L. Jämterud / S. TorgnysonAspects of Globalisation Aim and description One of the objectives of your Academic English Course is that you should become better acquainted with reading and understanding English texts, not least from specialist literature. You should also be able to discuss different kinds of texts, so in the following section you will read articles discussing various aspects of globalisation. The aim is to give you a better understanding of globalisation, and to help you become more familiar with some of the economic as well as social implications it has. Instructions The articles are to be read intensively. The vocabulary is there both to help you read and understand the articles better – which means some of the words are repeated in the vocabulary lists – and as material to study (not only for the exam, but for your benefit of course!). Where there are specific comprehension questions, jot or write down answers (but you do not need to write whole essays for each answer). All questions must be answered, so that you are prepared when you come to the classroom. It is also important that you try to link the articles with one another, or contrast them, to support your arguments. Don’t just guess – convince us! Some articles are written with a very clear "aim", political or other – bear that in mind when reading the articles. When we meet in class, you will have the opportunity to discuss all the articles, sharing views and ideas as well as concentrating on such aspects that are of particular interest to you. Enjoy! /Shelley and Lars

Aspects of Globalisation

1. (Is the author for or against globalisation? Explain.) 2. Which of the analyses described in the article do you think is the best one? Why? 1. Briefly describe the views of Keynesians and The Washington Concensus. 2. What does the author predict will happen as a result of the recent world-wide economic crisis? Do you agree/Disagree? Do you see signs of any of his predictions currently coming true in Sweden?

Comprehension / Discussion Questions on ”A brief history of globalisation”, by James Featherstone

Comprehension / Discussion Questions on ”The Demise of Neoliberal Globalization”, by Immanuel Wallerstein

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1. Mr Marotta says that "free trade benefits consumers who buy foreign goods such as

clothes from China… Most imports have a lower cost and higher quality." How can this be positive for those who export the goods?

2. What do you think are Mr Marotta's strongest and weakest arguments for free trade and why do you choose these?

1. What is the authors’ assessment of how globalisation has affected the USA?

2. What are they most happy with and most afraid of, respectively? What comparisons can be made with the Swedish (or if you have another native) economy?

Comprehension / Discussion Questions on ”Is globalisation Good or Bad?” by George Marotta

Comprehension / Discussion Questions on "Can anyone steer this economy?”

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3. (What recommendations do they give the president?)

1. In what way has globalisation changed in recent years, according to the author?

2. Who seem to benefit the most from globalisation these days, according to the author?

3. (To what extent do you agree with the statement under Capital Gains: “Capital markets are playing a growing role in development and global economic integration?” What can Sweden learn from this?)

1. How are globalization, company profits and wages inter-connected in this article? 2. Record levels of mergers, acquisitions and soaring bonuses have prevailed over the last decade, what examples of this can you think of world-wide? (include Sweden)

Comprehension / Discussion Questions on ”It’s a smaller world

Comprehension / Discussion Questions on ”Profits of Doom” by Richard Tomkins

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1. (What picture did you have of child labor before you read this article?

Was there anything particularly surprising?)

2. How do politicians and economists define child labor? What is the cause of child labor according to the article?

3. When Vietnam had their economic boom in the 1990’s, what effect did it have on child labor there? 4. In what ways are globalization and child labor intertwined? List the positive and negative effects of globalization on labor discussed in the article.

Comprehension / Discussion Questions on ”Globalization and the Economics of Child Labor”, by Eric V. Edmonds

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1. What is meant by globalisation in this article?

2. Give some examples of Swedish products or companies that could be seen as ‘cultural

stereotypes’, apart from those mentioned in the article.

1. What is the author’s view on globalization?

2. (Which of the authors’ arguments for and against globalization, respectively, is the strongest do you think?)

3. (What role does politics play regarding globalization, according to the article?)

Comprehension / Discussion Questions on ”Survey – Mastering Global Business: Making brands work around the world”

Comprehension / Discussion Questions on "Globalization for Whom?", by Dani Rodrik

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1. Which article do you think was the most and least biased one, respectively. Why those?

2. What are the strongest arguments for and against free trade in this compendium? Motivate your answer and discuss.

3. What could Sweden (or your own native country) learn from the view proffered in this compendium?

4. What could Sweden (or your own native country) do to help the developing countries increase their standard of living?

Comprehension / Discussion Questions on the whole compendium

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Vocabulary (from Collins Cobuild or Marriam-Webster Dictionaries): proliferate to grow by rapid production of new parts, cells, buds, or offspring holding investment deleterious causing harm or damage WTO World Trade Organization pitch in to join in and help with an activity (informal) impartial unbiased incarcerate imprison fiery having a passionate, quick-tempered nature capitalize to convert into capital self-contained sm-one or smth that is complete and separate and do not need help or resources from outside clog block (NB! Not the Swedish wooden shoe…) dissident people who disagree and criticize their government plank principle on which a [political] group bases its policy retaliate to get revenge lumber timber or logs especially when dressed for use rankle to cause anger, irritation, or deep bitterness shrift [give sb short shrift] pay sb very little attention revile [to] spread negative information about buttress support; make stronger or defensible forgo do without

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mire unpleasant or difficult situation; dirt or mud renounce give up, especially by formal announcement prevail widespread, generally accepted depredations damage or destruction protectionist the acts of a govt.to help its country’s trade by taxing goods bought from other countries renders to cause to become rebut prove to be false or incorrect apotheosis the perfect example; high point potable suitable for drinking hearse a large car that carries the coffin at a funeral odious extremely unpleasant nadir the opposite of ‘zenith’ exacerbate aggravate detractor critic contend argue contingent dependent on or conditioned by something else; likely but not certain to happen apparel [AmE.] clothes vociferous loud tether rope or chain, which is used to tie an animal brand make, as in “Malboro is brand of cigarette” R&D Research and Development

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denote indicate stagger spread over a period of time tint a small amount of colour; dye smth a slightly different colour surpass to become better, greater or stronger than archetype a very typical example of a certain person or thing differentiate distinguish torrid extremely hot and dry (weather); passionate plant factory displacement the forcing of people away from the area or country where they live aftermath the period immediately following a usually ruinous event arbitrary based on or determined by individual preference or convenience rather than by necessity or the intrinsic nature of something forgo do without hub a centre of activity leviathan giant hoopla excited commotion instigate to goad or urge forward xenophobic one unduly fearful of what is foreign and especially of people of foreign origin abetted to actively second and encourage caveat a warning of a specific limitation of smth

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volatility instability incremental smth that gradually increases in value or worth quell quiet, pacify irrevocably smth that cannot be changed or reversed alleviate ease unscathed not injured paragon a model of excellence or perfection repatriation to restore or return to the country of origin IMF International Monetary Fund gargantuan gigantic comply with to conform or adapt one's actions to another's rule prone to have a tendency to equable calm, cheerful – even in difficult circumstances tacit implied or inferred without direct expression thrall the state of being in the power of another person/s emoluments profits arising from an office or employment ameliorate to make a bad situation better, improve coerce to compel by force or authority without regard to the person’s wishes curtail to stop something before it is finished, to cut short

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A brief history of globalisation WRITTEN BY JAMES FEATHERSTONE FT.com site; Jan 31, 2001 From the high tide of Victorian expansion to the outbreak of the First World War the world was globalising like crazy. In the period between the end of the WW1 and, effectively 1979, nation states lost their global nerve and trade barriers proliferated. The advent of the Thatcher-Reagan axis in the 1980s blew that consensus away. Business cross-holdings grew often between companies from different continents. By the time of the south east Asian financial crash in 1997, cross holdings were sufficiently large to allow the tidal-wave of pain to hit every other continent with dizzying speed. Brazil and Russia ‘ several thousand miles apart ‘ crashed within weeks of each other. What is new nowadays is hostility to globalisation as a phenomenon, not just capitalism in general. And fears over its deleterious effects are growing. One of the patron saints of the anti-WTO protestors in Davos and Seattle last year, journalist Naomi Klein, wrote an international best seller called No Logo which was an extended complaint about the "mummifying" effects of global capitalism. "An increase of choice", she wrote, "is eminently consistent with dull conformity ‘ 'The world wears Tommy Hillfiger'." The same group of protestors are holding a rival conference in February this year to the WTO conference being held in Davos in Switzerland. Their concerns ‘ forcefully put on one of their main web sites, http://www.A16.org ‘ are to do with the impact developed-world economics has on the developing world. These, claim the protestors, force developing countries into debt, resulting in economic reform packages that impose "austerity", which in turn drives down living conditions. Other critics ‘ significantly from both ends of the political spectrum ‘ have pitched in, offering varying degrees of apocalyptic prognoses. Hans Magnus Enzensberger, a German eco-Marxist, historian and writer thinks that greedy Western-style global capitalism and the collapse of Cold War certainties will bring disintegration on a vast scale and an "autism of violence", a tide of "self-destruction and collective madness". Let’s hope not. Figures showing a consistent rise of average global income seem to offer some rays of hope. The World Bank, not an entirely impartial observer, consistently weighs in with solid-looking arguments. Two recent reports (see further contacts) argue that the inequalities that modern, global capitalism produces are inevitable, and that the alternative is an equality of poverty. The reports note that the proportion of the world’s population that lives on less than $2 a day has fallen since 1987 from 24 per cent to 20 per cent. The absolute total is the same, but global capitalism has, in effect financially catered for the expanded world population. So what, say some other critics; global capitalism is inherently destabilising and economic gain is not worth it if it is bought at the cost of settled culture and people’s lives. One such critic is John Gray, a Thatcherite game-keeper turned anti-globalisation poacher. He argues in his book False Dawn: the Delusions of Global Capitalism that the world is being forced to conform to an American version of capitalism with minimal welfare systems, low taxes and weak business and environmental regulations. America itself shows what the result will be; the majority of Americans have not benefited from the long boom. The middle classes suffer from "assetless economic insecurity that afflicted the nineteenth-century". "America", continues Gray, "is on the verge of massive social disruption, currently held back by mass imprisonment of the underclass." And yet, although inequality has grown in the US since the 1970s, overall wealth has increased enormously. Gray observes that American blacks are incarcerated at an alarming rate in the US ‘ a direct product, he believes, of inequality. But scholars in the US point out that the wealth of black America makes "Black America" the tenth-most-prosperous "nation" on earth. Moreover, there is now a large and prosperous black middle class. Cultural breakdown might be a problem, but straight inequality seems not to be. One extraordinary supporter of globalisation, given her record, is Clare Short, the UK’s formerly fiery left-wing International Development Minister. She scolded the anti-globalisation protestors by saying that globalisation would be "more likely to alleviate world poverty" than anything else. The latest thinking in Trades Union circles is that they must also globalise themselves in order to counteract the power of multinational business. And one key argument for the existence of the European Union is that political structures need to be of a size appropriate to the task of reigning in multinational companies. An intriguing addition to the debate came last year in a book by a Peruvian writer called Hernando de Soto: The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. De Soto argues that far from capitalism failing the world’s poor, they have never really been allowed to try

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it. He tots up the total wealth of the poorest people in the world and comes to the startling figure of $9,300bn ($9.3 trillion) dollars. However, most of the world’s poor do not have any legal title to the land or property they possess ‘ or, as likely, they are prevented from having legal title by repressive or incompetent governments. It is this inability, literally, to capitalise on the possessions they do own that keeps them mired in poverty. A man with a cow can milk the cow and feed himself. A man with a piece of paper showing legal title to that same cow can use it to raise further capital and invest in his future. The answer to the troubles of globalisation for de Soto is not a retreat from capitalism, but to let everyone have a go. Does the rise of globalisation threaten world stability by increasing the gap between rich and poor, or, accepting a degree of inequality must exist to drive the global economy onwards, is it slowly improving the wealth and worth of mankind as a whole?

2008: The Demise of Neoliberal Globalization  Immanuel Wallerstein Yale global, 4 February 2008

The ideology of neoliberal globalization has been on a roll since the early 1980s. It was not in fact a new idea in the history of the modern world-system, although it claimed to be one. It was rather the very old idea that the governments of the world should get out of the way of large, efficient enterprises in their efforts to prevail in the world market. The first policy implication was that governments, all governments, should permit these corporations freely to cross every frontier with their goods and their capital. The second policy implication was that the governments, all governments, should renounce any role as owners themselves of these productive enterprises, privatizing whatever they own. And the third policy implication was that governments, all governments, should minimize, if not eliminate, any and all kinds of social welfare transfer payments to their populations. This old idea had always been cyclically in fashion.

In the 1980s, these ideas were proposed as a counterview to the equally old Keynesian and/or socialist views that had been prevailing in most countries around the world: that economies should be mixed (state plus private enterprises); that governments should protect their citizens from the depredations of foreign-owned quasi-monopolist corporations; and that governments should try to equalize life chances by transferring benefits to their less well-off residents (especially education, health, and lifetime guarantees of income levels), which required of course taxation of better-off residents and corporate enterprises.

The program of neoliberal globalization took advantage of the worldwide profit stagnation that began after a long period of unprecedented global expansion in the post-1945 period up to the beginning of the 1970s, which had encouraged the Keynesian and/or socialist views to dominate policy. The profit stagnation created balance-of-payments problems for a very large number of the world's governments, especially in the global South and the so-called socialist bloc of nations. The neoliberal counteroffensive was led by the right-wing governments of the United States and Great Britain (Reagan and Thatcher) plus the two main intergovernmental financial agencies - the International Monetary Fund and the World Bank, and these jointly created and enforced what came to be called the Washington Consensus. The slogan of this global joint policy was coined by Mrs. Thatcher: TINA, or There is No Alternative. The slogan was intended to convey to all governments that they had to fall in line with the policy recommendations, or they would be punished by slow growth and the refusal of international assistance in any difficulties they might face.

