We need more globalisation

Martin Wolf

The 1980s and 1990s witnessed the collapse of the Soviet communist tyranny, an unprecedentedly rapid spread of democracy and nigh on universal economic liberalisation. East and South Asia, home to 55 per cent of humanity, enjoyed an unprecedented leap towards prosperity.

Yet critics of globalisation talk of this period of great hope and remarkable achievement as if it were a catastrophe. Many do so because they lament the death of the revolutionary tradition that held sway over the imaginations of so many over two centuries. Most compare the imperfect world in which we live with a perfect one of their imagining. It is in their way of viewing what has happened in the world, rather than the details of their critique, that those hostile to global economic integration are most in error.

What we must do is build upon what has been achieved, not, as so many critics wish, throw it all away. In the era after September 11 2001, that co-operative task has certainly become far more difficult. For peoples to sustain openness to one another is far harder at a time of fear than one of confidence. But the task has also become more urgent. A collapse of economic integration would be a calamity. Not only would it deprive much of humanity of hope for a better life. It would also, inevitably, lead to growing friction among the countries of the world.

Global economic integration has gone into reverse before. Between 1914 and 1945, the combined force of international rivalry, instability, interests and ideas caused the disintegration of this earlier form of globalisation.

History is unlikely to repeat itself. There is little chance of war between the great powers, who, in any case, are committed to market-led economic development and co-operation. The move to floating rates has significantly reduced the risk of a second Great Depression. Protectionist interests have been significantly modified and ameliorated by contemporary economic developments, including the rise of the international integrated transnational company. Finally, while vocal groups oppose global capitalism, they are very different from, and much less intellectually coherent than, the opponents of liberalism of a century ago.

Yet the danger to our open world economy is not small. The combination of fears of terrorism, economic instability, protectionist reactions to economic change and the rise of new competitors, particularly China, and protesters against economic integration could yet do grave damage. Global economic integration may not collapse, but that does not mean it will advance in ways that provide the greatest possible opportunities for the largest possible proportion of humanity.
Consider the biggest obstacle to a more even spread of global prosperity and the provision of essential global public goods: not global economic integration or transnational companies, as critics allege, but the multiplicity of independent sovereigns. It is not just the failure of states, but their existence, that creates the problems we now confront.

Think, first of all, of global inequality. Inequality among individuals has exploded over much of the past two centuries, not because of increased inequality within countries, but because of the divergent growth of different societies. Over the past two decades, the accelerated growth of a number of very large, poor countries - above all, China and India - has reduced global interpersonal inequality. But a huge number of countries containing some 1.5bn people lags ever further behind. The overwhelming probability is that some, though certainly not all, of these countries will continue to lag in the decades to come. If so, not only the absolute, but even proportionate, gaps in average living standards between the richest and the poorest countries in the world will continue to grow. Today, that ratio is some 75 to one. A century ago, it was about 10 to one. In half a century, it could easily be 150 to one.

What then lies behind such massive divergences in performance? A large part of the answer, as we have seen, is cumulative historical forces causing divergence. As countries grow richer, they are better able to afford high standards of education, health and public services. As citizens become better informed and more prosperous, they insist on higher standards in public life. At a certain point, economic growth becomes a routine. A positive cycle of reinforcement goes from the economy, to polity and society, and back again.

Meanwhile, at the opposite end of the spectrum from success to failure, societies seem stuck in an equally powerful vicious cycle. Very low standards of living mean correspondingly limited ability to provide any of the necessary public goods that underpin economic growth. Education is inadequate and illiteracy rife. Economic activity remains unsophisticated. Ambitious people view politics as a way to extract the wealth unavailable in normal economic activity. The result is corruption or, at worst, outright civil war. Among large states, the US may be seen as an exemplar of the first kind of society and Nigeria as the exemplar of the second.

