August 18, 2002
The
Free-Trade Fix
By TINA ROSENBERG Globalization
is a phenomenon that has remade the economy of virtually every nation,
reshaped almost every industry and touched billions of lives, often in
surprising and ambiguous ways. The stories filling the front pages in recent
weeks -- about economic crisis and contagion in Argentina, Uruguay and
Brazil, about President Bush getting the trade bill he wanted -- are all part
of the same story, the largest story of our times: what globalization has
done, or has failed to do. Globalization
is meant to signify integration and unity -- yet it has proved, in its way,
to be no less polarizing than the cold-war divisions it has supplanted. The
lines between globalization's supporters and its critics run not only between
countries but also through them, as people struggle to come to terms with the
defining economic force shaping the planet today. The two sides in the
discussion -- a shouting match, really -- describe what seem to be two
completely different forces. Is the globe being knit together by the Nikes
and Microsofts and Citigroups in a dynamic new system that will eventually
lift the have-nots of the world up from medieval misery? Or are ordinary
people now victims of ruthless corporate domination, as the Nikes and
Microsofts and Citigroups roll over the poor in nation after nation in search
of new profits? The
debate over globalization's true nature has divided people in third-world
countries since the phenomenon arose. It is now an issue in the United States
as well, and many Americans -- those who neither make the deals inside World
Trade Organization meetings nor man the barricades outside -- are perplexed. When I
first set out to see for myself whether globalization has been for better or
for worse, I was perplexed, too. I had sympathy for some of the issues raised
by the protesters, especially their outrage over sweatshops. But I have also
spent many years in Latin America, and I have seen firsthand how protected
economies became corrupt systems that helped only those with clout. In
general, I thought the protesters were simply being sentimental; after all,
the masters of the universe must know what they are doing. But that was
before I studied the agreements that regulate global trade -- including this
month's new law granting President Bush a free hand to negotiate trade
agreements, a document redolent of corporate lobbying. And it was before
looking at globalization up close in Chile and Mexico, two nations that have
embraced globalization especially ardently in the region of the third world
that has done the most to follow the accepted rules. I no longer think the
masters of the universe know what they are doing. The
architects of globalization are right that international economic integration
is not only good for the poor; it is essential. To embrace self-sufficiency
or to deride growth, as some protesters do, is to glamorize poverty. No
nation has ever developed over the long term without trade. East Asia is the
most recent example. Since the mid-1970's, Japan, Korea, Taiwan, China and
their neighbors have lifted 300 million people out of poverty, chiefly
through trade. But the
protesters are also right -- no nation has ever developed over the long term
under the rules being imposed today on third-world countries by the
institutions controlling globalization. The United States, Germany, France
and Japan all became wealthy and powerful nations behind the barriers of protectionism.
East Asia built its export industry by protecting its markets and banks from
foreign competition and requiring investors to buy local products and build
local know-how. These are all practices discouraged or made illegal by the
rules of trade today. The
World Trade Organization was designed as a meeting place where willing
nations could sit in equality and negotiate rules of trade for their mutual
advantage, in the service of sustainable international development. Instead,
it has become an unbalanced institution largely controlled by the United
States and the nations of Europe, and especially the agribusiness,
pharmaceutical and financial-services industries in these countries. At
W.T.O. meetings, important deals are hammered out in negotiations attended by
the trade ministers of a couple dozen powerful nations, while those of poor
countries wait in the bar outside for news. The
International Monetary Fund was created to prevent future Great Depressions
in part by lending countries in recession money and pressing them to adopt
expansionary policies, like deficit spending and low interest rates, so they
would continue to buy their neighbors' products. Over time, its mission has
evolved into the reverse: it has become a long-term manager of the economies
of developing countries, blindly committed to the bitter medicine of
contraction no matter what the illness. Its formation was an acknowledgment
that markets sometimes work imperfectly, but it has become a champion of
market supremacy in all situations, echoing the voice of Wall Street and the
United States Treasury Department, more interested in getting wealthy