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The Washington Consensus promised renewed economic growth to everyone and a way out of the global profit stagnation. Politically, the proponents of neoliberal globalization were highly successful. Government after government - in the global South, in the socialist bloc, and in the strong Western countries - privatized industries, opened their frontiers to trade and financial transactions, and cut back on the welfare state. Socialist ideas, even Keynesian ideas, were largely discredited in public opinion and renounced by political elites. The most dramatic visible consequence was the fall of the Communist regimes in east-central Europe and the former Soviet Union plus the adoption of a market-friendly policy by still-nominally socialist China.

The only problem with this great political success was that it was not matched by economic success. The profit stagnation in industrial enterprises worldwide continued. The surge upward of the stock markets everywhere was based not on productive profits but largely on speculative financial manipulations. The distribution of income worldwide and within countries became very skewed - a massive increase in the income of the top 10% and especially of the top 1% of the world's populations, but a decline in real income of much of the rest of the world's populations.

Disillusionment with the glories of an unrestrained "market" began to set in by the mid-1990s. This could be seen in many developments: the return to power of more social-welfare-oriented governments in many countries; the turn back to calling for government protectionist policies, especially by labor movements and organizations of rural workers; the worldwide growth of an alterglobalization movement whose slogan was "another world is possible."

This political reaction grew slowly but steadily. Meanwhile, the proponents of neoliberal globalization not only persisted but increased their pressure with the regime of George W. Bush. Bush's government pushed simultaneously more distorted income distribution (via very large tax cuts for the very well-off) and a foreign policy of unilateral macho militarism (the Iraq invasion). It financed this by a fantastic expansion of borrowing (indebtedness) via the sale of U.S. treasury bonds to the controllers of world energy supplies and low-cost production facilities.

It looked good on paper, if all one read were the figures on the stock markets. But it was a super-credit bubble that was bound to burst, and is now bursting. The Iraq invasion (plus Afghanistan plus Pakistan) are proving a great military and political fiasco. The economic solidity of the United States has been discredited, causing a radical fall in the dollar. And the stock markets of the world are trembling as they face the pricking of the bubble.

So what are the policy conclusions that governments and populations are drawing? There seem to be four in the offing. The first is the end of the role of the U.S. dollar as the reserve currency of the world, which renders impossible the continuance of the policy of super-indebtedness of both the government of the United States and its consumers. The second is the return to a high degree of protectionism, both in the global North and the global South. The third is the return of state acquisition of failing enterprises and the implementation of Keynesian measures. The last is the return of more social-welfare redistributive policies.

The political balance is swinging back. Neoliberal globalization will be written about ten years from now as a cyclical swing in the history of the capitalist world-economy. The real

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question is not whether this phase is over but whether the swing back will be able, as in the past, to restore a state of relative equilibrium in the world-system. Or has too much damage been done? And are we now in for more violent chaos in the world-economy and therefore in the world-system as a whole.

Title: Global Economics , By: Marotta, George, Vital Speeches of the Day, 0042742X, 2/15/2004, Vol. 70, Issue 9, Global Economics IS GLOBALIZATION GOOD OR BAD? "Is globalization good or bad?" is the question of the day. The answer is "Yes, it is both good and bad." But it's happening; it is an unstoppable trend; and, on balance, does much more good than harm for most of the world's population. Globalization refers to the fact that the world is getting smaller and smaller because world trade has increased dramatically over the last five decades. The U.S. is now more interdependent on other nations than ever before. Today, at the dawn of the 21st century, in the U.S. and other industrialized countries we have a global economy. By almost every measure--trade, direct investment, equity purchases, bank lending and even government borrowing-the American economy is now more global than it has ever been. Let's look at the facts. In 2002, the US exported $700 billion worth of goods. The biggest buyers of our goods were Canada, the countries of the European Union, Mexico, Japan and China. During that year, we imported goods valued at $1,150 billion. We imported the most from the European Union, Canada, Mexico, China and Japan. As a result, we had a $350 billion deficit in trade in goods. In services, the US exported $287 billion and imported $240 billion for a $47 billion trade surplus in 2002. The U.S. is becoming more interdependent on other countries. In 1950, international trade--the sum of U.S. exports and imports--involved only about one tenth of our U.S. economy. Today, trade accounts for nearly a quarter of our economy, the highest portion in history. (The U.S. GDP was $10 trillion in 2002, and the total U.S. imports and exports was $2.4 trillion.) The US is the largest trading nation in the world for both exports and imports of goods and services. The United States accounts for roughly 20 percent of world trade in goods and for 16 percent of world trade in services. The value of world trade has increased dramatically since 1970--22-fold--and 54 percent just since 1994. There are currently about $10 trillion goods and services in world trade. The media reports mostly on the negative effects of free trade, and especially the loss of U.S. jobs due to low-cost imports. However, free trade helps businesses and workers who produce goods and services for export. For example, trade helps our farmers who produce grain, helps workers at Boeing that makes airplanes, General Dynamics that produces military equipment, Microsoft that exports software, miners who extract the coal for export, etc.

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Free trade benefits consumers who buy foreign goods such as clothes from China, cars from Japan, perfume and wine from France, and fruit in season from South America. Most imports have a lower cost and higher quality, and that improves our standard of living. Two generations ago, trade was of little importance to the US. We had a relatively self-contained economy. Trade then was the preserve of experts and specialists. Now, it is an issue that affects the lives of all Americans. In 1975, the sale of U.S. bonds and equities to foreigners amounted to only five percent of US capital markets; now it amounts to 25% of our capital markets. Over the last 15 years, foreign direct investment in the US has grown 500 percent. As a result five percent of the US workforce or about 7 million workers in the 1990s worked for firms that are partially or wholly foreign owned. In 1975, Americans had only one percent of their equities invested in foreign stocks; now they have 10 percent. That percentage is sure to increase as financial advisors recommend foreign securities for diversification purposes, especially as the dollar declines in value against foreign currencies. Another advantage of trade is that U.S. workers in export-related plants receive pay that is 14 percent higher than at similar firms that do not export. Trade has grown at an annual average rate of 10 percent per year since 1970, faster than the growth of the U.S. gross domestic product over the same period. Some believe that trade hurts one of the parties to the transaction. However, elementary economics teaches students that trade is not a zero-sum game. Both parties must benefit--or else there would not have been a trade. It is something like a trade in the stock market, both the buyer and seller benefited, or else the seller would not have initiated the sale and the buyer would not have agreed to buy. Another aspect of globalization is the fact that the world is in the midst of the largest migration in history. In China alone, there are one hundred million people on the move from the countryside to the cities. In Germany the death rate has exceeded the birth rate for decades, so they need immigrants to maintain their economic structure. The "German" portion of the population will drop by twelve million by 2030. In England, there are now more practicing Muslims than Anglicans. In Russia, the population has dropped three million in the past decade. The US population continues to increase but only because of immigration and the African-American and Hispanic birth rates. The world is getting small because of the greater and more frequent communication that is taking place between peoples and cultures. The result is a gradual merging of beliefs and modes of life. This is helping people to accept certain common values and ideas such as the sanctity of the individual, due process of law, universal education, the equality of women, human rights, private property, and science as the engine of growth. Most importantly, it is encouraging the determination of people to take charge of their destiny and not to simply accept the hand dealt them. Because of the introduction of the fax machine

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and now the use of the internet and low-cost telephone services, easy communication is bringing us all closer together. In spite of all the positive aspects of globalization, some are protesting the trend. For example, on November 30, 1999, tens of thousands of workers, students, environmentalists and social activists clogged the streets of downtown Seattle, Washington, in an effort to shut down a meeting of the world trade ministers. The protestors oppose the use of child labor by multinational corporations in developing countries, are against agri-business's growing use of genetically modified seeds and lament the destruction of tropical rain forests. They decry the globalization of national economies in all parts of the world. In the September 2002, there were protests at the World Trade Organization talks in Cancun, Mexico. Also last month in Miami there were demonstrations when the trade ministers met to discuss the proposed Free Trade Area of the Americas (FTAA). This will extend the three-nation NAFTA (Canada, U.S., Mexico) to include all of Central and South America. The goal is to reach final agreement for this enlarged free trade zone by 2005. The FTAA will unite the 800 million people of the entire Western Hemisphere into a gigantic, duty-free trading zone. Our modern media works this way: they give huge coverage to the few dissidents while underplaying or ignoring the enormous benefits which will accrue to the great silent majority from the world free trade movement. In 1992, 12 countries united to create a free trade zone within the European Union, and later three more nations joined. An additional ten countries will be admitted over the next two years. Most of the EU countries gave up their own national currency in favor of a new European regional currency called the "Euro." The Euro is now one of the major currencies in the world and is worth 120 US cents. It started a few years ago at 117, went down as low as 83, and now has rebounded back to make new highs. The success of the free trade movement in Europe gave impetus to the establishment of the North American Free Trade Agreement (NAFTA). This agreement has been very successful in increasing trade between the three members, Canada, the U.S. and Mexico. The trade pact was signed in 1992 and became effective in 1994. It called for the elimination of most tariffs and other barriers on products and services passing between the three countries. Some tariffs, customs duties will be removed immediately, while others will be gradually reduced over a period as long as 15 years. NAFTA is an expansion of a trade agreement signed between the US and Canada in 1988. By lowering trade barriers, the agreement has expanded trade in all three countries, led to increased employment, more choices for consumers at competitive prices, and rising prosperity. Despite the slowdown in the world economy in 2001 and the terrible events of September 11, NAFTA has completed its first decade and continues to provide benefits to consumers, farmers, workers and businesses in Canada, Mexico and the United States. Trade among the three parties has doubled in that period and now reaches a level of almost $2 billion each day in trilateral trade.

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Canada's merchandise exports to its two NAFTA partners have almost doubled. In contrast, its exports to the rest of the world have increased by only five percent. Mexico has benefited even more with its trade increasing 225 percent to its two partners, while Mexican trade to the rest of the world increased by less than half that amount. U.S. merchandise exports to its two NAFTA partners have nearly doubled, while exports to the rest of the world have increased by only 44 percent. U.S. goods exported to Mexico in 2002 totaled $100 billion and imports from Mexico were $134 billion. You may recall that President Bush lost the election in 1992 to Bill Clinton because third party candidate Ross Perot won 14 percent of the vote. One of Perot's major campaign planks was opposition to the proposed NAFTA agreement. He contented that, if adopted, it would produce a "swishing" sound of jobs going south from the U.S. to Mexico. It is ironic that, President Clinton with much Republican support was able to secure agreement on the creation of the North American free trade agreement. The U.S. has benefited from a more prosperous and stable Mexico that fosters higher environmental standards and reduces the flow of illegal migration to the U.S. A small vocal group of Americans are against "globalization." However, world trade is making everyone in the world better off. Lower-priced imports not only help us to contain inflation, it extends a family's buying power by about three percent. Obviously, both parties to a trade benefit from that trade or else it wouldn't take place. The benefits of specialization are obvious. It allows goods to be produced more cheaply, lowering the cost of living for the population on both sides of the trade. What can one person do to support free trade? First, inform yourself on the overwhelming benefits of free world trade and make your views known to your representatives and senators whenever the subject comes up. We've had scare tactics used in the past to discourage good trends. For example, when countries were developing fast, a group that called themselves The Club of Rome warned that there were not enough resources in the world for all countries to advance. That did not prove to be correct. There was worry about world over-population. So-called experts warned that the large population by the end of the last century would not be able to sustain itself. And that proved to be incorrect. The rapid rate of population growth has slowed dramatically as countries developed economically. There was worry that pollution would strangle us. There were movies that depicted an earth spoiled by pollution. And we know that levels of pollution have been going down in many countries over the past two decades. Of course, competition causes problems. It certainly has for the workers and companies in the steel industry. The US once had many companies making steel, and we were one of the few countries producing steel at the turn of the 20th century. Today, many foreign countries produce steel. Four US steel companies have gone bankrupt because they could not compete

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in the new world environment. Our industry has not kept up with modernization and other countries can produce better quality of steel less expensively than we can. To give our steel industry a chance to improve, the US government placed a tariff on the importation of foreign steel in 1997. However, the European Union last year declared that if the US did not remove its tariff on steel, it would retaliate with restrictions on the importation of US goods into EU countries. So, the U.S. removed the tariffs and the EU dropped its threat to retaliate. Although the US action will make it more difficult for US industry to compete, had the EU retaliated many more Americans would be hurt from that action. The US has imposed tariffs on other imports, such as lumber into the US. This particularly hurts Canada, our biggest source of imported lumber. This action is fine for the lumber industry, but it does add cost to build a home. That hurts particularly the lowest-income family that has to strain to buy their first home. Americans will support free trade when they realize that it is in the best interests of our nation, and indeed, the whole world. There are at least ten reasons to support free trade. The free trade system helps to promote peace. As we become more interdependent, it does not make sense for exporters to want to harm their own customers. The WTO was established in 1995 as a successor to the General Agreement on Tariffs and Trade (GATT). This international organization establishes the rules for global commerce and then enforces them. It develops rules to protect the interests of smaller countries. There is an obligation upon members to bring their disputes to the WTO. It helps countries to settle disputes before they threaten stability. Free trade cuts the cost of living and raises everyone's standard of living. Protectionism, on the contrary, raises prices. For example, during the early 1980s car prices rose as the US restricted the number of cars Japan could export to the US. In the US, it is estimated that lower-priced imports helps to contain inflation and extend our buying power by about three percent. Free trade gives consumers more choice in goods and services and also provides better quality products. The US car manufacturers were quick to improve US-made cars when consumers shifted to better-quality Japanese-made cars. Trade raises the income of all participants. Trade is not a zero-sum game. One recent study shows that the incomes of people have been raised by at least one-half trillion dollars due to increased trade. Trade stimulates economic growth. In the European Union alone, free trade has helped to create one million new jobs.