The forces at work do not, fortunately, only cause divergence. There are also powerful forces for convergence. The accumulated know-how, as well as the markets, of the high-income countries offer opportunities for economic catch-up. But the evidence suggests that some societies are far better able to catch up than others. Natural resource abundance has proved a handicap for a host of reasons, not least the opportunities it gives to political rent-seeking. In contrast, labour abundance seems to work well, in the right policy environment, partly because it creates a direct connection between effort and reward. In an economy whose wealth is based on the efforts of its citizens, rather than on riches that come out of the ground, a government's ability to extract resources while failing to provide valuable services in return is relatively limited. The mutual dependence of the citizens and state forms the basis of a functioning social contract. If the state breaks that contract, by extortion, the economy fa ils to grow, or, if it has attained wealth, retrogresses.

If we ask further what would be the most powerful mechanism for ensuring that the forces of economic convergence overwhelm those of divergence, the answer has to be jurisdictional integration. The European Union is a regional system of jurisdictional integration. It imposes an obligation on all its members to accept freedom to trade, migrate and move capital. Such integration is not just an obligation, it is a credible commitment. These commitments have made the EU an extraordinarily successful machine for generating economic catch-up among previously poorer members, from Italy in the 1950s and 1960s to Ireland in the 1990s.

If similarly credible obligations could be spread globally, there can be little doubt that convergence would accelerate. At present capital flows to developing countries are remarkable for their modesty. But if the commitments to protecting property and allowing capital to move freely were credible everywhere, the movement of capital to poor countries would increase hugely. Again, if people could move freely from poor and failing countries to richer ones, global inequality and extreme poverty would both fall substantially.

We can go much further than this. Imagine not just jurisdictional integration in the sense of the contemporary EU, but in the sense of a contemporary state, say the US. Consider then a world in which the US was not one of the world's countries, but a global federation with equal voting rights for all. Far greater resources would then flow to the poorer regions of this imaginary "world-country", to finance infrastructure, education, health and the machinery of law and order.

This should not be surprising. We know very well that money is spent by a country on those with a political voice. In 2001, total official assistance from all rich countries to all developing countries amounted to $52bn. This was substantially less than the sums spent by the British government on the education of the country's young people and roughly a seventh of what the rich countries spend on assistance to their farmers. Provided such a "world-country" avoided imposing unnecessarily high costs on labour in the poorer regions, as Germany did after unification in the early 1990s, convergence should be accelerated still further.

These thought experiments illuminate what is far and away the most important source of inequality and persistent poverty: the fact that humanity is locked into almost 200 distinct countries, some of which are prosperous, well governed and civilised, while most others remain poor, badly governed and apparently incapable of providing the basis of a tolerable existence. Since the success of the economy depends on the quality of the state, this inequality in the quality of states guarantees persistent inequality among individuals.

The multiplicity of countries, their divergent historical experiences and the differences in the quality of the regimes they live under do not merely help perpetuate mass poverty and global inequality. They also make it almost impossible to ensure the provision of global public goods. The underlying constraint here is free-riding. While everybody should be better off if countries combined to provide global public goods, it is normally in the interests of individual countries to let others bear the cost.

This, however, is not the only difficulty. Some public goods may be of far greater importance to some countries than to others. Elimination of HIV/Aids from southern Africa is an obvious example: it is of vast importance to the countries concerned, but of somewhat less moment to others far away. But the resources needed to tackle such a disease may well be unavailable in the countries most directly affected. Similarly, those likely to be most damaged by global warming may well not be those that do most to cause it.

These are not trivial obstacles to the world many wish to inhabit. They are created by deep-seated conflicts among the values the contemporary world holds most dear. We believe in self-governing sovereignty, democracy, and, if not in greater global equality, at the least in alleviation of global poverty. But rich sovereign democracies will always use the bulk of their resources to tackle the problems of their own citizens and protect themselves against disruption from abroad. They will control immigration tightly and be strongly inclined towards protecting adversely affected citizens against the impact of imports from the rest of the world. Similarly, an impoverished sovereign state must rely largely on its own resources. At worst, an incompetent, plundering, even murderous regime may assail its people without hindrance. At best, it will struggle to create the conditions for greater prosperity.

