The Backlash Against Globalization
Speech given before the Trilateral Commission Tokyo, Japan
© Institute for International Economics
When the Trilateral Commission was set up in 1973, my memory is that it was primarily aimed at addressing two issues. One was the integration of a great new Asian power into the world economy and world scene-Japan. The second was to deal with a perceived breakdown of the world economic order of the day: the collapse of the Bretton Woods system of fixed exchange rates and the outbreak of protectionist actions and protectionist legislative pressures in the United States. In addition, the oil shocks were just around the corner. In short, the world economic order was in doubt.
I believe that the Trilateral world faces very similar challenges today. There is clearly the entry into the world economy and broader scene of a great new Asian power-China. That is not my topic today, but it is crucial and the Commission will have to deal with it. But my topic is the second set of issues, what I believe is another set of threats to prosperity and stability of the world economy, namely, the backlash against globalization.
A Fundamental Challenge
The pressures in the 1970s were very substantial but they were mainly technical and they had technical fixes. We could move from fixed to flexible exchange rates; we could initiate a new round of global trade negotiations to get the liberalizing momentum going again. Even in response to the oil crises, which took longer, market responses plus new institutional initiatives-for instance, the International Energy Agency and the Strategic Petroleum Reserve in the U.S.-of essentially a technical nature were taken.
The world economy today faces a more fundamental set of challenges because the backlash against globalization is much more than economic. As Henry Kissinger frequently reminds us, there is a huge political dimension and the politics and the economics are often out of synch. As Mario Vargas Llosa reminds us, there is also a huge cultural dimension which raises a mass of contentious and difficult issues of their own.
Now the backlash has been manifest in the demonstrations in Seattle, Davos, Bangkok, and in Washington this coming weekend. Demonstrations highlight the importance of the NGOs, which is an important part of the issue. But, in my view, the demonstrations themselves are only superficial signs of the real issue. The real backlash, the real challenge to globalization, is much more substantive; we have seen it arising not just in the last few months but over a series of years. I believe it is the critical issue of multilateral management for the future with which this Commission ought to concern itself.
Multilateral Finance and Trade Regimes at Risk
The backlash obviously takes different forms in different regions and different countries. But there are several patterns within the international finance and trade regimes that one can tick off.
First, it is clear that we have an international monetary system that is crisis-prone. We have had at least three major sets of crises in the last decade alone: the European crisis of the early 90s; the Latin American crisis emanating from Mexico in the mid 90s; the East Asian crisis spilling over into Russia and Brazil in the last two or three years. Private capital flows can de-stabilize-being too big at one time and too little at another-and there has been a failure to put in place any substantial reforms to improve the prospect for stabilizing the system in the future. Indeed, we have serious proposals in the United States from a Congressional commission recently, on which I happen to have led the dissent, which essentially wants to abolish the International Monetary Fund and the World Bank, and there are significant pockets of support for that approach in our Congress.
Second, the trading system has essentially been stalemated for several years. There are no new multilateral negotiations of any serious nature being conducted anywhere. The situation is very serious if, like me, believe in the bicycle theory, which says you either move forward or you fall over.
But even if you don't believe in the bicycle theory, you have to be impressed by the series of failures over the last few years. The U.S. administration has been unable to get any new negotiating authority from the Congress for five years; U.S. trade policy is stalemated domestically. Efforts to negotiate a new international investment agreement failed miserably at the OECD in Paris. The effort to launch a new multilateral trade negotiating round in Seattle failed miserably. All the momentum is with the anti-globalization forces.
Hopefully, our Congress will vote to grant permanent normal trade relations to China in the next few weeks. But even that outcome is uncertain. And even if it passes, the fact that it's at all close is amazing. It's a no-brainer. The U.S. negotiated opening of the Chinese market but, if the U.S. doesn't give permanent normal trade relations to China, the U.S. will not benefit from that opening and will turn the competitive advantage over to its trading competitors. There should be a vote of 535 to 0 in our Congress but, it's a cliff-hanger and, when I talked to the White House just before leaving for this meeting, they were still 20 votes short of being able to say they would win it.
The point is that there is a big backlash against globalization. We see it in the financial world. We certainly see it in the trading world as well. It's much more fundamental than pure economics. We know that globalization does increase income and social disparities within countries. We know that globalization does leave some countries and certainly some groups of people behind. We do know that a lot of Europeans don't want to eat genetically modified American foods and that adds to their resistance to globalization. We know that a lot Americans worry about races to the bottom--labor standards, environmental standards, and other perceived doubts about dealing with the rest of the world. We know that a lot of developing countries are raising doubts about the entire system, and such specifics as whether having agreed to the enshrinement of intellectual property rights is really in their national interest. (They would like to pull it back out of the WTO, having agreed to put it in five or six years ago.) So the list is long of the perceived intrusions of globalization into national sovereignties. There is therefore a backlash against it, which I think we have to take as an extremely serious economic, political, and social matter.