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The basic principles of free trade make life more efficient. It allows a division of labor. Each participant does what he can do best and trades his product with someone else who can do something else better. The WTO and the benefits of world trade helps to shield governments from the lobbying pressure of narrow interest groups. The farmers group is so strong that farm subsidies in the US, European Union and Japan raises the prices paid by consumers to the tune of $300 billion a year. Despite of some disruptive effects, globalization and free trade represents the world's best chance to enrich the lives of the greatest number of people. ~~~~~~~~ Address by George Marotta Title: CAN ANYONE STEER THIS ECONOMY?, By: Mandel, Michael, Dunham, Richard S., Business Week, 00077135, 11/20/2006, Issue 4010 Section: Cover Story

Global forces have taken control of the economy. And government, regardless of party, will have less influence than ever

SOMETIME NEXT YEAR --perhaps around Christmas 2007, if current trends continue--the U.S. will hit a milestone. For the first time in recent memory, the cost of imported goods and services will exceed federal revenues. In other words, Americans will soon pay more to foreigners than they do to their national government. We're almost there now. Imports cost us about $2.2 trillion a year; the federal government collects $2.4 trillion in revenues. Why is that important? Because for the past 70 years, Washington has been the 800-pound gorilla, more powerful by far than any other force in the U.S. economy. That's not true anymore. The federal government remains plenty influential, but the global economy is more so. This will come as a rude shock to Representative Nancy Pelosi (D-Calif.), the presumptive Speaker of the House, Charles B. Rangel (D-N.Y.), the likely chairman of the House Ways & Means Committee, and other newly enfranchised leaders in the Democratic Party. Sure, they're likely to have the power to pass legislation, including boosting the minimum wage. But such a measure, even if President George W. Bush signed it, would help only a small fraction of the workforce. It would do almost nothing to ameliorate the weak wage growth that has plagued most Americans, including college graduates, in recent years. The broad-based drop in incomes is being driven more by the rise of China and India and the intensification of global competition. And there is little Democrats can do to reverse these trends. No matter which party you belong to, or which Big Idea or school of economic policy you subscribe to, one thing is clear: Globalization has overwhelmed Washington's ability to control the economy. Whether you're a Republican supply-side tax-cutter, a Wall Street deficit hawk of either party, or a Silicon Valley techie type, your preferred levers of economic policy just don't work as well as they once did.

As recently as 10 years ago, the U.S. economy was still relatively self-contained. Then-Federal Reserve Chairman Alan Greenspan--often called the most powerful man in the world--could be sure that the U.S. economic machine would eventually respond when he called for higher or lower rates. Tax and spending decisions made in Washington could set the course

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for growth, while economic events in the rest of the world, such as the Asian financial crisis of the mid-1990s, were felt as minor bumps. That has changed. Since 1995 imports have risen from 12% of gross domestic product to about 17%. And foreign money finances about 32% of U.S. domestic investment, up from 7% in 1995. In other words, the U.S. is more open to the global economy than ever before, and the links run in both directions. Now many of the levers affecting the U.S. economy are located not in Washington but in Beijing, London, and even Mexico City. Greenspan and his successor, Ben S. Bernanke, have found this out the hard way. To restrain economic growth and cool the housing market, the two Fed heads have raised short-term interest rates 17 times since 2004, for a total increase of more than four percentage points. But even as the Fed tightened up on the domestic money supply, foreign investors made up the difference. As a result, the interest rate on 10-year government bonds today is 4.6%, exactly where it was in 2004, when the Fed started raising rates. Good news for home buyers who want mortgages. Not so good news for the policymakers trying for a soft landing.

PRESIDENT BUSH ENCOUNTERED a similar problem. His huge tax cuts poured hundreds of billions into the economy and kept output rising at a decent clip. Nevertheless, the fiscal stimulus generated far fewer jobs than anyone expected, as more and more production headed overseas. "Traditional macro policies are less effective than they used to be," says Robert S. Shapiro, a top economic adviser to President Bill Clinton who now runs a Washington economic consulting firm. "We don't know how to ensure strong job creation and strong wage growth anymore."

Pelosi and the congressional Democrats, who embraced fiscal restraint as their pre-election mantra, shouldn't expect much better economic results by pulling the deficit-cutting lever. On the campaign trail, Pelosi promised to contain the budget deficit, telling one Washington audience that "if American families are expected to balance their checkbooks, so, too, should the Congress of the United States." While that commitment may resonate politically, there's growing economic evidence that reducing the budget deficit won't do much to jazz up business investment and growth. A new study from the Federal Reserve Bank of New York, as nonpolitical an organization as you will find, reports that "investment has exhibited only a tenuous response to fiscal policy changes." Even the Big Idea of devoting more tax dollars to research and development to make the U.S. more competitive--an idea repeatedly advocated by such tech leaders as John T. Chambers of Cisco Systems Inc. and John Doerr of venture capital giant Kleiner Perkins Caufield & Byers--is beginning to look economically and politically troublesome. True, increased funding for R&D appears to be a rare area of agreement between the two parties: Pelosi and the House Democrats came out with their "Innovation Agenda" last November, and Bush followed with his innovation-based "Competitiveness Initiative" in the January State of the Union speech. But in the brave new world of the global economy, where companies move factories and facilities around the world like game pieces, it's no longer a given that U.S. workers benefit directly from U.S.-funded research. One worrisome example: Despite federal outlays of over $125 billion for medical research over the past five years, the U.S. has a large and growing trade deficit in advanced biotech and medical goods. "The era in which we could assume that increased U.S. public investment in R&D automatically generates domestic growth is over," says Jeff Faux of the liberal Economic Policy Institute.

Policymakers now face the unenviable task of managing the economy in the face of an overwhelming flow of goods and money back and forth across national borders. "The federal government affects the economy only on the margins," says Charles R. Black Jr., Republican consultant and outside adviser to President Bush. Adds Timothy J. Penny, a former Democratic representative from Minnesota who is now at the University of Minnesota:

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"Washington is far less relevant than it used to be. You don't have to be an economics professional to see the evidence." And get this: We don't even know how to measure whether we as a country are succeeding or failing. The traditional metrics for economic security and prosperity are capturing impressive signs of life. Unemployment, inflation, and interest rates are low by historical standards. The stock market is rising, and household wealth is higher than it was at the peak of the 1990s boom, even after adjusting for inflation. To a large extent, this is thanks to the global economy, which has been fueling the U.S. expansion with cheap goods and cheap money. Yet real wages are down over the past five years, the trade deficit is enormous, and there are widespread worries about America's continued ability to compete. Washington has responded to these concerns, in large part, with a series of small fixes, like tinkering with the pension system. But what's needed is a new Big Idea for economic policy--or two or three competing Big Ideas--that accounts for the verities of the global economy.

The first step is to get a better handle on what's really happening to U.S. workers and businesses in today's economy, where wealth is as important as income, and where events in Shanghai are as important as events in Chicago. If the value of a family's home goes way up, but its income dips a bit, is the family better or worse off? If a U.S.-based company opens up an R&D facility in India or China, does its employment of American workers go up or down--and, does its overall contribution to U.S. growth increase or decrease? We don't have the statistics needed to answer these questions. Second, we need to take hold of the main unused lever of economic policy: health care. Politicians and economists have mainly thought of health care as a cost that is dragging down competitiveness. Health-care spending is the main source of long-term federal, state, and local budget deficits, the prime gobbler of national savings, and one of the biggest tax distortions, in the form of the tax exemption for company-provided health insurance. All these things are true. But health care is also a huge source of private sector jobs, one of the most technologically advanced sectors of the economy, and frankly, the provider of a service people can't get enough of. It can even be thought of as an investment, to the degree that better health allows Americans to work longer and to better enjoy their lives. We have to view health care as a force for growth, rather than an impediment. Finally, a Big Big Idea--probably too big to even consider right now--would be the creation of global institutions for governing the world economy. History tells us that market economies are prone to financial crises, to which the only solution is a strong central bank. During the Asian financial crisis of the 1990s, for example, the Fed played that role. But with the explosive growth of China and India, that sort of role for the Fed is no longer feasible, and no new institution has arisen to take its place. As former Treasury Secretary Robert E. Rubin, now a top official at Citigroup, recently said: "There's no policy mechanism for bringing together the countries that really matter in the global economy." The best solution would be some sort of global central bank with real powers--but that's not going to happen until there's a big enough financial crisis to truly scare people.

ECONOMIC POLICY, IN THE SENSE that we understand it today, is a comparatively recent invention. It started with John Maynard Keynes in the 1930s. He put forth the Big Idea that governments had the ability to soften a downturn. Keynesian economics, as it was termed, calls for reducing interest rates, cutting taxes, and hiking government spending to ease the worst effects of recession. Today, Keynes's prescriptions could be called Policy Classic, since even diehard free marketeers agree that fighting recessions is the right thing for governments to do. What's more, Policy Classic still works in the modern global economy, up to a point. When a fire starts in your house, you should still try as hard as you can to douse it with water, even if your hose is leaky. Consider how Washington responded to the recession of 2001. One could quibble with the exact timing of Greenspan's rate cuts, and the Democrats weren't particularly happy with the Bush tax cuts. But there's no disputing that massive amounts of fiscal and monetary stimulus made the 2001 downturn one of the mildest on

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record. And the recovery hasn't been half bad, either. Since the economy peaked in the second quarter of 2001, economic growth has averaged a decent 2.8%. Yet the recovery could have been a lot stronger, given the amount of stimulus pumped into the economy. Consumers and businesses aren't fools: They used their extra money to buy cheap imports rather than more expensive American-made goods and services. Between 2001 and today, imports rose by three percentage points as a share of GDP, one of the main reasons that job growth was so slow. By comparison, the import share rose by only one percentage point or so in the recoveries of the early 1980s and the early 1990s.

In an open economy, Policy Classic loses its punch. The inability to create jobs after a recession is bad enough. What really should concern us all, though, is what might happen in the next recession. Foreign investors have been extraordinarily willing to put their money into the U.S. But let's suppose, just for the sake of argument, that a recession here makes other countries look like a better bet. Then foreign investors pull out their money, pushing interest rates way up and the dollar way down. The higher rates slow the economy, and the lower dollar makes imports more expensive, triggering higher inflation. Poof! Instant stagflation. And what's worse, Bernanke and the Fed will be forced to keep interest rates high to fight inflation.

But enough of cataclysmic scenarios that might or might not happen. The question to ask is this: How does globalization affect the long-term policies for growth, both liberal and conservative, rolled out by the U.S. in recent decades? Probably the best known is supply-side economics, which originated in the 1970s and achieved prominence under President Ronald Reagan in the 1980s. Like all Big Ideas, the logic behind supply-side economics is clear: Lower tax rates give workers an incentive to put in more hours, encourage savings and investment by increasing the after-tax rate of return, and spur entrepreneurs to expand their businesses by allowing them to keep more of the profits. According to Kevin A. Hassett, director of economic policy studies at the American Enterprise Institute, globalization actually increases the pressure to cut taxes. If tax rates are too high, "corporate income is so mobile that the money just leaves," says Hassett. "There's an international tax competition, and everyone is playing." Yet economists are hard-pressed to find evidence that tax cuts have a big effect on growth. Last summer, the Treasury Dept. released a study that looked at the long-term impact of extending President Bush's tax cuts, which are due to expire at the end of 2010. The study concluded that extending the tax cuts indefinitely would boost GDP by only 0.7% over the long run. That's less than a rounding error. It's also clear that having a low tax rate is only one factor among many determining international competitiveness. It's equally important to have an honest government, or an efficient health-care system, or an educated workforce. "There isn't a single blueprint for a successful economy," says Robert E. Hall, a Stanford University economist who was one of the main advocates of a flat tax in the 1980s.

On to the next Big Idea: deficit reduction, a mirror image of supply-side economics that the Democrats have made the centerpiece of their political and economic agenda. "Fiscal responsibility is important for the long term," says Bruce Reed, president of the Democratic Leadership Council. "The overall economy is going to pay a price if the country is going broke." The case for deficit reduction as a long-term growth strategy is also straightforward. Smaller budget deficits are supposed to boost national savings, which leads to lower interest rates, smaller trade deficits, increased investment by businesses, and more job creation. And certainly that's the way it worked in the 1990s, when Rubin was running economic policy under President Clinton--hence the name Rubinomics. But this line of reasoning doesn't hold up so well in an economy that is far more exposed to global forces than it was in 1993, when Clinton took office. The financial markets have become far more seamlessly global, making the U.S. budget deficit a much smaller influence on interest rates. Today's roughly $250

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billion deficit would use up about 14% of U.S. national savings. That's a big deal, but it's only 2% of global savings. The ease with which capital flows across national borders helps justify the Bush Administration's relative lack of concern about budget deficits or even personal savings. "What starts to break down is the simple link between encouraging savings and encouraging investment," says James S. Poterba, a Massachusetts Institute of Technology economist appointed by Bush to his tax reform commission in 2005. "If Joe in Pittsburgh saves, we can't say that we benefit this factory in Harrisburg. The jobs we generate might be jobs somewhere else"--like overseas.