creditors repaid than in serving the poor. It is
often said that globalization is a force of nature, as unstoppable and
difficult to contain as a storm. This is untrue and misleading. Globalization
is a powerful phenomenon -- but it is not irreversible, and indeed the
previous wave of globalization, at the turn of the last century, was stopped
dead by World War I. Today it would be more likely for globalization to be
sabotaged by its own inequities, as disillusioned nations withdraw from a
system they see as indifferent or harmful to the poor. Globalization's
supporters portray it as the peeling away of distortions to reveal a clean
and elegant system of international commerce, the one nature intended. It is
anything but. The accord creating the W.T.O. is 22,500 pages long -- not
exactly a free trade agreement. All globalization, it seems, is
local, the rules drawn up by, and written to benefit, powerful nations and
powerful interests within those nations. Globalization has been good for the
United States, but even in this country, the gains go disproportionately to
the wealthy and to big business. It's not
too late for globalization to work. But the system is in need of serious
reform. More equitable rules would spread its benefits to the ordinary
citizens of wealthy countries. They would also help to preserve globalization
by giving the poor of the world a stake in the system -- and, not incidentally,
improve the lives of hundreds of millions of people. Here, then, are nine new
rules for the global economy -- a prescription to save globalization from
itself. 1. Make
the State a Partner f there
is any place in Latin America where the poor have thrived because of
globalization, it is Chile. Between 1987 and 1998, Chile cut poverty by more
than half. Its success shows that poor nations can take advantage of
globalization -- if they have governments that actively make it happen. Chile
reduced poverty by growing its economy -- 6.6 percent a year from 1985 to
2000. One of the few points economists can agree on is that growth is the
most important thing a nation can do for its poor. They can't agree on basics
like whether poverty in the world is up or down in the last 15 years -- the
number of people who live on less than $1 a day is slightly down, but the
number who live on less than $2 is slightly up. Inequality has soared during
the last 15 years, but economists cannot agree on whether globalization is
mainly at fault or whether other forces, like the uneven spread of
technology, are responsible. They can't agree on how to reduce inequality --
growth tends not to change it. They can't agree on whether the poor who have
not been helped are victims of globalization or have simply not yet enjoyed
access to its benefits -- in other words, whether the solution is more
globalization or less. But economists agree on one thing: to help the poor,
you'd better grow. For the
rest of Latin America, and most of the developing world except China (and to
a lesser extent India), globalization as practiced today is failing, and it
is failing because it has not produced growth. Excluding China, the growth
rate of poor countries was 2 percent a year lower in the 1990's than in the
1970's, when closed economies were the norm and the world was in a recession
brought on in part by oil-price shocks. Latin American economies in the
1990's grew at an average annual rate of 2.9 percent -- about half the rate
of the 1960's. By the end of the 1990's, 11 million more Latin Americans
lived in poverty than at the beginning of the decade. And in country after
country, Latin America's poor are suffering -- either from economic crises
and market panics or from the day-to-day deprivations that globalization was
supposed to relieve. The surprise is not that Latin Americans are once again
voting for populist candidates but that the revolt against globalization took
so long. When I
visited Eastern Europe after the end of Communism, a time when democracy was
mainly bringing poverty, I heard over and over again that the reason for
Chile's success was Augusto Pinochet. Only a dictator with a strong hand can
put his country through the pain of economic reform, went the popular wisdom.
In truth, we now know that inflicting pain is the easy part; governments
democratic and dictatorial are all instituting free-market austerity. The
point is not to inflict pain but to lessen it. In this Pinochet failed, and
the democratic governments that followed him beginning in 1990 have
succeeded. What
Pinochet did was to shut down sectors of Chile's economy that produced goods
for the domestic market, like subsistence farming and appliance
manufacturing, and point the economy toward exports. Here he was following
the standard advice that economists give developing countries -- but there
are different ways to do it, and Pinochet's were disastrous. Instead of
helping the losers, he dismantled the social safety net and much of the
regulatory apparatus that might have kept privatization honest. When the
world economy went into recession in 1982, Chile's integration into the
global marketplace and its dependence on foreign capital magnified the crash.