The Backlash Could Become Much Stronger
All this seems paradoxical in a very fundamental sense. The world economy is in good shape. Indeed, almost all of the crisis countries-particularly in Asia and Latin America-have experienced rapid V-shaped recoveries from the crises of the last few years.
The ultimate paradox is that this backlash against globalization is so severe in the United States even with the excellent economic situation that we are experiencing, as Marty Feldstein laid out yesterday. But, I repeat, U.S. trade policy has been stalemated for five years; there is no authority to take any new initiatives. All this occurs after two decades when a market-oriented philosophy, the so-called "Washington consensus," seemed to gain near-universal approval and provided a guiding ideology and underlying intellectual consensus for the world economy, which was quite new in modern history.
It seems to me that all these things make the backlash all that more worrisome. If we have the manifestations I've indicated in a period of economic progress and success, what could be the outcome when the U.S. economy inevitably slows down, unemployment begins to rise and a $400 billion trade deficit becomes a huge target of attack and criticism? What if a similar downturn and more difficult economic times occur in the rest of the world?
It would be easier to dismiss all these concerns except for one troublesome fact: We've seen it happen before. As Joe Nye pointed out earlier, we had a similar period of globalization a hundred years ago. The standard understanding, of course, is that this earlier world of globalization-which by many measures was more extensive than today-came crashing down with the advent of World War I followed by the Great Depression. But careful students of that history have informed us that the contemporary backlash a century ago was already significantly rolling back globalization well before the onset of war and depression. Protectionist trade measures-including in the United States but other countries as well-resisted the increasing intrusion of foreign competition. Immigration, which was a huge factor in globalization during that period, began to be resisted, including by earlier generations of immigrants, and began to shut down that element of globalization even before the more traumatic outbreaks in the early part of the 20th century. New challengers to the system-Germany, Japan, and to some extent the United States-were accommodated to some degree, but not wholly, and that too raised instabilities and doubts that spilled over into the political as well as the economic side of the system. In truth, we had a backlash in the early 20th century that contributed to the end of that period of globalization and may have helped bring on the subsequent cataclysms that ended it for half a century.
I dwell on this background at length because I believe that the Trilateral regions face an enormous challenge, perhaps as great as the one we faced when the initial post-War system seemed to be breaking down at the time this Commission was set up in the early 1970s. But, to repeat, I think it's more difficult in certain respects, particularly in its breadth. It deals with political, social, and cultural issues, as well as economic ones.
It also extends far beyond the Trilateral regions. It is not just our countries that are now involved in this but rather the entire world, including notably the emerging markets. Yesterday we discussed how the countries of the Asian region-primarily emerging market economies but, of course, including Japan-are looking for a way to find an independent regional identity and break out of total reliance on the multilateral system. This search is due at least in part to the breakdown or failures of that multilateral system. It is another clear indication of how the backlash against the current form of globalization may manifest itself and raise huge new issues in the security, as well as the economic, domain.
Before I close by saying a few words about potential remedies, let me clearly suggest that I do not believe everything is gloom and doom. Mexico and most of the East Asian countries, as noted, have experienced rapid V-shaped recoveries from their crises, that eases some of the anxiety about the monetary system. There has been some modest monetary reform; I don't want to suggest there has been none. As Marty Feldstein said, there has not really been much trade protectionism yet-a bit in the United States but not too much in the developing countries, even those subjected to financial crisis.
So, at least at this point, there is not too much to reverse. There is still time to head off the incipient difficulties. The whole IT sector has not yet been caught up in all this in any negative way; its growth is proceeding without too much by way of impediments from the things I mentioned. The White House Conference on the New Economy last Wednesday discussed this issue relatively briefly; such impediments are not yet perceived to be a serious concern to the economies and the sectors that are so important now to the rapid growth in the United States and elsewhere. But I would suggest that this backlash, both now and potentially, is very strong. Indeed, it could get much stronger, especially when our economies begin to turn down and especially if political changes in our own countries make globalization and opposition to it even more difficult to manage in light of the role of particular pressure groups and political interests.
Four Elements of a Response
With this as background, let me suggest briefly and in sketchy form what I think are the four elements of a response to the problem that we will, I hope, concern ourselves with in the coming years.
First and foremost is education, to clarify and analyze much more extensively what is in fact the reality of the impact of globalization: the fact that, on balance, it is clearly beneficial for all countries and for most groups and therefore, on the whole, is certainly desirable. Much of the criticism of globalization either reflects ignorance of the facts; or is sheer nonsense, such as the argument that multinational firms promote races to the bottom rather than races to the top; or sheer disingenuousness, a cover for traditional trade protection; or, as Mario Vargas Llosa has said, a cover for traditional nationalism in many of its forms.