So if globalization weakens the usefulness of tax cuts and deficit reduction as policy tools, what's left? The New Economy boom of the 1990s was driven by technological change and innovation. The logical way to rekindle the magic, then, is to boost government spending for R&D and education. Just listen to Daron Acemoglu of MIT, the most recent winner of the John Bates Clark Medal, given to the best economist under the age of 40. "The U.S. is a frontier country," says Acemoglu, meaning that its competitive advantage comes from being at the forefront of new technology. As a result, he says "if any policy is going to have a beneficial effect, it has to help the innovation sector." This Big Idea was first suggested by Paul Romer, now at Stanford University, in the 1980s, and named New Growth Theory. That term fell out of favor after the tech crash--perhaps because it sounded too much like the New Economy--and the Big Idea now goes by the prosaic name "innovation policy." The problem is that it's tough to make a direct connection between federal R&D spending and the creation of high-tech jobs. Despite the U.S. prominence in medical research, the pharmaceutical, biotech, and medical devices industries have added only 19,000 workers in the past five years.

THE TRUTH IS, CHINA and India are increasingly attractive places for companies to do research and development (using ideas, perhaps, that were originally developed using U.S. tax dollars). Money is following as well, with U.S. venture capitalists investing more than $400 million in Chinese and Indian companies in the third quarter alone, according to the National Venture Capital Assn. There's a growing sense that at a time of scarce resources, the U.S. may not be getting enough bang for its buck from R&D spending. "The question about funding basic R&D for health care is the same as for funding other basic R&D," says Robert B. Reich, Labor Secretary under Clinton and now at the University of California at Berkeley. "How long can and should the U.S. continue to subsidize the rest of the world?" This question becomes especially pressing if the newly resurgent Democrats carry through on their promise to put in place a "pay-as-you-go" budget system whereby new spending cannot be financed by increased borrowing. Who is going to vote an increase for science if it means raising taxes or cutting spending for children? The last bout of meaningful deficit reduction, during Clinton's first term, did serious damage to R&D spending, which dropped by 3.9% in real terms.

Education poses a different set of issues. Clearly, education is key to competitiveness. "If an educated population is the engine of change, then we're doing a really, really lousy job," says Claudia Goldin, a Harvard economist who is co-authoring a book about education and technology. "We have been un-subsidizing higher education for some time." There are two problems. First, real wages for young Americans with a bachelor's degree have declined by almost 8% over the past three years. Nobody knows the reason for sure, but some economists suspect that global competition has something to do with it. The other problem is that education is closely tied, in tricky ways, to the hot-button issue of immigration. Despite post-September 11 restrictions, foreign students with temporary visas still account for almost 40% of new graduate students in science and engineering. We still need to spend more on education, but in an era of labor mobility the decision about where to put our resources is not a slam-dunk.

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With the Big Ideas under assault by globalization, economists have responded by focusing on smaller goals. "Are there places where we can make sensible improvements that don't require big philosophical changes in what we are doing?" asks Poterba of MIT. For example, the new pension bill encourages companies to automatically enroll new hires in 401(k) plans unless they opt out. Economists believe that will greatly increase savings by workers. Not as big a deal, perhaps, as full-scale tax reform, but a gain. Beyond that, the idea of a national economic policy may be fundamentally out of date in a world of global markets. Washington is no longer the center of the economic universe. That's a basic fact that Democrats and Republicans alike will need to get their heads around.

Copyright The McGraw-Hill Companies, Copyright 2006

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COVER STORYGLOBALIZATION

IT'S A SMALLERAs more countries mature and enter the global market,the balance of economic and political power is changing.Businesses will have to stay on their toes to prosper.

Iftcr undergoing a decade ofldr;tniatic change, the world'sIccononiy looks very different

than it did throughout the 1990s. A hostof countries that were just finding theireconomic feet and beginning to phiy onthe global stage now have economic andpolitical power to spare.The titans of theWest have also seen their roles change asthey have discovered they can no longerexpand with impunity into the farthesttluiig corners of the earth.

This is the inevitable result of global-ization, which, by one definition, is ".iprocess of greater integration within tlieworld economy through movements ofgoods and services, capital, technology;ind (to a lesser extent) labor, which leadincreasingly to economic decisions be-ing influenced by global conditions."That definition is as apposite as ever—perhaps even more so, given the acceler-ation of economic integration bothglobally and regionally. But, as manyformerly emerging markets mature andmore countries enter the global market,the balance ot economic and politicalpower is ch.-inging. The businesses andeconomies that prosper will be playingby a whole new set of rules.

One of the symptoms of this change isthat yield-hungry investors ;ire lookingfarther afield as their traditional stomp-ing grounds are beginning to look lesslike emerging markets. The extremelyfavorable conditions in global capital

markets (see box, page 22) for emergingmarkets over the past few years encour-aged more stable types of investors, suchas pension funds from the United States,to invest in emerging markets assets."That's really benefited the targe devel-oping economies such as Brazil, Mexico,Turkey and some of the Asian coun-tries," says Lauren Phillips, a research fel-low at London's Overseas DevelopmentInstitute. As a result, though, the yield onthose markets has fallen. "Investors havebeen looking at smaller emerging mar-kets, which can now access internationalcapital much more easily." she adds.

The changes taking place are not driv-

en only by investors dipping their toes innew markets; the very' workings of theglobalization machine are turning differ-ently now. No longer does glohalizationjust describe the process of westerniiuiitinationals moving into new mar-kets. Now it is more about convergence,with companies around the world hav-ing the same access to sophisticatedtechnology and banking services.

hi many ways, the changes are beingled by the global banks. As they work togrow their business and develop newmarkets and products, the banks are fa-cilitating rapid growth in cross-bordertrade—of goods, services and currencies.Technology is the great facilitator. Com-panies no longer have to establish aphysical presence in multiple countriesbecause, in many cases, they are simplylinking up with local businesses and ei-ther outsourcing or ofishoring their pro-duction and administrative functions.

As such services become more com-moditized and universal, poorer countriescan enjoy the greatest transformative im-pact. The benefits for a newly emergingeconomy of being able to tap into thesesophisticated and highly efficient process-es fi-om day one can barely be overstated.Instead of waiting on the platform for theslow train of economic progress to rattleinto the station, these economies arc ableto jump straight onto an express that is al-ready haliA\'ay to their destination.

In a perhaps unexpected spin-off, the

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WORLsharp rise in the availability of informa-tion, primarily through the hiternet, hasenabled the worlds central bankers toraise their game to a whole new level.Aided by a wealth of information abouthow best to run a modern economy andby the reams of detail available aboutwhat their peers are doing and how theyare faring, the world's central bankersare exhibiting a dramatic rise in compe-tence and effectiveness. According tothe central bankers' organization, theBank for International Settlements(BIS), central bankers have been able tohone their craft as their access to infor-mation "and the general level of trans-parency around central banks' opera-tions" has increased.

Imbalanced OutputWhile there is no continent where

the effects ot globalization are not evi-dent, some regions and nations are far-ing far less well than some of their erst-while peers. The contrasts betweenLatin America and East Asia provide aperfect example. Nowhere has the trans-formation wrought by globalizationbeen more dramatic than in East Asia,much of which suffered economicmeltdown during the financial crisis of1998. The fallout from that crisisshowed the region was riddled withmany of the problems that seem to beendemic to developing economies—corruption, cronyism and nepotism—and observers at the time were predict-ing that it would be many years beforethe region's formerly dynamiceconomies regained their luster. Thatthose commentators proved to be sowrong is symptomatic of the dramaticchanges that have taken place in the

very nature of globalization.Far from descending into

economic chaos, many ofthecountries in the region workedhard to root out the problems andto rebuild their economies on amuch more sustainable basis.

According to Homi Rharas, chiefeconomist for the East Asia Pacific re-gion at the World Bank, the region'scountries have been able to stage thisrapid recovery because they abandonedthe traditional model of simply provid-ing large, low-income workforces tomature industries from the developedworld, instead taking a new approach tobuilding their economies. "The newAsia is more innovative and networked.It's characterized by a very competitivebusiness environment that encouragesnew products and processes and a laborforce able to absorb new ideas," he says.

Growtb and development in Asia havebeen so rapid that some are concernedthat a number of other major emergingmarkets, particularly in Latin America.are getting left behind. "Latin America'seconomies have failed to diversify intotechnology-oriented products and high-

end manufacturing, and they contin-ue to be driven by commodities andraw materials," says Phillips. "To someextent its growth is driven by that,though, because it is providing thesource materials Asia needs to continuedeveloping," she adds.

Within individual countries there arealso clear losers from globalization.Joseph E. Stigtitz, a Nobel Prize-winningeconomist and former adviser to formerUS president Bill Clinton, says that whileglobalization has meant that countrieshave become more economically inter-dependent, which requires us to worktogether collectively, economic global-ization had not kept pace with democra-tic institutions. "We have a system whereoften the outcomes are not just," he ex-plains. "There are Viinners and losers. Onpaper GDP may be high in some ofthedeveloping countries, but that doesn'tmean that country is better off."

Stiglitz also notes that there are losersin developed countries, too, particularlythose whose jobs are shipped to foreignmarkets. In his latest book, Mahiui; Gbh-alizatwn Horfe. Stiglitz takes a remarkablysimilar position to the US Federal Re-

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serve chairman Ben Bernanke, pointingout that a government's failure to en-sure its workers are cushioned from theharsh realities of globalization willprompt those people to become in-creasingly opposed to trade and in favorof econoniic protectionism. "You haveto protect them," says Stiglitz, "to helpthem find new jobs, increase educationand provide job assistance. The firstthing is to realize that there are losers asa result of trade liberalization," he com-ments.

In his speech to the Fed's annualmeeting this year, Bernanke urged pol-icymakers to ensure that the benefits ofglobalization would be felt at all levelsand not just by the rich. At the samemeeting, Stanley Fischer, the head of Is-rael's central bank and a former firstdeputy managing director of the IMF,countered that, while there will be eco-nomic casualties, they are merely symp-tomatic of the shift in economic power

that is under way. He agrees that the gi-ant gains from globalization appear tobe concentrated in just a handful ofcountries—China and India being themost prominent—but the countriesthat trade with them will also benefit.

"Chinas voracious appetite for rawmaterials, which has produced a boomin commodity prices, has helped manydeveloping countries, as well as com-modity-rich industrial countries likeAustralia," Fischer said. "China and In-dia's energy needs have helped push oiland other energy prices to their highestsustained levels and have contributed tothe prosperity of energy producers inthe Middle East, in Russia and centralAsia, and also in Africa where there arenow many oil exporters."

According to Phillips, the two coun-tries are also bringing finance to placesthat have been passed over in previouswaves of globalization: "China and In-dia are investing in Africa or in Latin

America, taking risks in countrieswhere western firms have tended not toinvest, such as Sudan," she says. "Indiahas put a large amount of money intoBolivia, and China also has large invest-ments in Latin America."

A Double-Edged SwordThe rapid growth of still-developing

countries such as Russia, China andIndia means they wield enormousecononiic and political power, but italso presents something of J double-edged sword. China, for example,which despite its gargantuan size is stillvery much a developing market, is al-ready practicing some of the econom-ic adventurism that the Europeanpowers were so fond of in the ]9tlicentury. Conscious of its seemingly in-satiable hunger for energy and raw ma-terials, it is frantically building rela-tionships with resource-rich nations,particularly in Latin America, Africa

CAPITAL GAINS

Capital markets are playing a growing role indevelopment and global economic integration.By Gordon Platt

When Emaar the Econoniic City held its initial public offering in Saudi Arabia inJuly, a record 10 million Saudis, or approximately half the nationalpopulation, sut)scribed to the issue. More than 30% of the applications were

made using automatic teller machines.

Capital markets are helping to democrati2e emerging markets and raise capital forcompanies that want to expand. They are also helping to create market economies inthe Middle East, Africa, Asia and elsewhere that can reap the benefits of glohalization.

The S680 million proceeds of the Saudi IPO will be used toward the developmentof the S26.6 billion King Abdullah Economic City, or KAEC, to be buitt on thekingdom's Red Sea coast north of Jeddah. Saudi British Bank (SABB) was the leadunderwriter of ttie IPO, with Riyad Bank and National Commercial Bank as sub-underwriters, HS6C was ttie financial adviser.

Demographics are spurring a trend toward economic liberalization, as swellingyouth populations create pressure on governments to provide gainful employment.The KAEC project alone is expected to create 500,000 jobs for Saudi citizens.

The development ot regional capital markets nol only benefits domesticeconomies by creating risk-sharing opportunities and a new vehicle for savings butalso builds support among the people for market reforms, corporate governance andtransparency, says Todd Moss, a senior fellow at the Washington, DC-based Centerfor Global Development, a not-for-profit thlnK tank that focuses on reducing globaipoverty and ineguaiity.