Poverty soared, and unemployment reached 20 percent. Pinochet's
second wave of globalization, in the late 1980's, worked better, because the
state did not stand on the side. It regulated the changes effectively and
aggressively promoted exports. But Pinochet created a time bomb in Chile: the
country's exports were, and still are, nonrenewable natural resources. Chile
began subsidizing companies that cut down native forests for wood chips, for
example, and the industry is rapidly deforesting the nation. Chile
began to grow, but inequality soared -- the other problem with Pinochet's
globalization was that it left out the poor. While the democratic governments
that succeeded Pinochet have not yet been able to reduce inequality, at least
it is no longer increasing, and they have been able to use the fruits of
Chile's growth to help the poor. Chile's
democratic governments have spread the benefits of economic integration by
designing effective social programs and aiming them at the poor. Chile has
sunk money into revitalizing the 900 worst primary schools. It now leads
Latin America in computers in schools, along with Costa Rica. It provides the
very low-income with housing subsidies, child care and income support. Open
economy or closed, these are good things. But Chile's government is also
taking action to mitigate one of the most dangerous aspects of global
integration: the violent ups and downs that come from linking your economy to
the rest of the world. This year it created unemployment insurance. And it
was the first nation to institute what is essentially a tax on short-term
capital, to discourage the kind of investment that can flood out during a
market panic. The
conventional wisdom among economists today is that successful globalizers
must be like Chile. This was not always the thinking. In the 1980's, the Washington
Consensus -- the master-of-the-universe ideology at the time, highly
influenced by the Reagan and Thatcher administrations -- held that government
was in the way. Globalizers' tasks included privatization, deregulation,
fiscal austerity and financial liberalization. ''In the 1980's and up to 1996
or 1997, the state was considered the devil,'' says Juan Martin, an Argentine
economist at the United Nations' Economic Commission for Latin America and
the Caribbean. ''Now we know you need infrastructure, institutions,
education. In fact, when the economy opens, you need more control
mechanisms from the state, not fewer.'' And what
if you don't have these things? Bolivia carried out extensive reforms
beginning in 1985 -- a year in which it had inflation of 23,000 percent -- to
make the economy more stable and efficient. But in the words of the World
Bank, ''It is a good example of a country that has achieved successful
stabilization and implemented innovative market reforms, yet made only
limited progress in the fight against poverty.'' Latin America is full of
nations that cannot make globalization work. The saddest example is Haiti, an
excellent student of the rules of globalization, ranked at the top of the
I.M.F.'s index of trade openness. Yet over the 1990's, Haiti's economy
contracted; annual per capita income is now $250. No surprise -- if you are a
corrupt and misgoverned nation with a closed economy, becoming a corrupt and
misgoverned nation with an open economy is not going to solve your problems. 2.
Import Know-How Along With the Assembly Line f there
is a showcase for globalization in Latin America, it lies on the outskirts of
Puebla, Mexico, at Volkswagen Mexico. Every New Beetle in the world is made
here, 440 a day, in a factory so sparkling and clean that you could have a
baby on the floor, so high-tech that in some halls it is not evident that
human beings work here. Volkswagen Mexico also makes Jettas and, in a special
hall, 80 classic Beetles a day to sell in Mexico, one of the last places in
the world where the old Bug still chugs. The
Volkswagen factory is the biggest single industrial plant in Mexico. Humans
do work here -- 11,000 people in assembly-line jobs, 4,000 more in the rest
of the factory -- with 11,000 more jobs in the industrial park of VW
suppliers across the street making parts, seats, dashboards and other
components. Perhaps 50,000 more people work in other companies around Mexico
that supply VW. The average monthly wage in the plant is $760, among the
highest in the country's industrial sector. The factory is the equal of any
in Germany, the product of a billion-dollar investment in 1995, when VW chose
Puebla as the exclusive site for the New Beetle. Ahhh,
globalization. Except .
