade policy is a poorlysuited instrument for achieving it. The right response to thisgrowing demand for higher skills is not to stifle change throughtrade barriers but to raise the general skill level of theworkforce. Instead of a futile effort to "save" the jobs ofyesterday, the focus should be on preparing workers to meet therising demands of the labor market for specialized skills.

EXPANDING ECONOMIC LIBERTY

Globalization is really just shorthand for expanding economicliberty across international borders. The debate it has spawned isthe repackaging, on a global scale, of the long-running argumentover whether the way to prosperity is through free markets orcentralized government planning, or some "third way" between thetwo. If you believe free markets unleash forces that aredestructive to human happiness and must be controlled by activegovernment intervention, you will tend to see globalization as athreat. If you believe that free markets, operating within a ruleof law, are essentially self- regulating and lead, in the words ofAdam Smith, "as if by an invisible hand" to a greater generalprosperity, then you will tend to see globalization as ablessing.

The argument that globalization is much more the latter than theformer is supported not only by economic theory but by decades ofhard-earned experience. A growing majority of nations have madetheir peace with globalization based not on whim or blind ideologybut on the manifest failure of any alternative. They have come torealize that the spread of free markets and the institutions thatsupport them offer the best hope that the fruits of prosperity canbe shared by a wider circle of mankind.

--------------------------------------------------------------------------------

Notes 1.David Henderson, "The Changing International EconomicOrder: Rival Visions for the Coming Millennium," Melbourne BusinessSchool, 9 Sept. 1999.

2.Figures quoted by Alan Greenspan, chairman, Federal ReserveBoard of Governors, "Technology and Trade," Speech before theDallas Ambassadors forum, 16 Apr. 1999,http://www.federalreserve.gov/boarddocs/speeches/1999/19990416.htm

3.United Nations, World Investment Report: 1998 (hereafterWIR:1998), 9.

4.United Nations, Human Development Report: 1999, 25.

5.Organization for Economic Cooperation and Development, PolicyCoherence Matters, (Paris: OECD, 1999), 45.

6.United Nations, WIR:1998, 57.

7.Thomas Friedman, The Lexus and the Olive Tree (New York:Farrar, Straus and Giroux, 1999), 86--87.

8.One problem with these cross-country studies of growth andtrade is that trade liberalization is seldom an isolated event.LDCs liberalize in the context of broader economic reforms, whichoften include selling state-owned industries; reducing governmenttaxation, spending, and borrowing; and deregulating domestic pricesand production. This poses the challenge of determining the sourceof faster growth. Another methodological challenge is in measuringopenness. There is no standard statistical measure of a nation'sopenness. What is clear is a general correlation between openness,under various definitions, and economic performance.

9.Jeffrey Sachs and Andrew Warner, "Economic Reform and theProcess of Global Integration, Brookings Papers on EconomicActivity 1 (1995).

10.Jeffrey Frankel and David Romer, "Does Trade Cause Growth?"American Economic Review, June 1999, 379--99.

11.Organization for Economic Cooperation and Development, OpenMarkets Matter: The Benefits of Trade and InvestmentLiberalization, 1998, 10.

12.K. Deininger and L. Squire, "A New Data Set Measuring IncomeInequality," World Bank Economic Review 10:3, 565--91.

13.World Bank, Social Indicators,www.worldbank.org/poverty/data/trends/. Hereafter referred to asSocial Indicators.

14.Social Indicators.

15.Social Indicators.

16.Michael Novak, Business as a Calling (New York: Free Press,1996), 161.

17.Freedom House, Freedom in the World 1998--99,www.freedomhouse.org/survey99/tables/indeptab.html

18.James Gwartney and Robert Lawson, Economic Freedom of theWorld: 1998/1999 Interim Report (Vancouver, B.C.: Fraser Institute,1998), 76--78.

19.OECD, Trade, Employment and Labor Standards: A Study of CoreWorkers' Rights and International Trade (Paris: OECD, 1996),12--13.

20.Gene Grossman and Alan Krueger, "Economic Growth and theEnvironment," National Bureau of Economic Research Working PaperNo. W4634, Feb. 1994.

21.Council on Environmental Quality, Environmental Quality: 1997Report (Washington), 86--89.

22.Social Indicators.

23.OECD, Policy, 60.

24.James Gwartney, Robert Lawson, and Walter Block, EconomicFreedom of the World: 1975--95 (Vancouver, B.C.: Fraser Institute,1996), xxii.

25.Joint Economic Committee of Congress, "The U.S. Economy atthe Beginning and End of the Twentieth Century," Dec. 1999, 8.

26.Patrick Low, Marcelo Olarreaga, and Javier Suarez, "DoesGlobalization Cause a Higher Concentration of International Tradeand Investment Flows?" World Trade Organization, Staff WorkingPaper ERAD-- 98--08, Aug. 1988, 22.

27."White Man's Shame," Economist, 25 Sept. 1999, 89.

28.Daniel Griswold, "Trade, Jobs, and Manufacturing: Why (AlmostAll) U.S. Workers Should Welcome Imports," Cato Trade BriefingPaper No. 6, 30 Sept. 1999, 11.

29.William Cline, "Trade and Income Distribution: The Debate andNew Evidence," Institution for International Economics(Washington), International Economic Policy Brief No. 99--7, 3.

30.Cline, "Trade," 5.