"Companies that list their shares must comply with accounting standards," Mosssays. "If a growing family business wants to take on additional investors, it will haveto open up its books." The effects are enhanced if foreign investors are involved, hesays. "International investors demand even stronger standards, which they are usedto in their home market." he notes.

Capital markets are a key way of linking into ihternationai networks, Moss says.They also influence the way governments conduct their business and subject themto scrutiny. "If you don't have a credit rating, and many poor African countriesdon't, then you don't have to worry about maintaining it." he says. "If you do have arating, you have more at stake."

The 15 stock markets in sub-Saharan Africa are forging links with the JSE securitiesexchange in Johannesburg and are working to harmonize listing requirements.Meanwhile, exchanges in Uganda, Kenya and Tanzania are aiso working together tocreate another regional hub. East African Breweries, the first company in the region toreach Si billion in market capitalization, is listed on exchanges in all three countries.

"There are two main ways that capital gets distributed: through banks and themarkets," says Marc Chandler, global head of currency strategy at Brown BrothersHarriman in Mew York. Most developing countries rely more on banks, which tend tobe extremely conservative and make binary decisions. "Either you get the loan oryou don't," he says, "In contrast, the markets have capital for everyone, evencompanies that are bankrupt, and only the terms are dickered over."

One of the criticisms of developing countries in Asia, according to Chandler, isthat they haven't done enough to develop their markets. As a result, they areunable to absorb the vast savings and export earnings, which means that capitalmust be exported, he says. Meanwhile, sub-investment-grade companies fromdeveloping Asia have flocked to ttie United States and Europe to raise funds.

The excess savings in the Middle East is even greater due to the flood ofpetrodollars, Chandler says. Many oil-exporting countries have large Muslim

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GLOBALIZATION

and central Asia. Unfortunately, it is aJ-so prone to practicing some heavy-handed political manipulation in its at-tempt to secure future resourcesupplies. Shortly before Zambia's re-cent presidential election, China an-nounced that its companies would stopinvesting in Zambia until it was clearthat the China-friendly incumbentpresident would be re-elected.

Russia, too, has been flexing its mus-cles in the past year, clearly demonstrat-ing tbjt it, too, has growing political andeconomic power. Few would argue,however, that abruptly turning off theenergy- supplies to its neighbors was aresponsible use of that power.

Brave New World?1 here IS no disputing the numbers:

Trade is growing at a tremendous rate,while countries across the emergingworld are seeing their absolute GDPand their GDP per head growing rapid-

Stiqiitz: "There are losers as aresult of trade liberalization"

ly. Many millions of people have beenlifted from poverty in the past decade.At the same time, according to Stiglitz,more than 40% of the world s popula-tion still lives in poverty.

The numbers do not tell the wholestory, though. Inequality remains, withincountries and between them, and inmany nations, both developed and de-veloping, the gulf between the rich andthe poor is growing ever wider. Someanalysts suggest this is the result ofchanging corporate behavior: Compa-nies are reaping huge financial benefitsfrom globalization but are passing ontbeir swelling profits not to their work-ers but to their shareholders and, in theUS at least, their senior managers. BenBernanke has already brought this tolight, while in China officials are tryingto find ways to ensure the benefits fromthat country's explosive growth areshared more evenly, if both those eco-nomic giants are successful in creatingmore equable economies, we could bewitnessing the dawn of yet another newphase of globalization in which multina-tionals become more acutely aware ofthe debt they owe their employees. •

populdtions and impose restrictions on paying interest or trading in futures andoptions. This has discouraged the development of domestic capital markets. However,the recent surge in Islamic financing is removing some of fhese impediments.

"It is in the US economic and geo-strategic interests for there to be deep andt)road Islamic capital markets," Chandler says. "They promote economic developmentand thus foster stability. They help to integrate the region and its people into thev^orld economy, giving them a greafer stake in the world's prosperity," he says.

Chandler says the US should consider issuing a tiollar-denominated Sharia-compliant financial instrument, " i t would signal respect for Islamic law and people andwould recognize the limitations of military and political strategies," he says. Such aninstrument would also appeal to fund managers of socially responsible investments,who may he attracted to the high ethical standards that Sharia demands, he adds.

The International Finance Corporation, or IfC, the private-sector lending arm ofthe World Bank Group, is helping lo develop capital markets in emerging economiesby issuing bonds in local currencies as part of the funding of the organization'soperations. John Borthwick, IFC's deputy treasurer lor funding, says the ultimatebeneficiaries of efficient local capital markets are the companies that are able toissue debt denominated in their own currency. "Over time, domestic securitiesmarkets will lower the cost of capital for local businesses," he says. "What's moreimportant, these companies should not be forced to finance their operations wifhforeign-currency-denominated borrowings." One lesson of the Asian financial crisisof the late 1990s is the need for companies to avoid currency risk by seekingdomestic sources of finance.

IFC has SI5 billion of debt outstanding in 16 different currencies, including eightemerging market currencies, and has issued securities in 35 different currencies, ifswaps most of its bond issues into variable-rate dollar-denominated debt. In October2005 IFC became the first nonresident institution to issue yuan-denominated "pandabonds" in China's capital markets. The 10-year bonds were placed with institutional

investors. China International Capital and CITIC Securities were joint lead managers."One issue doesn't make a world of difference in a highly regulafed environment suchas exists in China." Borthwick says. "But fhere is no question that such issues help todevelop the domestic financial sector and local capital markets." •

In recent years, IFC has opened new debt markets in Colombia, Morocco and Pera •with its borrowing operations. It also launched the first Islamic bond by asupranational in Malaysia in December 2004. The three-year ringgit-denominatedbonds were heavily oversubscribed. HSBC Bank Malaysia and CommerceInternational Merchant Bankers were the joint lead managers.

"We may return to Peru, Malaysia and China with future local-currency bondissues." Borthwick says. IFC has been hoping for some time to issue baht-denominated bonds in Thailand, but market conditions have not been right. The coupin September could delay further issuance in baht. IFC also has been ready to issuerupee bonds in India for some time but has been dissuaded because the market forswapping into dollars does not work efficiently.

The European Bank for Reconstruction and Development, or EBRD, is helping toestablish market economies in formerly communist countries in eastern Europe andcentra) Asia. In Russia the EBRD issued five-year, ftoating-rate, ruble-denominatedbonds in May 2005. It helped the National Currency Association create a moneymarket index similar to Libor, known as the Moscow Prime Offered Rate, or MosPrime.The EBRD's first local-currency loan was in Hungarian forints in 1994. The bank hasalso made loans in the Bulgarian, Ciech, Kazakh, Polish and Slovak currencies.

The European Investment Bank, or E1B, the EU's long-term financing institution,issued its first floating-rate note in the Bulgarian lev in September 2006. Its firstBulgarian issue was a five-year fixed note in 2004. The floating-rate note bears acoupon linked to the three-month Sofidor, the interbank lending rate. Austria-basedRZB Group was the sole lead manager for the issue, which was jointly arranged byRaiffeisen Zentralbank dsterreich and Raiffeisenbank (Bulgaria).

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Profits of doom 

By Richard Tomkins

Published: October 13 2006 13:54 | Last updated: October 13 2006 13:54

In theory, the deal between capital and labour is simple. Capitalists say to the workers: you help us lift profits and we will reward you with higher wages. That way, everyone wins.

But recently this tacit agreement has collapsed. If you are a humble wage-slave you may not be aware that, across the industrialised world, companies are enjoying an era of extraordinarily high profit growth. What you may be aware of, however - perhaps painfully - is that, except for those at the very top of the income scale, pay rises are barely keeping up with inflation.

In Britain, company profits were the highest last year since records began in 1965; yet median weekly earnings, adjusted for inflation, fell by 0.4 per cent. It is the same story in all the rich countries of the west. In a recent research note on the US economy, Goldman Sachs, the US investment bank, said: “As a share of GDP, profits reached an all-time high in the first quarter of 2006. Several factors have contributed to the rise in profit margins. The most important is a decline in labour’s share of national income.”

Naturally, investors and other members of the financial community welcome this as they have enjoyed the benefits of rising share prices, record levels of merger and acquisition activity and soaring bonuses. Company executives, too, have benefited through their stock options and performance-related bonuses. A survey last week showed directors’ pay at Britain’s biggest companies shot up by 28 per cent last year.

In fact, outside the populist media, most commentators regard high corporate profits as benign - rising corporate profitability normally translates into more investment, more jobs and higher pay.

But what about the ordinary, middle-class employees of the companies making these extraordinarily high profits? The sort of pay rises they are getting are the sort you would expect in a recession. Why are they not sharing in the boom?

One explanation might be that, at least in the private sector, trade unions have lost much of their power. But there is more to it than that. In the pre-globalisation era, western labour enjoyed near-monopoly access to western capital. That is to say, western capital was immobile, and had to treat with western labour because it had nowhere else to go.

That changed with globalisation, when the dismantling of barriers to world trade gave western capital access to vast amounts of low-cost labour in countries that were previously closed off.

Cheap labour, plus the opportunity to exploit new global markets, has brought a profit bonanza to western companies. But it has not been reflected in higher wages for employees at home because companies are no longer in thrall to employees at home. Instead, the gains have been split between capitalists, who have enjoyed higher returns; executives, whose emoluments go up with profits; and poor workers in the developing world, who have gained from the growth in jobs and rising wages that would once have gone to the west.

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This is not quite how globalisation was supposed to work out. According to the principle of comparative advantage, rich countries with their skilled workforces would specialise in turning out advanced products while the poor countries with their unskilled labour would specialise in low-technology goods. Yes, there could be job losses in the rich countries among unskilled factory workers, but western workers overall would gain from the opening of new markets for their products and from cheaper imports.

With hindsight, this analysis massively underestimated the effects of globalisation on western workers. Too much of it was fixated on the threat to jobs and too little of it on the threat to wages.

In a paper he prepared for a recent Federal Reserve Bank of Boston conference, Richard Freeman, a Harvard labour economist, estimates that the entry of China, India and the former Soviet bloc roughly doubled the number of workers in the market economy, from 1.46 billion to 2.93 billion. Since those countries brought little capital with them, the number of workers in the system shot up while the amount of capital increased very little. As the law of supply and demand might suggest, when labour is abundant and capital scarce, the returns to labour tend to fall and those to capital rise.

In addition, the idea that only low-skilled factory workers have anything to fear from globalisation has turned out to be a myth. The former Soviet bloc already has many highly educated workers (the Soviets, remember, beat the Americans into space) and the less developed countries are pouring investment into higher education. “Indonesia, Brazil, China, India - name the country - have more than doubled university student enrolments in the 1980s and 1990s,” Freeman says. China is investing particularly heavily in science and engineering and “by 2010 it will graduate more PhDs in science and engineering than the US”.

In a similar vein, the developing world has inconveniently departed from the script that said it would specialise in low-tech goods. “China has moved rapidly up the technological ladder, has greatly increased its high-tech exports and has achieved a significant position in research in what is purported to be the next big industrial technology - nanotechnology,” Freeman says. “Over 750 multinational firms have set up R&D facilities in China.”

So globalisation is not just about a few blue-collar factory workers in the west losing their jobs and everyone else being better off. Because of plummeting telecom charges, all kinds of middle-class, white-collar jobs once thought of as non-tradable - not just in telemarketing and call centres but in accountancy, medical diagnostics and information technology - have started moving to the developing world.

Jeff Faux, founder of the labour-leaning Economic Policy Institute in Washington D.C. and author of The Global Class War: How America’s Bipartisan Elite Lost Our Future - and What It Will Take to Win it Back, says: “A few years ago the phenomenon was dismissed as: ‘Well, perhaps some people in the automobile industry or steel or electronics will lose their jobs, but their kids are going to be better off because they’ll go to college and become accountants and engineers and people like that.’ Now, of course, we’re offshoring those jobs as well, so offshoring has gone up the ladder.”

But it is not just the offshoring that counts. According to Andrew Glyn, an Oxford University economics lecturer and author of Capitalism Unleashed: Finance, Globalization, and Welfare, western companies are investing in the developing countries only 4 per cent of the sums they are investing in the west. “So although it’s quite a large proportion of the investment going

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into China, as a proportion of what’s going into North America or Britain or Germany, it’s really small potatoes so far.”

No; the force that is acting to suppress western wages is not so much offshoring as the threat of it. As Freeman says in his paper, by giving companies a new supply of low-wage labour, the doubling of the global labour force has weakened the bargaining position of workers - not, by the way, in the rich west alone, but in Latin America, South Africa and the more advanced economies of Asia, too.

“Firms threaten to move facilities to lower-wage settings or to import products made by low-wage workers if their current workforce does not accept lower wages or working conditions, to which there is no strong labour response,” Freeman says.

This has been vividly illustrated in Germany, where several big companies have obtained agreements from their employees to accept reductions in pay or longer working hours by threatening to move production to eastern Europe. But usually the threat does not need to be so openly expressed. That vast reserve army of low-wage labour is always there in the background, the curse of over-supply condemning employees to accept what they are offered.

At the same time, wages in one sector respond to those in another. If globalisation depresses wages in tradable sectors but leaves them unaffected in, say, retailing, then more people will seek jobs in retailing, depressing wages in that sector too.

Certainly, globalisation has fulfilled part of its promise to western workers. Cheap imports have brought down the cost of many consumer goods, often very noticeably. Paradoxically, however, these gains have been offset by big increases in energy costs, caused in part by rising demand for energy from the very factories that produce these cheaper goods. That in turn has produced a vast redistribution of income from energy consumers to oil producers in the Middle East and elsewhere.