. . this plant is not here because Mexico has an open economy, but because it
had a closed one. In 1962, Mexico decreed that any automaker that
wanted to sell cars here had to produce them here. Five years later, VW
opened the factory. Mexico's local content requirement is now illegal, except
for very limited exceptions, under W.T.O. rules; in Mexico the local content
requirement for automobiles is being phased out and will disappear entirely
in January 2004. The
Puebla factory, for all the jobs and foreign exchange it brings Mexico, also
refutes the argument that foreign technology automatically rubs off on the
local host. Despite 40 years here, the auto industry has not created much
local business or know-how. VW makes the point that it buys 60 percent of its
parts in Mexico, but the ''local'' suppliers are virtually all foreign-owned
and import most of the materials they use. The value Mexico adds to the
Beetles it exports is mainly labor. Technology transfer -- the transmission
of know-how from foreign companies to local ones -- is limited in part
because most foreign trade today is intracompany; Ford Hermosillo, for
example, is a stamping and assembly plant shipping exclusively to Ford plants
in the United States. Trade like this is particularly impenetrable to
outsiders. ''In spite of the fact that Mexico has been host to many car
plants, we don't know how to build a car,'' says Huberto Juarez, an economist
at the Autonomous University of Puebla. Volkswagen
Mexico is the epitome of the strategy Mexico has chosen for globalization --
assembly of imported parts. It is a strategy that makes perfect sense given
Mexico's proximity to the world's largest market, and it has given rise to
the maquila industry, which uses Mexican labor to assemble foreign
parts and then re-export the finished products. Although the economic
slowdown in the United States is hurting the maquila industry, it still
employs a million people and brings the country $10 billion a year in foreign
exchange. The factories have turned Mexico into one of the developing world's
biggest exporters of medium- and high-technology products. But the maquila
sector remains an island and has failed to stimulate Mexican industries --
one reason Mexico's globalization has brought disappointing growth, averaging
only 3 percent a year during the 1990's. In
countries as varied as South Korea, China and Mauritius, however, assembly
work has been the crucible of wider development. Jeffrey Sachs, the
development economist who now directs Columbia University's Earth Institute,
says that the maquila industry is ''magnificent.'' ''I could cite 10 success
stories,'' he says, ''and every one started with a maquila sector.'' When
Korea opened its export-processing zone in Masan in the early 1970's, local
inputs were 3 percent of the export value, according to the British
development group Oxfam. Ten years later they were almost 50 percent. General
Motors took a Korean textile company called Daewoo and helped shape it into a
conglomerate making cars, electronic goods, ships and dozens of other products.
Daewoo calls itself ''a locomotive for national economic development since
its founding in 1967.'' And despite the company's recent troubles, it's true
-- because Korea made it true. G.M. did not tutor Daewoo because it welcomed
competition but because Korea demanded it. Korea wanted to build high-tech
industry, and it did so by requiring technology transfer and by closing
markets to imports. Maquilas
first appeared in Mexico in 1966. Although the country has gone from
assembling clothing to assembling high-tech goods, nearly 40 years later 97
percent of the components used in Mexican maquilas are still imported, and
the value that Mexico adds to its exports has actually declined sharply since
the mid-1970's. Mexico
has never required companies to transfer technology to locals, and indeed,
under the rules of the North American Free Trade Agreement, it cannot. ''We
should have included a technical component in Nafta,'' says Luis de la Calle,
one of the treaty's negotiators and later Mexico's under secretary of economy
for foreign trade. ''We should be getting a significant transfer of
technology from the United States, and we didn't really try.'' Without
technology transfer, maquila work is marked for extinction. As transport
costs become less important, Mexico is increasingly competing with China and
Bangladesh -- where labor goes for as little as 9 cents an hour. This is one
reason that real wages for the lowest-paid workers in Mexico dropped by 50
percent from 1985 to 2000. Businesses, in fact, are already leaving to go to
China. 3. Sweat
the Sweatshops — But Sweat Other Problems More When
Americans think about globalization, they often think about sweatshops -- one
aspect of globalization that ordinary people believe they can influence
through their buying choices. In many of the factories in Mexico, Central
America and Asia producing American-brand toys, clothes, sneakers and other
goods, exploitation is the norm. The young women who work in them -- almost
all sweatshop workers are young women -- endure starvation wages, forced
overtime and dangerous working conditions. In
Chile, I met a man who works at a chicken-processing plant in a small town.