We must, however, carry out a much more elaborate and extensive analysis of the impact of globalization, not just on whole countries but on groups within them. At my Institute for International Economics we have half a dozen projects analyzing this impact, including transatlantic projects with Thierry de Montbrial's French Institute for International Relations and Karl Kaiser's Research Institute of the German Society for Foreign Affairs. I think we are all going to have to do much more elaborate analyses and projections of the real effects, to cope with this combination of ignorance and deliberate disingenuousness and move in a positive direction. As I say, the momentum is clearly now with the anti-globalization forces and the beginning of the answer starts with education and an understanding of the true impact and meaning of globalization, including all its benefits.
A second part of the response has to be an honest recognition and admission that there are costs and losers. For too long, those of us on the pro-globalization side tried to ignore and deny this fact-but it clearly must be accepted and admitted. It follows from standard economic theory, and it follows from looking out the window and seeing the impact within many of our countries. This, in turn, means that something needs to be done to help deal with the costs and those who are losers. In broad terms, it requires better social safety nets in many of our countries and programs that will help the adjustment to dislocation, whether caused by globalization or other interrelated forces. The lack of transitional safety nets in the United States-effective unemployment insurance, portable health care, portable pensions-in the face of shocks generated by globalization causes enormous anxiety and unsettlement. This situation leads to the shocking fact that, in the United States, polls show that our labor force has greater levels of anxiety today with the strong economy than at the depth of the recession in 1991.
Another and more fundamental element of this response, of course, is the creation of education and training programs to empower all components of our population to take advantage of globalization rather than feel victimized by it. Such programs-which are better conducted, incidentally, by the private sector rather than by governments-should enable people to take advantage of the phenomenon and roll with it rather than oppose it.
One American company, for instance, United Technologies, now gives not only full financing for as much education, job- or non-job-related, as its workers want, but has just announced it will finance four years of additional schooling for any worker it lays off because of a move of production abroad. If American industry as a whole would do that we would have both much more and much more effective adjustment, and an ability to deal with the problem at the fundamental level. This second set of issues-transition dislocation cushions, and empowerment to take advantage of opportunities over the long run-is the essential domestic element of any effective response to the backlash.
Third, we will have to renew our efforts to reform the international financial architecture to help prevent crises. These crises are particularly debilitating to smaller countries, which then are enormously tempted to try to find ways to opt out of the system or, at a minimum, to reduce the impact on them of unfettered globalization. We need much more openness and transparency of the financial system, though some progress has been made; we need much greater flexibility of exchange rates in order to avoid fixed peg targets; we need to bless capital controls in some instances to avoid the excessive sloshing of hot money in and out; and we need more effective early warning systems to try to anticipate and prevent crises rather than wait and then react after they occur. We need much more effective means to coordinate exchange rates among the big countries-the Trilateral G-3-where the enormous fluctuations still lead to tremendous problems, not just for ourselves but for other countries around the world who peg their currencies to our countries' currencies either individually or in groups. And we need to engage the private sector much more systematically in rescue operations, bailing-in rather than bailing-out on a much more systematic basis than the ad-hoc case-by-case approach that is followed today.
Finally, the fourth element is to restart true multilateral liberalization of the global trading system, partly for momentum and bicycle reasons but partly to head off potentially destabilizing regional steps-some of which we've heard about here in Asia and others which we see occurring in other parts of the world. I hasten to say that I do not regard regionalism as necessarily undermining or inconsistent with globalization. Indeed the two can frequently reinforce each other. But if we have a failure to move forward on the global front, if the opponents of globalization are permitted to continue to block any forward movement at the global level, then regionalism will not only fill the vacuum where countries can do it but it will take place in the absence of any effective multilateral framework and that could lead to the fears that many have expressed over the years that regionalism will drive the world apart rather than move it together.
Even more importantly, however, new multilateral trade negotiations are essential to deal with many of the real issues that are being raised by the critics-new standards to deal with food trade, new standards to deal with labor arrangements and environmental concerns. These issues have now been forced onto the agenda in a way which cannot be ignored without literally playing into the hands of the opponents of further globalization and those who would wreck the system, rather than try to reform it.
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Whether or not you like my proposed remedies, the main point I want to leave is that we in the Trilateral world, or more broadly we in any part of the world who believe in the benefits of an open world economic system, not just for economic but for political and much broader reasons as well, ignore the backlash against globalization at our peril. There is no doubt that the anti-globalization forces now are in the ascendancy, at least on the policy front, and that it is particularly paradoxical and particularly worrisome that such is the case when the world economy, and particularly the U.S. economy, is in such good shape. I think it is essential for each of us in our individual countries, but also working collectively in groups like the Trilateral Commission, to take the threat seriously and begin devising a multi-part program to start turning the tide against the criticism.