Some western workers may also have benefited from rising share prices, either through direct investment in shares or through their pension funds. But rich people are much bigger shareholders than poor people, so they will have reaped greater gains.

Indeed, the gains of globalisation have flowed disproportionately to the people who least need them - the rich and super-rich. According to the US Census Bureau, the top fifth of American households received 50.4 per cent of all household income last year, the largest share since records began in 1967, and the biggest gains have been going to those at the very top.

On the other hand, the gains are also flowing to the people who most need them: the poor workers of the developing world. While wages in the advanced countries are stagnant, wages in the developing world are rising rapidly, albeit from a small base. Freeman estimates that if Chinese wages double every decade, as they did in the 1990s, they will reach the levels found in the advanced countries today in about 30 years. Absorbing the labour forces of other countries could take a little longer but the transition could be complete in 40 to 50 years - at which point, presumably, western wages will start rising again and the balance between capital and labour will be restored.

Fair enough; but you do not have to be a wild-eyed anti-globalisation protester to have a bit of a problem with this. As Stephen King, chief economist of HSBC, the London-based international bank, and Janet Henry, the bank’s global economist, put it in a research note on the global economy: “Globalisation isn’t just a story about a rising number of export markets

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for western producers. Rather, it’s a story about massive waves of income redistribution, from rich labour to poor labour, from labour as a whole to capital, from workers to consumers and from energy users towards energy producers. This is a story about winners and losers, not a fable about economic growth.”

But if western workers are emerging as globalisation’s losers, how come consumer spending has held up? Rising house prices have made a lot of people feel richer, encouraging them to lift their spending by saving less and borrowing more. Also, more spouses and partners are taking jobs or working longer hours, increasing total household income.

The problem is, these trends cannot go on masking workers’ stagnant wages forever. And as voters are confronted with the reality of the processes now taking place, they are likely to start demanding an end to outsourcing and a return to trade protection.

Concerns about this are already growing in the US. In a recent speech, Ben Bernanke, Federal Reserve chairman, noted that there had been eras of globalisation before, but none where the greater part of the earth’s population was engaged, at least potentially, in the global economy. Neither was there any precedent for the degree to which companies were fragmenting production and moving everything to the cheapest possible location. Social and political opposition to openness could be strong, he warned, saying the challenge for policy-makers was to ensure that the “benefits of global economic integration” were “sufficiently widely shared”.

Princeton economist Alan Blinder, a former Federal Reserve vice-chairman, went further. In the US journal Foreign Affairs, he said economists had underestimated both the importance of offshoring and its disruptive effect on wealthy countries. “We have so far barely seen the tip of the offshoring iceberg, the eventual dimensions of which may be staggering,” he wrote. The “governments and societies of the developed world must face up to the massive, complex and multi-faceted challenges that offshoring will bring”.

As so often is the case, identifying the problem is easier than finding a solution. Education and training, the politicians’ usual panaceas, will not by themselves protect western workers from competition with the increasingly well-educated workforces of the developing world.

In any case, says Faux, the Global Class War author, it is unlikely that pay levels in China will converge with those of the west until workers in China have the same sort of hard-won rights and protections as those in the west. As it is, “We are in the process of creating a global market without a global social contract.” We take it for granted that the west must have its child labour laws, workplace safety regulations and so on, but in the global market, no such rules apply.

Ideally, Faux says, you would have rules to protect all workers set at the global level, “but I think that’s kind of Utopian at this moment”. More realistically, he says, such rules should be built into all future and existing trade agreements so that they protected the interests of workers as well as those of investors.

Freeman’s paper says the over-riding goal of labour market policy around the world in the next decade or so should be to make sure the absorption of China, India and the ex-Soviet bloc into world capitalism goes as smoothly as possible. “The bent of policy in the US and elsewhere should be in the direction of favouring labour rather than capital, which ought to take care of itself in a global economy with twice as many workers, many available at low wages.”

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Clearly, taxes could be used to divert some of the gains made by capital and the rich towards ordinary wage-earners. Globalisation has made high taxes unfashionable because they encourage companies or people who pay them to move to countries with more forgiving tax regimes; yet if a voter backlash emerges, governments will have to find some way of responding.

Jeffry Frieden, a Harvard political economist and author of Global Capitalism: Its Fall and Rise in the Twentieth Century, says a consensus is emerging across the political spectrum that “although there are tremendous benefits to be gained from globalisation and from international economic integration, these benefits need to rest upon some way of compensating or accommodating those who are harmed by market processes.”

Perhaps this is all just a false alarm. Some commentators believe that, as the post-war baby-boomers retire, the crisis facing the west will turn out to be a shortage of labour rather than a surplus.

Freeman demurs. “If I am wrong and there is to be a great labour shortage in the foreseeable future, it will come not from demography but from events the shortage soothsayers ignore - a global pandemic that kills millions of people; climate change that destroys parts of economies; [or] political insanity that produces barriers to trade, migration and capital flows around the world. With reasonable policies and a bit of luck, however, none of these events will up-end the movement towards a single and more egalitarian world economy.”

Still: imagine, at the birth of globalisation, western politicians had made an amazing proposition to voters. “Together,” they could have said, “we are going to end world poverty. In order to achieve this, we are going to ask you to accept a pay freeze in real terms for as long as it takes for the wages of workers in the developing countries to catch up, which we estimate will be about half a century. Until the adjustment is complete, the reduction in labour costs will produce the side-effect of extraordinarily high profits for companies, enriching many of those who are already among the richest in society.

“So there will be winners and losers. The bad news is that you, the ordinary, middle-class employees of the west, will be losers and everybody else will be winners. But the good news is, your sacrifice will make poverty history.”

Would you have voted for this?

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Globalization and the Economics of Child Labor A version of this essay was published as "Reduziert die Globalisierung die Kinderarbeit?" in Neue Zürcher Zeitung, February 23/24, 2002 p29. Eric V. Edmonds Dartmouth College Child labor pervades the developing world. The International Labour Office estimates that at least 250 million children between the ages of 5 and 15 are working. This prevalence of child labor upsets many people in rich countries. As a result, governments in Europe and elsewhere have imposed or threatened to impose trade sanctions that restrict the sale of goods from developing countries. The stated aim of these sanctions is to force developing countries to take steps towards the elimination of child labor. However, several recent studies have found that the employers of these child laborers are usually their parents, and that these parents prefer their laboring children to attend school rather than work. Poverty creates child labor. A new study examining child labor in over 4,000 Vietnamese households during the 1990s suggests that when globalization improves the income of impoverished households, this additional income helps parents reduce the workload of their children and send more of them to school. What is child labor? In November of 2000, ten children earning around $11 per month burned to death in a garment factory in Bangladesh. The exits from the factory were chained shut. Images of children chained into factories, sold as slaves, or forced into prostitution stain the popular imagination about child labor. Fortunately, while many children work in the developing world, relatively few experience such atrocities. Politicians in developing countries like to define child labor as work that impairs the development and well-being of children. Economists prefer a less subjective definition. Economists view child labor as the economic activities in which children participate. This definition includes slavery and prostitution, but it extends to the types of activities that children regularly participate in throughout the developing world. In 1999 and 2000, UNICEF interviewed children across 30 developing countries. UNICEF discovered that factory work is rare. Only 3% of children work outside of their household for pay. Unpaid domestic work is more common than is work for pay. UNICEF found that 2% of boys and 5% of girls perform unpaid domestic work for households other than their own. However, most working children are employed in their own household, helping with household duties or the family’s farm and business. Consider the typical 14 year old girl living in rural Nepal who was interviewed in a recent labor survey. She works about 35 hours per week. She spends 19 hours of that time working in agriculture for her family, and 9 hours helping her family with household work. She does not

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work for pay, and she does not attend school. An array of activities occupies the rest of her time. Gathering firewood and collecting water are two of her more time consuming tasks. While economists and politicians differ in their definition of child labor, economists differ among themselves in how they define the economic activities of children. The first wave of child labor studies only considered work for pay, work in a formal household business, and work in agriculture. More recently, economists have begun to recognize that ignoring household activities limits their ability to understand how children spend their time. For example, if a parent leaves the household to work for a local employer, a child may take over many of the parent's household roles. Ignoring time spent by children collecting wood and water, tending to animals, preparing foods and meals, or caring for family members would imply that a child spending two hours a day in agriculture works more than the child laboring twelve hours a day filling in for an absent parent. Why do children work? Social scientists vary in how they view a parent’s decision to send a child to work. The debate revolves around how parents in developing countries view child labor. In one view, parents want their children to work. Perhaps parents even have children in order to send the children to work. This view implies that parents take advantage of any earnings opportunity open to children. So long as parents benefit more when the child works than when the child goes to school, child labor persists. Improvements in living standards may do nothing to ameliorate child labor. An opposing view believes that parents in developing countries do not differ from parents in rich countries in how they view child labor. Researchers have observed that parents in poor countries generally say that they would rather their children attend school and work less. So why is child labor so pervasive? For the simple reason that impoverished households need their children to work. Households that cannot meet their basic needs depend upon the income of their children for survival. Without the income from working children, parents in poor households may have to choose which children to feed. Moreover, schooling is expensive in most of the developing world. Thus, it is not uncommon to see some children working so that their siblings may attend school. If governments could somehow prevent children from working, we might see less schooling rather than more, because the loss of income from working children would make schooling even more unaffordable. A casual cross-country comparison supports the view that child labor stems from poverty. In the world’s poorest nations with per capita incomes below $1,500 in 1998, it is not unusual to find over 30% of children working. In contrast, child labor is rare in countries with per capita incomes above 7,000 U.S. Dollars. Per capita income of the U.S. in 1998 was approximately $30,000. Thus, parents in countries that are not even a quarter as wealthy as the U.S. are able to keep their children from having to work. This cross-country evidence on the link between child labor and poverty is supported by a recent study in Vietnam that examines how the economic activities of children evolve as household incomes change. The General Statistical Office of Vietnam and the World Bank followed over 4,000 households during Vietnam’s economic boom in the 1990s. Participation rates in child

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labor declined by over 25% in rural Vietnamese households between 1993 and 1998. The declines in child labor were largest in the households experiencing the largest growth in living standards during Vietnam’s boom. Income growth was largest in poor households. Overall, the study finds that improvements in living standards can explain 94% of the decline in child labor for households near the poverty line in Vietnam. Thus, the evidence from both across and within countries suggests that children work because of poverty. When incomes increase, children stop working. How can globalization affect child labor? Globalization and child labor interact in two basic ways. First, globalization may increase the employment and earnings opportunities available to poor households in developing countries. Changes in local labor markets from globalization may increase or decrease child labor. Second, globalization increases the influence of rich countries in the domestic policies of the developing world. Globalization can enhance employment and earnings in developing countries because of inflows of foreign investment or increases in the value of a developing country’s export products. When a country opens to international markets, foreign investment often (but not always) enters the country. This leads to increases in the demand for local labor and hence higher wages. In addition, many of today's developing countries have comparative advantage in agriculture, and integration into international markets may increase the price of the export product to international levels. Thus, trade liberalization may increase employment and wages in these agricultural export sectors. These changes in developing country labor markets stemming from globalization could increase child labor. Increased earning opportunities may increase the demand for child labor and the wages paid to children. Indirectly, increased earnings opportunities to parents may change the types of work performed by parents. Children may be forced to take over some of the activities usually performed by adults within their household. Alternatively, globalization induced improvements in earnings opportunities can reduce child labor. If poverty drives child labor, children work either for the income from work or because they cannot afford school fees. When one child makes more as a result of globalization, other children may be able to stop working and attend school. Moreover, increased parental earnings may help parents reduce the work that children perform. Parents can buy substitutes for goods previously produced by children, or they can use their increased income to substitute for the money previously earned by children. Hence, globalization can help parents in poor countries stop child labor without foreign intervention. Of course, critics of globalization question whether globalization increases the earnings opportunities of residents in poorer countries. Globalization increases a country’s exposure to foreign competition. This may force inefficient firms in import-competing industries out of business. Regardless of the long-term benefits of this reallocation of resources, in the short term, these adjustments may create difficulty for some households with children.