The plant is owned by Chileans and processes chicken for the domestic market
and for export to Europe, Asia and other countries in Latin America. His job
is to stand in a freezing room and crack open chickens as they come down an
assembly line at the rate of 41 per minute. When visitors arrive at the
factory (the owners did not return my phone calls requesting a visit or an
interview), the workers get a respite, as the line slows down to half-speed
for show. His work uniform does not protect him from the cold, the man said,
and after a few minutes of work he loses feeling in his hands. Some of his
colleagues, he said, are no longer able to raise their arms. If he misses a
day he is docked $30. He earns less than $200 a month. Is this
man a victim of globalization? The protesters say that he is, and at one
point I would have said so, too. He -- and all workers -- should have
dignified conditions and the right to organize. All companies should follow
local labor laws, and activists should pressure companies to pay their
workers decent wages. But
today if I were to picket globalization, I would protest other inequities. In
a way, the chicken worker, who came to the factory when driving a taxi ceased
to be profitable, is a beneficiary of globalization. So are the millions of
young women who have left rural villages to be exploited gluing tennis shoes
or assembling computer keyboards. The losers are those who get laid off when
companies move to low-wage countries, or those forced off their land when
imports undercut their crop prices, or those who can no longer afford
life-saving medicine -- people whose choices in life diminish
because of global trade. Globalization has offered this man a hellish job,
but it is a choice he did not have before, and he took it; I don't name him
because he is afraid of being fired. When this chicken company is hiring, the
lines go around the block. 4. Get
Rid of the Lobbyists he
argument that open economies help the poor rests to a large extent on the
evidence that closed economies do not. While South Korea and other East Asian
countries successfully used trade barriers to create export industries, this
is rare; most protected economies are disasters. ''The main tendency in a
sheltered market is to goof off,'' says Jagdish Bhagwati, a prominent
free-trader who is the Arthur Lehman professor of economics at Columbia
University. ''A crutch becomes a permanent crutch. Infant-industry protection
should be for infant industries.'' Anyone
who has lived or traveled in the third world can attest that while controlled
economies theoretically allow governments to help the poor, in practice it's
usually a different story. In Latin America, spending on social programs
largely goes to the urban middle class. Attention goes to people who can
organize, strike, lobby and contribute money. And in a closed economy, the
''state'' car factory is often owned by the dictator's son and the country's
forests can be chopped down by his golf partner. Free
trade, its proponents argue, takes these decisions away from the government
and leaves them to the market, which punishes corruption. And it's true that
a system that took corruption and undue political influence out of economic
decision-making could indeed benefit the poor. But humans have not yet
invented such a system -- and if they did, it would certainly not be the
current system of globalization, which is soiled with the footprints of
special interests. In every country that negotiates at the W.T.O. or cuts a
free-trade deal, trade ministers fall under heavy pressure from powerful
business groups. Lobbyists have learned that they can often quietly slip
provisions that pay big dividends into complex trade deals. None have been
more successful at getting what they want than those from America. The most
egregious example of a special-interest provision is the W.T.O.'s rules on
intellectual property. The ability of poor nations to make or import cheap
copies of drugs still under patent in rich countries has been a boon to world
public health. But the W.T.O. will require most of its poor members to accept
patents on medicine by 2005, with the very poorest nations following in 2016.
This regime does nothing for the poor. Medicine prices will probably double,
but poor countries will never offer enough of a market to persuade the
pharmaceutical industry to invent cures for their diseases. The
intellectual-property rules have won worldwide notoriety for the obstacles
they pose to cheap AIDS medicine. They are also the provision of the W.T.O.
that economists respect the least. They were rammed into the W.T.O. by
Washington in response to the industry groups who control United States trade
policy on the subject. ''This is not a trade issue,'' Bhagwati says. ''It's a
royalty-collection issue. It's pharmaceuticals and software throwing their
weight around.'' The World Bank calculated that the intellectual-property rules
will result in a transfer of $40 billion a year from poor countries to
corporations in the developed world. 5. No
Dumping Manuel
de Jesús Gómez is a corn farmer in the hills of Puebla State, 72 years old
and less than five feet tall. I met him in his field of six acres, where he
was trudging behind a plow pulled by a burro. He farms the same way campesinos
in these hills have been farming for thousands of years. In Puebla, and in
the poverty belt of Mexico's southern states -- Chiapas, Oaxaca, Guerrero --
corn growers plow with animals and irrigate by praying for rain. Before
Nafta, corn covered 60 percent of Mexico's cultivated land. This is where
corn was born, and it remains a symbol of the nation and daily bread for most
Mexicans. But in the Nafta negotiations, Mexico agreed to open itself to
subsidized American corn, a policy that has crushed small corn farmers.