This is not an argument for world government. Even if it were achievable, such a leviathan would almost certainly crush the enterprise and competition that generate economic advance. Nor could such a world-state be meaningfully democratic. Even in the EU, differences in culture, language and sense of identity make it virtually impossible to generate anything approximating to a European politics. Elections without a shared political space are barren. At best, they generate remote technocracies. At worst, they can easily end up with the tyranny not so much of the majority as of enraged and self-interested minorities. But the globe's political fragmentation is, nonetheless, a huge obstacle to the achievement of many of the objectives the critics of globalisation hold dear.

Only a few lunatics - the localisers - believe that the prosperity of the citizens of existing countries would be enhanced by fragmenting the integrated markets of contemporary national economies into self-sufficient village or manorial economies. But the world economy is fragmented, notwithstanding the progress made towards exploiting at least the potential gains from economic integration in recent decades. For that, the principal explanation is political fragmentation.

What sort of world should people who understand the power of market forces for human betterment now support? What role should international institutions play? And what are the proper limits of national sovereignty? These are not simple questions. Difficult choices arise. There is no one set of right answers. My suggestions come in "10 commandments of globalisation" (see above).

All these commandments matter. But the first two are the most important. The view that states and markets are in opposition to one another is the obverse of the truth. The world needs more globalisation, not less. But we will only have more and better globalisation if we have better states. We must reject the critics' fantasies and nightmares. Above all, we must recognise that inequality and persistent poverty are the consequence not of the still limited integration of the world economy, but of the globe's political fragmentation. If we wish to make our world a better place, we must look not at the failures of the market economy, but at the hypocrisy, greed and stupidity that so often mar our politics. As for the critics of market-led globalisation, they are not the antidote to the poison of bad politics. They are among its purveyors.

The sight of the affluent young of the west wishing to protect the poor of the world from the processes that delivered their own remarkable prosperity is unutterably depressing. So, too, is the return of all the old anti-capitalist cliches. It is as if the collapse of Soviet communism had never happened. The self-righteous indignation of those who have been so signally and repeatedly on the wrong side of history would be astonishing, if it were not so predictable. We must, and can, make the world a better place to live in. But we will do so only by ignoring these siren voices. The open society has, as always, its enemies, both within and without. Our time is no exception. We owe it to posterity to ensure that they do not triumph.

Why Globalization Works, by Martin Wolf, is published by Yale University Press, (US $30)

Martin Wolf's ten commandments of globalisation

1. The market economy is the only arrangement capable of generating sustained increases in prosperity, providing the underpinnings of liberal democracy and giving individual human beings the opportunity to strive for what they desire in life.

2. Individual states remain the locus of political debate and legitimacy. Supranational institutions gain their legitimacy and authority from the states that belong to them.

3. It is in the interest of both states and their citizens to participate in international treaty- based regimes and institutions that deliver global public goods, including open markets, environmental protection, health and international security.

4. Such regimes need to be specific and focused. But they also need means of enforcement.

5. The World Trade Organisation has been enormously successful. But it has already strayed too far from its primary function of promoting trade liberalisation. The arguments for a single undertaking binding all members also need to be reconsidered, since that brings into the negotiations a large number of small countries with negligible impact on world trade.

6. The case for regimes covering investment and global competition is strong. But such regimes do not need to be imposed on all the world’s countries. It would be better to create regimes that include fewer countries, but contain higher standards.

7. It is in the long-term interest of countries to integrate into global financial markets. But they need to understand the need for an appropriate exchange rate regime, often a floating rate, and a sound and well-regulated financial system.

8. In the absence of a global lender of last resort, it is necessary to accept standstills and renegotiation of sovereign debt. A particularly strong case can be made for developing ways to write off ‘odious debt’ – debt contracted by politically illegitimate regimes.

9. Official development assistance is very far indeed from a guarantee of successful development. But the sums now provided are so small, a mere 0.22 per cent of the gross domestic product of the donor countries in 2001, that more should help, if used wisely. Aid should go to countries with sound policy regimes, but it should never be large enough to free a government from the need to raise most of its money from its own people.

10. Countries should normally be allowed to learn from their own mistakes, even if that means that some make no progress. But the global community also needs the capacity and will to intervene effectively where states fail altogether.