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A second argument against the link between globalization and increased earnings opportunities claims that globalization encourages the entry of foreign multinationals and that they depress the earnings opportunities and wages of local workers. This can happen if foreign companies wield non-competitive market power in local markets. Anecdotes of this type of "bad" behavior of firms are common in the popular press. Serious researchers have taken the time to collect data on every single manufacturing plant in a vast array of countries. Every one of these studies based on complete manufacturing information finds that foreign firms actually pay higher wages than do local firms after researchers control for other firm characteristics. Not only does globalization affect earnings opportunities in developing countries, but globalization also increases the ability of rich countries to influence policy in the world’s poorer nations. As developing countries integrate into the world economy and increasingly rely on export markets to sell their products, rich countries can use the threat of trade sanctions to coerce policies that attempt to curtail child labor. In December 2001, EU Trade Commissioner Pascal Lamy announced that EU foreign ministers have approved a preferential tariff scheme for countries that adhere to ILO labor standards including child labor. Both the Clinton and Bush administrations have voiced a commitment to a similar policy, and in 1999 the U.S. imposed quotas on Cambodia's garment industry because of working conditions and child labor. Thus, globalization enables high income countries to punish poor nations for high levels of child labor. Evidence on globalization and child labor A recent study of child labor in Vietnam evaluates how trade policy might affect child labor. Out of a concern for domestic food security, Vietnam restricted its exports of rice starting in 1989. These quotas suppressed the domestic price of rice. Between 1993 and 1997, Vietnam gradually relaxed this export quota so that by 1998, Vietnam was completely exposed to the international price of rice. During this period of liberalization, the price of rice increased by 30% relative to the rise in the consumer price index. Rice is an important commodity in Vietnam. It is the primary staple in the Vietnamese diet, the largest single component of household expenditure, and 70% of households produce rice. Moreover, in 1993, before the liberalization of rice prices in Vietnam, 26% of children between 6 and 15 worked in rice production in Vietnam, and rice production was far and away the largest employer of adults. Thus, rice price increases should affect both children and adults. The study finds that rice price increases can account for 45% of the overall decline in child labor that Vietnam experienced in the 1990s. This corresponds to approximately 1 million fewer working children in Vietnam. The study identifies several ways in which rice price increases affect child labor. Both child and adult wages rise with increases in rice prices. Higher child wages encourage children to work, but the observed rise in adult wages appears to reduce child labor more than higher child wages increase child labor. The impact on child labor of these wage increases is tiny compared to the decline in child labor attributable to the additional income captured by households owning land for rice production.

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Rice producing households enjoy higher incomes after rice price increases, and they use this additional income to replace the income previously brought into the household by child labor. Almost all of the variation in how Vietnamese households respond to rice price increases can be explained by landholdings. Households that do not own any land suitable for rice cultivation suffer with rice price increases. It becomes more expensive for these households to buy food, and the study finds that children have to work more in these landless or nonagricultural households. However, land suitable for rice cultivation is sufficiently evenly distributed in Vietnam that most households with children benefit from increases in rice prices. This equitable land redistribution is why over 1 million children appear to benefit from rice price increases. These results are startling. Even though rice price increases make child labor more lucrative, parents choose to use increases in household income to reduce the amount that their children work. Moreover, the children who work the most before the price changes are the largest beneficiaries of these improvements in household income. Secondary school age girls experience the largest declines in work. Likewise, their school attendance increases with rice prices by more than any other age and gender group. Extrapolating from this Evidence How representative are these findings from Vietnam? The primary contribution of this research is the finding that parents in poor countries use extra income to move children out of work. This effect of additional income occurs even in the face of increased earnings opportunities for children. Thus, the patronizing view, held by so many rich country observers, that poor country parents somehow do not care about the well-being of their children seems unfounded. Moreover, these findings suggest that the use of punitive, income reducing sanctions against countries where child labor is prevalent may not have the intended impact. If children work because of poverty, then sanctions and punishments for countries with child labor hardly seem to be policies that have the welfare of children in mind. A more effective way to discourage child labor would be to supplement support for income generating activities with, perhaps, additional incentives for children to stay in school. The next round of global trade negotiations aims to bring developing countries into the international trading community. Many of these countries are agricultural economies that will experience price movements in agricultural commodities like the rice price changes studied in Vietnam. Whether children in other countries will benefit like children in Vietnam depends in part on how the gains from trade will be distributed. In Vietnam, over 70% of the population produces rice and hence benefits from the liberalization of rice markets. Children in countries with less equitable distributions of the gains from trade may not benefit from globalization as much as Vietnam. Thus, the challenge for the rich country observer concerned about child labor is not to fight globalization and international trade. Rather, it is to make sure that the gains from international

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market integration reach the poor in developing countries. The available evidence suggests that child labor could virtually disappear if the poor of the world could attain living standards that are even a quarter of that currently enjoyed by wealthy countries like the United States and Switzerland. Additional Readings:

• UNICEF's report on progress since 1990's World Summit on Children: http://childinfo.org/

• Understanding Children's Work – a joint project of the ILO, the World Bank, and

UNICEF: http://www.ucw-project.org/index.html

• The International Labor Office tracks child labor worldwide: http://www.ilo.org/public/english/standards/ipec/simpoc/index.htm

• The World Bank recently completed a survey of research on the consequences of

globalization. That survey, Globalization, Growth and Poverty: Building an Inclusive World Economy, is available on-line: http://econ.worldbank.org/prr/structured_doc.php?sp=2477&st=&sd=2857

• The author’s research on child labor is available from his website:

http://www.dartmouth.edu/~eedmonds/

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Survey - Mastering Global Business: Making brands work around the world Financial Times; Jan 29, 1998

 Making brands work around the world   Summary What are global brands and do they make sense? Only if they increase profitability, argues Jean-Noel Kapferer. And global branding on the scale of Coca-Cola or Marlboro is not easy to achieve. Using a number of case studies, he plots the advantages of the global brand, conditions that favour or work against the development of world brands and three strategies for creating brands with global appeal. The debate between advocates of brand globalisation and those favouring adaptation to local markets began in the 1980s. The present article will urge a pragmatic approach to the problem. The empires built by Marlboro or Coca-Cola will never be replicated; they benefited from particular historical and time factors. The international expansion of Coca-Cola was fostered in great part by the second world war and the presence of GIs in Europe and Asia. It took Malboro 35 years to conquer the world and it took McDonald's 22 years. These models are useless for a European food producer such as Danone. Its brand image varies from country to country because its products vary: creamy desserts in Germany, plain yoghurts in France, fruit yoghurts in the UK. How do you create a uniform image around the concept of health, for example, if the brand is not present with the same product in each country? This is the reality for European brands today. Ten years after the academic debates, companies have learned from their trials and errors. They have recognised the difficulties and the necessity of adopting a pragmatic view _ does globalisation of brands increase profitability?

 Towards a global brand   No one contests the economic necessity of geographically extending a product - it is a source of economies of scale, of amortisation of rising R&D costs and of competitive advantage in local markets. But how far do we push the global idea? Should we globalise positioning, creative concepts and even the products themselves? First, it is important to be precise about the terms used. A brand has three facets, as shown in Figure 1. Global branding implies the wish to extend all three facets throughout the world. However, it is often more realistic and profitable to extend only one or two. For example, the Mars brand is not absolutely global. The Mars chocolate bar is sold as an all-round nutritious snack in the UK and as an energiser in Europe (two different concepts and positioning for the same physical product). Nestlé adapts the taste of its worldwide brands to local consumer expectation. The Nescafé formulas vary worldwide. Global marketing implies the wish to extend a single marketing mix to a particular region (for example Europe or Asia) or even to the world. It also denotes a situation in which a firm's competitive position in one country can be significantly affected by its position in other countries. The global approach sees the role of individual countries as only part of a wider competitive strategy. The aim of marketing globalisation is not to maximise sales but to increase profitability. In the first place, it cuts out duplicated tasks. For example, instead of bringing out different TV advertising for each country, a firm can use a single film for one region. The McCann-Erickson agency is proud of the fact that it has saved Coca-Cola Dollars 90m in production costs over the past 20 years by producing films with global appeal. Launching a product in several countries simultaneously eliminates the problem of its appearing at staggered intervals from country to country. Staggering has the drawback of allowing competitors time to pre-empt a product in one country that they have seen in another. Globalisation allows a firm to exploit good ideas wherever they come from. Timotei shampoo was developed in Finland and spread to other European countries. The beverage Malibu, which is sold worldwide, was created in South Africa.

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Conditions favouring global brands   Certain situations make global communication and brand policy easier. They are linked to the product, to the markets, to the force of brand identity and to the organisation of companies. Social and cultural changes provide a favourable platform for global brands. Under such circumstances, part of the market no longer identifies with long-established local values but instead seeks new models on which to build its identity. It is open to influence from abroad. In drinking Coca-Cola, we drink the American myth - fresh, open, bubbling, young, dynamic, all-American images. Young people in search of identity form a particular target. In an effort to stand out from others, they draw their sources of identity from cultural models provided by the media. Levis are linked with a mythical image of breaking away down the lonely open road _ an image part James Dean, part Jack Kerouac, tinted with a glimpse of a North American Eldorado. Nike tells young people to surpass themselves, to transcend the national confines of race and culture. New, unexplored market sectors do not, by definition, have an inherited system of values. Everything is there for the making and it is up to the brand to do it. There is nothing to prevent global marketing of high-tech computer, photographic, telecommunications or service brands. The world is being standardised by the increasing power of technology. The products of technology no longer stem from local culture but belong rather to our times. They are the fruit of science and the age. They therefore escape the local cultural contingencies that hinder global communication. Globalisation also applies to services. Hertz, Avis and Europcar globalised their campaigns by portraying the stereotype of the hurried executive. An Italian businessman will identify more with a businessman who is not Italian than with an Italian who is not a businessman. In general terms, globalisation is possible _ and indeed desirable _ in markets that revolve around mobility. This applies to telecommunications, the hotel industry, car rental, airlines and also the transfer of pictures and sounds. When a brand is perceived as being international, its authority and expertise are automatically accepted. Globalisation is paradoxically made easier when a brand is built around a cultural stereotype. AEG, Bosch, Siemens, Mercedes and BMW rest secure in the 'Made in Germany' model, which opens up the global market since the stereotype invoked goes beyond national bounds. It conjures a meaning of robust performance in any country. The Barilla name is another stereotype; it is built on the classic Italian image of tomato sauce, pasta, a carefree way of life, songs and sun. Volvo, Ericsson and Saab epitomise Sweden. Finally, certain brands represent archetypes. Marlboro embodies the archetype of the Rousseauean man - solitary and autonomous yet modernised and popularised throughout the world in Westerns. Drakkar Noir represents machismo. Lancome expresses the French woman. On the whole, brands whose identity focuses on the product and its roots can more easily go global. Jack Daniels whiskey pivots its brand identity on its distillery and its tradition, which leads to advertising that is remarkably homogeneous. Although the company works with different agencies, each one produces material that is typically Jack Daniels. A strong identity often rests on a product edge, an advantage that structures the whole marketing mix whatever the country. It is striking to see how alike the customers of the warm underwear Damart are, whatever the country. The exclusive consumer benefit naturally attracts the same people in all countries _ the elderly. Certain organisational factors also ease the shift to a global brand. One-man companies and brands that bear the name of a creator who is still alive are from the start more global. Countries are less able to modulate locally the identity of Ralph Lauren as the head of the company is precisely Ralph Lauren. American companies are more ready to globalise because marketing in their huge domestic market is essentially global, ignoring the states and the social and cultural diversity of the American melting-pot. Another organisational factor concerns the way US companies first expanded into Europe. Many firms set up European headquarters, based most often in Brussels or London. Operations within particular countries had to answer to these centres for their financial performance. Seen from the US, there were centres for 'European Operations' from early on. Europe was considered a single and homogeneous area. Finally, a single centre of production in Europe is also a strong factor in globalisation, at least for products. Procter & Gamble centralises production of detergents Europe in its Amiens factory. This maximises product standardisation and enables innovations to spread to all countries at once.

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 Barriers to globalisation   Where products have foundations within a particular culture, the difficulties of a global approach are enormous. Yoghurt is a case in point (see panel) but other examples abound. The way in which a product is consumed often reduces any possibility of applying a transnational approach, even sometimes of exporting a brand. Ricard, a French aniseed drink, is a good illustration of this. Ricard is the third best-selling spirit brand in the world after Bacardi and Smirnoff. However, 95 per cent of its sales are domestic despite relentless efforts to export it. For example, even after 15 years of heavy investment, the penetration of Ricard in Spain remains very low. The brand is drunk mainly by Algerian-born French people who emigrated to Spain. In Spain cocktail drinks are not common and this is a fundamental problem for Ricard -- when do you drink it? Moreover, Spanish drinkers are reluctant to add water to alcohol in case it changes the taste. Ricard, however, is drunk with five parts of water to one of Ricard. The same problem damages any hopes of US market penetration. Americans do not mix water with alcohol. They drink their scotch or Bourbon on the rocks, a mode of consumption hardly favourable to Ricard. In France Ricard is strongly associated with Provence and with holidays. It embodies optimism: it is the sun in a bottle. This draws people from the north but has little appeal in countries situated south of Provence such as Italy or Spain. Finally, Ricard's brand image is not valued in Spain; it is associated with French tourists spending their summer holidays there.