''Before, we could make a living, but now sometimes what we sell our corn for
doesn't even cover our costs,'' Gómez says. With Nafta, he suddenly had to
compete with American corn -- raised with the most modern methods, but more
important, subsidized to sell overseas at 20 percent less than the cost of
production. Subsidized American corn now makes up almost half of the world's
stock, effectively setting the world price so low that local small farmers
can no longer survive. This competition helped cut the price paid to Gómez
for his corn by half. Because
of corn's importance to Mexico, when it negotiated Nafta it was promised 15
years to gradually raise the amount of corn that could enter the country
without tariffs. But Mexico voluntarily lifted the quotas in less than three
years -- to help the chicken and pork industry, Mexican negotiators told me
unabashedly. (Eduardo Bours, a member of the family that owns Mexico's
largest chicken processor, was one of Mexico's Nafta negotiators.) The state
lost some $2 billion in tariffs it could have charged, and farmers were
instantly exposed to competition from the north. According to ANEC, a national
association of campesino cooperatives, half a million corn farmers have left
their land and moved to Mexican cities or to America. If it were not for a
weak peso, which keeps the price of imports relatively high, far more farmers
would be forced off their land. The toll
on small farmers is particularly bitter because cheaper corn has not
translated into cheaper food for Mexicans. As part of its economic reforms,
Mexico has gradually removed price controls on tortillas and tortilla flour.
Tortilla prices have nearly tripled in real terms even as the price of corn
has dropped. Is this
how it was supposed to be? I asked Andres Rosenzweig, a longtime Mexican
agriculture official who helped negotiate the agricultural sections of Nafta.
He was silent for a minute. ''The problems of rural poverty in Mexico did not
start with Nafta,'' he said. ''The size of our farms is not viable, and they
get smaller each generation because farmers have many children, who divide
the land. A family in Puebla with five hectares could raise 10, maybe 15,
tons of corn each year. That was an annual income of 16,000 pesos,'' the
equivalent of $1,600 today. ''Double it and you still die of hunger. This has
nothing to do with Nafta. ''The
solution for small corn farmers,'' he went on, ''is to educate their children
and find them jobs outside agriculture. But Mexico was not growing, not
generating jobs. Who's going to employ them? Nafta.'' One
prominent antiglobalization report keeps referring to farms like Gómez's as
''small-scale, diversified, self-reliant, community-based agriculture
systems.'' You could call them that, I guess; you could also use words like
''malnourished,'' ''undereducated'' and ''miserable'' to describe their
inhabitants. Rosenzweig is right -- this is not a life to be romanticized. But to
turn the farm families' malnutrition into starvation makes no sense. Mexico
spends foreign exchange to buy corn. Instead, it could be spending money to
bring farmers irrigation, technical help and credit. A system in which the
government purchased farmers' corn at a guaranteed price -- done away with in
states like Puebla during the free-market reforms of the mid-1990's -- has
now been replaced by direct payments to farmers. The program is focused on
the poor, but the payments are symbolic -- $36 an acre. In addition, rural
credit has disappeared, as the government has effectively shut down the rural
bank, which was badly run, and other banks won't lend to small farmers. There
is a program -- understaffed and poorly publicized -- to help small
producers, but the farmers I met didn't know about it.
Wealthy
nations justify pressure on small countries to open markets by arguing that
these countries cannot grow rice and corn efficiently -- that American crops
are cheap food for the world's hungry. But with subsidies this large, it
takes chutzpah to question other nations' efficiency. And in fact, the poor
suffer when America is the supermarket to the world, even at bargain prices.
There is plenty of food in the world, and even many countries with severe
malnutrition are food exporters. The problem is that poor people can't afford
it. The poor are the small farmers. Three-quarters of the world's poor are
rural. If they are forced off their land by subsidized grain imports, they
starve. 6. Help
Countries Break the Coffee Habit Back in
the 1950's, Latin American economists made a simple calculation. The products
their nations exported -- copper, tin, coffee, rice and other commodities --
were buying less and less of the high-value-added goods they wanted to
import. In effect, they were getting poorer each day. Their solution was to
close their markets and develop domestic industries to produce their own
appliances and other goods for their citizens. The
strategy, which became known as import substitution, produced high growth --
for a while. But these closed economies ultimately proved unsustainable.
Latin American governments made their consumers buy inferior and expensive
products -- remember the Brazilian computer of the 1970's? Growth depended on
heavy borrowing and high deficits. When they could no longer roll over their
debts, Latin American economies crashed, and a decade of stagnation resulted.
At the
time, the architects of import substitution could not imagine that it was
possible to export anything but commodities. But East Asia -- as poor or
poorer than Latin America in the 1960's -- showed in the 1980's and 1990's
that it can be done. Unfortunately, the rules of global trade now prohibit
countries from using the strategies successfully employed to develop export
industries in East Asia. American
trade officials argue that they are not using tariffs to block poor countries
from exporting, and they are right -- the average tariff charged by the
United States is a negligible 1.7 percent, much lower than other nations. But
the rules rich nations have set -- on technology transfer, local content and
government aid to their infant industries, among other things -- are
destroying poor nations' abilities to move beyond commodities. ''We are
pulling up the ladder on policies the developed countries used to become
rich,'' says Lori Wallach, the director of Public Citizen's Global Trade
Watch. The
commodities that poor countries are left to export are even more of a dead
end today than in the 1950's. Because of oversupply, prices for coffee,
cocoa, rice, sugar and tin dropped by more than 60 percent between 1980 and
2000. Because of the price collapse of commodities and sub-Saharan Africa's
failure to move beyond them, the region's share of world trade dropped by
two-thirds during that time. If it had the same share of exports today that
it had at the start of the 1980's, per capita income in sub-Saharan Africa
would be almost twice as high. 7. Let
the People Go Probably
the single most important change for the developing world would be to
legalize the export of the one thing they have in abundance -- people.
Earlier waves of globalization were kinder to the poor because not only
capital, but also labor, was free to move. Dani Rodrik, an economist at
Harvard's Kennedy School of Government and a leading academic critic of the
rules of globalization, argues for a scheme of legal short-term migration. If
rich nations opened 3 percent of their work forces to temporary migrants, who
then had to return home, Rodrik says, it would generate $200 billion annually
in wages, and a lot of technology transfer for poor countries. 8. Free
the I.M.F. Globalization
means risk. By opening its economy, a nation makes itself vulnerable to
contagion from abroad. Countries that have liberalized their capital markets
are especially susceptible, as short-term capital that has whooshed into a
country on investor whim whooshes out just as fast when investors panic. This
is how a real-estate crisis in Thailand in 1997 touched off one of the
biggest global conflagrations since the Depression. The
desire to keep money from rushing out inspired Chile to install speed bumps
discouraging short-term capital inflows. But Chile's policy runs counter to
the standard advice of the I.M.F., which has required many countries to open
their capital markets. ''There were so many obstacles to capital-market
integration that it was hard to err on the side of pushing countries to
liberalize too much,'' says Ken Rogoff, the I.M.F.'s director of research. Prudent
nations are wary of capital liberalization, and rightly so. Joseph Stiglitz,
the Nobel Prize-winning economist who has become the most influential critic
of globalization's rules, writes that in December 1997, when he was chief
economist at the World Bank, he met with South Korean officials who were
balking at the I.M.F.'s advice to open their capital markets. They were
scared of the hot money, but they could not disagree with the I.M.F., lest
they be seen as irresponsible. If the I.M.F. expressed disapproval, it would
drive away other donors and private investors as well. In the
wake of the Asian collapse, Prime Minister Mahathir Mohamad imposed capital
controls in Malaysia -- to worldwide condemnation. But his policy is now
widely considered to be the reason that Malaysia stayed stable while its
neighbors did not. ''It turned out to be a brilliant decision,'' Bhagwati
says. Post-crash,
the I.M.F. prescribed its standard advice for nations -- making loan
arrangements contingent on spending cuts, interest-rate hikes and other contractionary
measures. But balancing a budget in recession is, as Stiglitz puts it in his
new book, ''Globalization and Its Discontents,'' a recommendation last taken
seriously in the days of Herbert Hoover. The I.M.F.'s recommendations
deepened the crisis and forced governments to reduce much of the cushion that
was left for the poor. Indonesia had to cut subsidies on food. ''While the
I.M.F. had provided some $23 billion to be used to support the exchange rate
and bail out creditors,'' Stiglitz writes, ''the far, far, smaller sums
required to help the poor were not forthcoming.''