 The paths to globalisation   Corporations now understand that some of their brands have the potential to attract consumers or industrial clients beyond borders and that their local success factors can be extended to other countries or zones even if they have to go through capital acquisition, alliances or licensing agreements. Through a feedback effect, a brand strengthens as it becomes international. It becomes part of the exclusive club of global actors on the shelves of big distributors, which are global themselves. At the industrial level, the global corporate brands are the only ones that can reach the lists taken into consideration by global purchasers. So, what are the main strategies for brand globalisation? The first globalisation strategy consists in duplicating progressively but everywhere the success factors of a local strategy. This approach is necessarily cautious and proceeds country by country, region by region. Minor changes are made where needed but a strong overall homogeneity prevails. Of course some legal precautions must be taken to prevent the brand being pre-empted by local competitors before its arrival and to ensure its validity. But these measures are designed to gain time. This has been the approach taken by Coca-Cola. The second globalisation strategy consists in launching the brand simultaneously in several countries. It is typically the approach used by large multinationals creating entirely new brands for an international target market. Any local adaptations of the product or advertising are incorporated as the product is developed. This is how the Gillette G2 and Sensor and the Ford Mondeo were launched. It is also typically the approach taken with luxury goods. The third globalisation strategy is the most common in Europe. It consists in unifying local brands that have been acquired by takeover. Big groups have, historically speaking, often chosen a strategy of external growth through the buying of strong local brands. The industrial sectors typically use this strategy. In buying these well-established reputations, companies often acquire strong local knowledge and influence. This approach also involves fast-moving consumer goods. In feminine protection products, the Swedish group Mölnlycke bought Nana in France, which then joined the Scandinavian brand Libresse. Given a patchwork situation where the brand portfolio does not present much homogeneity, companies proceed to regroup brands around the same positioning. There are two classic approaches: In the first, a company changes the names of the local brands by substituting the name of its own brand. To launch Laboratoires Garnier in Germany, L'Oreal bought out a famous local brand, Dralle,

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which had a local product, Beauty. In 1995 this range was relaunched as Ultra-Beauty of Dralle, with the signature of Laboratories Garnier in fine print. It was then easy to 'sneak' Ultra-Doux or Ultra-Rich, famous Garnier products, into this market and then the whole range of Ultra products. Eventually, Dralle would disappear completely. In the second approach, a company maintains the local brand equities that are connected to the brand names. For example, General Motors' operations in mainland Europe are called Opel and in the UK, Vauxhall.

 Yoghurt culture  

 Branding strategies across Europe   At first glance, one might think plain Danone yoghurt could be sold in the same way to all Europeans. This should also be the case with flavoured Danone Kid or Bio. But despite appearances, yoghurt is a typical case of non-transversality _ it cannot be sold in the same way in all countries. This is due to the historical background of national yoghurt markets. In France, the market remains conditioned by the time when yoghurt was a health product, sold exclusively in pharmacies (just like mineral water). This historical fact is unknown to most young consumers but it deeply affects the market culture. In France, the product reference _ the 'basic' product, against which variants are defined _ is plain yoghurt, a symbol of good health. Fruit and flavourings came later. In Anglo-Saxon countries, on the other hand, where yoghurt is not historically linked with pharmacies, the basic original product was low-fat fruit yoghurt. The market was therefore associated with pleasure, of a sort that adults in particular could enjoy. In the UK, flavoured yoghurt (without fruit) is a lesser yoghurt, a downmarket product. Plain yoghurt is perceived as fruit yoghurt without the fruit and without the pleasure _ a product only suitable for diets. In Spain or Portugal, where fruit is abundant, fruit yoghurt is not the product reference for the market. In these countries flavoured yoghurt is the main market segment. It is eaten as much by children as by adults: it is a family product. It does not therefore have a 'first name', a product name especially aimed at children (such as Danone's 'Kid'). In Italy, the product reference is blended yoghurt. Flavoured yoghurt is positioned for very young children. In France, flavoured yoghurt is perceived as the adding of flavour to plain yoghurt. The health logic prevails, as the slogan petit petit on devient moins petit ('little by little one becomes less little') testifies. To underscore this promise and to differentiate itself from competitors, Danone chose to give a first name to this yoghurt: 'Kid' suggests a child reaching a later stage of development. In France, Bio is perceived as a renaissance of plain yoghurt, conveying health then pleasure. In the UK, Bio was the first to reveal the healthy and white side of yoghurt. Only Yop crosses these borders. Positioned for teenagers around the concept of freedom, like a soft drink, Yop has a European commercial that works well in all countries, provided consumers know what a drinkable yoghurt is.

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Globalization for Whom? Time to change the rules - and focus on poor workers by Dani Rodrik

Globalization has brought little but good news to those with the products, skills, and resources to market worldwide. But does it also work for the world's poor?

That is the central question around which the debate over globalization—in essence, free trade and free flows of capital—revolves. Antiglobalization protesters may have had only limited success in blocking world trade negotiations or disrupting the meetings of the International Monetary Fund (IMF), but they have irrevocably altered the terms of the debate. Poverty is now the defining issue for both sides. The captains of the world economy have conceded that progress in international trade and finance has to be measured against the yardsticks of poverty alleviation and sustainable development.

For most of the world's developing countries, the 1990s were a decade of frustration and disappointment. The economies of sub-Saharan Africa, with few exceptions, stubbornly refused to respond to the medicine meted out by the World Bank and the IMF. Latin American countries were buffeted by a never-ending series of boom-and-bust cycles in capital markets and experienced growth rates significantly below their historical averages. Most of the former socialist economies ended the decade at lower levels of per-capita income than they started it—and even in the rare successes, such as Poland, poverty rates remained higher than under communism. East Asian economies such as South Korea, Thailand, and Malaysia, which had been hailed previously as "miracles," were dealt a humiliating blow in the financial crisis of 1997. That this was also the decade in which globalization came into full swing is more than a minor inconvenience for its advocates. If globalization is such a boon for poor countries, why so many setbacks?

Globalizers deploy two counter-arguments against such complaints. One is that global poverty has actually decreased. The reason is simple: while most countries have seen lower income growth, the world's two largest countries, China and India, have had the opposite experience. (Economic growth tends to be highly correlated with poverty reduction.) China's growth since the late 1970s—averaging almost 8 percent per annum per capita—has been nothing short of spectacular. India's performance has not been as extraordinary, but the country's growth rate has more than doubled since the early 1980s—from 1.5 percent per capita to 3.7 percent. These two countries house more than half of the world's poor, and their experience is perhaps enough to dispel the collective doom elsewhere.

The second counter-argument is that it is precisely those countries that have experienced the greatest integration with the world economy that have managed to grow fastest and reduce poverty the most. A typical exercise in this vein consists of dividing developing countries into two groups on the basis of the increase in their trade—"globalizers" versus "non-globalizers"—and to show that the first group did much better than the second. Here too, China, India, and a few other high performers like Vietnam and Uganda are the key exhibits

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for the pro-globalization argument. The intended message from such studies is that countries that have the best shot at lifting themselves out of poverty are those that open themselves up to the world economy.

How we read globalization's record in alleviating poverty hinges critically, therefore, on what we make of the experience of a small number of countries that have done well in the last decade or two—China in particular. In 1960, the average Chinese expected to live only 36 years. By 1999, life expectancy had risen to 70 years, not far below the level of the United States. Literacy has risen from less than 50 percent to more than 80 percent. Even though economic development has been uneven, with the coastal regions doing much better than the interior, there has been a striking reduction in poverty rates almost everywhere.

What does this impressive experience tell us about what globalization can do for poor countries? There is little doubt that exports and foreign investment have played an important role in China's development. By selling its products on world markets, China has been able to purchase the capital equipment and inputs needed for its modernization. And the surge in foreign investment has brought much-needed managerial and technical expertise. The regions of China that have grown fastest are those that took the greatest advantage of foreign trade and investment.

But look closer at the Chinese experience, and you discover that it is hardly a poster child for globalization. China's economic policies have violated virtually every rule by which the proselytizers of globalization would like the game to be played. China did not liberalize its trade regime to any significant extent, and it joined the World Trade Organization (WTO) only last year; to this day, its economy remains among the most protected in the world. Chinese currency markets were not unified until 1994. China resolutely refused to open its financial markets to foreigners, again until very recently. Most striking of all, China achieved its transformation without adopting private-property rights, let alone privatizing its state enterprises. China's policymakers were practical enough to understand the role that private incentives and markets could play in producing results. But they were also smart enough to realize that the solution to their problems lay in institutional innovations suited to the local conditions—the household responsibility system, township and village enterprises, special economic zones, partial liberalization in agriculture and industry—rather than in off-the-shelf blueprints and Western rules of good behavior.

The remarkable thing about China is that it has achieved integration with the world economy despite having ignored these rules—and indeed because it did so. If China were a basket case today, rather than the stunning success that it is, officials of the WTO and the World Bank would have fewer difficulties fitting it within their worldview than they do now.

China's experience may represent an extreme case, but it is by no means an exception. Earlier successes such as South Korea and Taiwan tell a similar story. Economic development often requires unconventional strategies that fit awkwardly with the ideology of free trade and free capital flows. South Korea and Taiwan made extensive use of import quotas, local-content requirements, patent infringements, and export subsidies—all of which are currently prohibited by the WTO. Both countries heavily regulated capital flows well into the 1990s. India managed to increase its growth rate through the adoption of more pro-business policies, despite having one of the world's most protectionist trade regimes. Its comparatively mild import liberalization in the 1990s came a decade after the onset of higher growth in the early

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1980s. And India has yet to open itself up to world financial markets—which is why it emerged unscathed from the Asian financial crisis of 1997.

By contrast, many of the countries that have opened themselves up to trade and capital flows with abandon have been rewarded with financial crises and disappointing performance. Latin America, the region that adopted the globalization agenda with the greatest enthusiasm in the 1990s, has suffered rising inequality, enormous volatility, and economic growth rates significantly below those of the post-World War II decades. Argentina represents a particularly tragic case. It tried harder in the 1990s than virtually any country to endear itself to international capital markets, only to be the victim of an abrupt reversal in "market sentiment" by the end of the decade. The Argentine strategy may have had elements of a gamble, but it was solidly grounded in the theories expounded by U.S.-based economists and multilateral agencies such as the World Bank and the IMF. When Argentina's economy took off in the early 1990s after decades of stagnation, the reaction from these quarters was not that this was puzzling— it was that reform pays off.

What these countries' experience tells us, therefore, is that while global markets are good for poor countries, the rules according to which they are being asked to play the game are often not. Caught between WTO agreements, World Bank strictures, IMF conditions, and the need to maintain the confidence of financial markets, developing countries are increasingly deprived of the room they need to devise their own paths out of poverty. They are being asked to implement an agenda of institutional reform that took today's advanced countries generations to accomplish. The United States, to take a particularly telling example, was hardly a paragon of free-trade virtue while catching up with and surpassing Britain. In fact, U.S. import tariffs during the latter half of the nineteenth century were higher than in all but a few developing countries today. Today's rules are not only impractical, they divert attention and resources from more urgent developmental priorities. Turning away from world markets is surely not a good way to alleviate domestic poverty—but countries that have scored the most impressive gains are those that have developed their own version of the rulebook while taking advantage of world markets.

The regulations that developing nations confront in those markets are highly asymmetric. Import barriers tend to be highest for manufactured products of greatest interest to poor countries, such as garments. The global intellectual-property-rights regime tends to raise prices of essential medicines in poor countries.

But the disconnect between trade rules and development needs is nowhere greater than in the area of international labor mobility. Thanks to the efforts of the United States and other rich countries, barriers to trade in goods, financial services, and investment flows have now been brought down to historic lows. But the one market where poor nations have something in abundance to sell—the market for labor services—has remained untouched by this liberalizing trend. Rules on cross-border labor flows are determined almost always unilaterally (rather than multilaterally as in other areas of economic exchange) and remain highly restrictive. Even a small relaxation of these rules would produce huge gains for the world economy, and for poor nations in particular.

Consider, for example, instituting a system that would allot temporary work permits to skilled and unskilled workers from poorer nations, amounting to, say, 3 percent of the rich countries' labor force. Under the scheme, these workers would be allowed to obtain employment in the rich countries for a period of three to five years, after which they would be expected to return

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to their home countries and be replaced by new workers. (While many workers, no doubt, will want to remain in the host countries permanently, it would be possible to achieve acceptable rates of return by building specific incentives into the scheme. For example, a portion of workers' earnings could be witheld until repatriation takes place. Or there could be penalties for home governments whose nationals failed to comply with return requirements: sending countries' quotas could be reduced in proportion to the numbers who fail to return.) A back-of-the-envelope calculation indicates that such a system would easily yield $200 billion of income annually for the citizens of developing nations—vastly more than what the existing WTO trade agenda is expected to produce. The positive spillovers that the returnees would generate for their home countries—the experience, entrepreneurship, investment, and work ethic they would bring back with them—would add considerably to these gains. What is equally important, the economic benefits would accrue directly to workers from developing nations. There would be no need for "trickle down."

If the political leaders of the advanced countries have chosen to champion trade liberalization but not international labor mobility, the reason is not that the former is popular with voters at home while the latter is not. They are both unpopular. When asked their views on trade policy, fewer than one in five Americans reject import restrictions. In most advanced countries, including the United States, the proportion of respondents who want to expand imports tends to be about the same or lower than the proportion who believe immigration is good for the economy. The main difference seems to be that the beneficiaries of trade and investment liberalization have managed to become politically effective. Multinational firms and financial enterprises have been successful in setting the agenda of multilateral trade negotiations because they have been quick to see the link between enhanced market access abroad and increased profits at home. Cross-border labor flows, by contrast, usually have not had a well-defined constituency in the advanced countries. Rules on foreign workers have been relaxed only in those rare instances where there has been intense lobbying from special interests. When Silicon Valley firms became concerned about labor costs, for example, they pushed Congress hard to be allowed to import software engineers from India and other developing nations.

It will take a lot of work to make globalization's rules friendlier to poor nations. Leaders of the advanced countries will have to stop dressing up policies championed by special interests at home as responses to the needs of the poor in the developing world. Remembering their own history, they will have to provide room for poor nations to develop their own strategies of institution-building and economic catch-up. For their part, developing nations will have to stop looking to financial markets and multilateral agencies for the recipes of economic growth. Perhaps most difficult of all, economists will have to learn to be more humble!

Dani Rodrik '79 is Hariri professor of international political economy at the Kennedy School of Government and author of The New Global Economy and Developing Countries: Making Openness Work.

 

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