I.M.F.
officials argue that their advice is completely equitable -- they tell even
wealthy countries to open their markets and contract their economies. In
fact, Stiglitz writes, the I.M.F. told the Clinton administration to hike
interest rates to lower the danger of inflation -- at a time when inflation
was the lowest it had been in decades. But the White House fortunately had
the luxury of ignoring the I.M.F.: Washington will only have to take the
organization's advice the next time it turns to the I.M.F. for a loan. And
that will be never. 9. Let
the Poor Get Rich the Way the Rich Have The idea
that free trade maximizes benefits for all is one of the few tenets
economists agree on. But the power of the idea has led to the overly
credulous acceptance of much of what is put forward in its name. Stiglitz
writes that there is simply no support for many I.M.F. policies, and in some
cases the I.M.F. has ignored clear evidence that what it advocated was
harmful. You can always argue -- and American and I.M.F. officials do -- that
countries that follow the I.M.F.'s line but still fail to grow either didn't
follow the openness recipe precisely enough or didn't check off other items
on the to-do list, like expanding education. Policy
makers also seem to be skipping the fine print on supposedly congenial
studies. An influential recent paper by the World Bank economists David
Dollar and Aart Kraay is a case in point. It finds a strong correlation
between globalization and growth and is widely cited to support the standard
rules of openness. But in fact, on close reading, it does not support them.
Among successful ''globalizers,'' Dollar and Kraay count countries like
China, India and Malaysia, all of whom are trading and growing but still have
protected economies and could not be doing more to misbehave by the received
wisdom of globalization. Dani
Rodrik of Harvard used Dollar and Kraay's data to look at whether the
single-best measure of openness -- a country's tariff levels -- correlates
with growth. They do, he found -- but not the way they are supposed to.
High-tariff countries grew faster. Rodrik argues that the countries in the
study may have begun to trade more because they had grown and gotten richer,
not the other way around. China and India, he points out, began trade reforms
about 10 years after they began high growth. When
economists talk about many of the policies associated with free trade today,
they are talking about national averages and ignoring questions of
distribution and inequality. They are talking about equations, not what works
in messy third-world economies. What economic model taught in school takes
into account a government ministry that stops work because it has run out of
pens? The I.M.F. and the World Bank -- which recommends many of the same
austerity measures as the I.M.F. and frequently conditions its loans on
I.M.F.-advocated reforms -- often tell countries to cut subsidies, including
many that do help the poor, and impose user fees on services like water. The
argument is that subsidies are an inefficient way to help poor people --
because they help rich people too -- and instead, countries should aid the
poor directly with vouchers or social programs. As an equation, it adds up.
But in the real world, the subsidies disappear, and the vouchers never
materialize. The
I.M.F. argues that it often saves countries from even more budget cuts.
''Countries come to us when they are in severe distress and no one will lend
to them,'' Rogoff says. ''They may even have to run surpluses because their
loans are being called in. Being in an I.M.F. program means less austerity.''
But a third of the developing world is under I.M.F. tutelage, some countries
for decades, during which they must remodel their economies according to the
standard I.M.F. blueprint. In March 2000, a panel appointed to advise
Congress on international financial institutions, named for its head, Allan
Meltzer of Carnegie Mellon University, recommended unanimously that the
I.M.F. should undertake only short-term crisis assistance and get out of the
business of long-term economic micromanagement altogether. The
standard reforms deprive countries of flexibility, the power to get rich the
way we know can work. ''Most Latin American countries have had deep reforms,
have gone much further than India or China and haven't gotten much return for
their effort,'' Birdsall says. ''Many of the reforms were about creating an
efficient economy, but the economic technicalities are not addressing the
fundamental question of why countries are not growing, or the constraint that
all these people are being left out. Economists are way too allergic to the
wishy-washy concept of fairness.''
But the
changes do not alter the underlying idea of globalization, that openness is
the universal prescription for all ills. ''Belt-tightening is not a
development strategy,'' Sachs says. ''The I.M.F. has no sense that its job is
to help countries climb a ladder.'' Sachs
says that for many developing nations, even climbing the ladder is unrealistic.
''It can't work in an AIDS pandemic or an endemic malaria zone. I don't have
a strategy for a significant number of countries, other than we ought to help
them stay alive and control disease and have clean water. You can't do this
purely on market forces. The prospects for the Central African Republic are
not the same as for Shanghai, and it doesn't do any good to give pep talks.''
China,
Chile and other nations show that under the right conditions, globalization
can lift the poor out of misery. Hundreds of millions of poor people will
never be helped by globalization, but hundreds of millions more could be
benefiting now, if the rules had not been rigged to help the rich and follow
abstract orthodoxies. Globalization can begin to work for the vast majority
of the world's population only if it ceases to be viewed as an end in itself,
and instead is treated as a tool in service of development: a way to provide
food, health, housing and education to the wretched of the earth. Tina Rosenberg writes editorials
for The Times. Her last article for the magazine was about human rights in
China. Copyright
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