School Essay on Globalization

7/24/2019 School Essay on Globalization

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U6800: Conceptual Foundations Final Essay Question 2

Xin Yi Cheow xc2298

Instructor: Hisham Aidi, Tuesday 610pm Section

This essay is a debate on the role of the state and whether it should adopt a free market

versus interventionist approach in managing the forces of globalization.

My essay will argue that the state should actively intervene through Keynesian economics

and regulation to curb the excesses of globalization, which was pursued under a framework of what

Joseph Stiglitz (2010) has called market fundamentalism. Characterized by unfettered markets

and rapid privatization and liberalization, I will show that this free market approach has led to

underdevelopment, inequality and in some instances, even violence, especially in developing

countries.

When managed appropriately, state intervention in the form of affirmative policies, direct

investment and suitable mix of regulation can help countries leverage economic linkages inherent in

globalization through the engines of trade, growth and transfer of knowledge to achieve equitable

economic prosperity.

Terms of reference

Given the economic nature of the debate, I shall focus on economic globalization as the term of

reference in this essay, which is defined by Jagdish Bhagwatias the integration of national

economics into the international economy through trade, direct foreign investment (by corporations

and multinationals), short-term capital flows, international flows of workers and humanity

generally, and flows of technology. (Pg 3, 2004)

Working definitions aside, definitions can betray inherent ideological bias for discussion,

and Dani Rodriks framing of Tom Friedmans globalization definition in what he called the latters

ode to globalization, The Lexus and the Olive Treeis significant: where globalizations economic


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linkages as personified by financiers and speculators who can move billions of dollars around the

globe in an instant forced all nations to don a "Golden Straitjacket This defining garment of

globalization, (Friedman) explained, stitched together the fixed rules to which all countries must

submit: free trade, free capital markets, free enterprise, and small government, wrote Rodrik. (pg

189, 2011)

Consequences of free-market non-intervention: Volatility, Exploitation and Violence

The conditions under which globalization is pursued under the Golden Straitjacket is synonymous

to the neoliberalism and neoclassical economics as terms used by Stiglitz and Vincent Ferraro.

According to Rodrik, the demands of such hyperglobalization require the crowding out of

domestic ideals, the insulation of economic policy-making bodies (central banks, fiscal authorities,

regulators, and so on), the disappearance (or privatization) of social insurance, the push for low

corporate taxes, the erosion of the social compact between business and labor, and the replacement

of domestic developmental goals with the need to maintain market confidence. (pg 204, 2011).

In fact, I would argue that globalization has been hijacked by the free-market ideology and

even Bhagwati, often dubbed the modern Adam Smith, alluded to the need for intervention when he

stated how the growingintegration of nations worldwide into the international economy has

intensified competitive pressures from rivals, while instant access of scarce knowledge by

multinationals due to diffusion of new information technologies has shrunk buffer and increased

economic insecurity(pg 12, 2004) In arguing for state intervention, I shall first lay out what are the

consequences of non-intervention under the free market doctrine.

Volatility:Stiglitz articulated for instance, that the rapid liberation of financial markets

through international economic institutions like the International Monetary Fund (IMF) is inevitably

accompanied by huge volatility that impedes growth and increases the risk of investing in a country,

leading investors to demand a higher-than-normal profit in risk premium. This increases the


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likelihood of recessions where the poor, without adequate social nets, bore the brunt of such

downturns. He showed how in the case of Thailand, free market lending principles imposed by the

IMF resulted in the investments of empty office buildings, starving other sectors like education and

transportation of badly-needed resources, even though the Thais had restricted bank lending for

speculative real estate before the IMF and US Treasury came along (pg 6, 2002). Bhagwati also

stressed the need to distinguish between the case for free trade versus and the freeing of capital

flows in haste without putting in place monitoring and regulatory mechanisms and banking

reforms, which he said amounts to rash, gungho financial capitalism. It can put nation-states at

serious risk of experiencing massive, panic-fed outflows of short-term capital funds, which would

drive their economies into a tailspin. (pg 7, 2004)

Perhaps the greatest illustration of the consequences of non-interventionist free market

ideology polices would be the Great Financial Crisis in 2008, where Stiglitz charged deregulation

played a central role in the crisis(pg 216, 2010). Stating that the debate over market

fundamentalism is over, Stiglitz wrote, September 15, 2008, the date that Lehman Brothers

collapsed, may be to market fundamentalism (the notion that unfettered markets, all by themselves,

can ensure economic prosperity and growth) what the fall of the Berlin Wall was to communism

(pg 219). A new set of regulations, he said, would be needed to prevent another crisis and restore

trust in banks, and they must be comprehensive. If not, there will be regulatory evasion- finance

will go to the least regulated country. (pg 216, 2010).

Exploitation: Dependency theorists, whose basic premise of international capitalism

creating dependency of poor peripheral states and their exploitation by richer countries (pg 60,

Ferraro, 2011) would also point to the failures of neoclassical economics the bedrock of free

market economy to explain the persistence of poverty in developing countries. When poor

countries export primary commodities to rich countries who then manufactured products of these

commodities and sold them back to poor countries, the difference in value added of these

products means poor countries would never be earning enough from their export earnings to pay for


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their imports. While the phenomenon is underpinned by a free market economy, Ferrero said that

the neo-classical approach, which assumed economic growth was beneficial to all, nevertheless

failed to predict such economic problems in developing countries (pg 58, 2008).

Secondly, Ferraro pointed to dependency theorists repudiation of the market as sufficient

distribution mechanism, a central theory in the neoclassical model of trickle-down economics.

Paying relatively little attention to the question of distribution of wealth, the neoclassical models

concern is on efficient production and assumes that the market will allocate the rewards of efficient

production in a rational and unbiased manner. This assumption may be valid for a well-integrated,

economically fluid economy where people can quickly adjust to economic changes, and where

consumption patterns are not distorted by non-economic forces such as racial, ethnic, or gender

bias, but these conditions are not pervasive in developing countries, said Ferraro. (pg 63, 2008)

Violence:In fact, the raw, laissez-faire capitalism form of markets promoted by United

States in the non-western world, and ironically abandoned by the West, has unleashed ethnic

violence against market-dominant minorities in the developing countries, argued Amy Chua. (pg

524, 2002) Because markets and democracy benefit different ethnic groups in such societies, the

pursuit of free-market democracy produces highly unstable and combustible conditions, she wrote.

(pg 520) Markets concentrate enormous wealth in the hands of an outsider minority, fomenting

ethnic envy and hatred among chronically poor majorities, and Chua attributed the ethnic conflict

playing out in countries from Indonesia, Sierra Leone, and Zimbabwe, even citing the personal

account of her Chinese aunts murder in the Philippines to this special combustibility of markets,

democracy and ethnicity. (pg 520, 517, 524)

Another scourge of free market is the phenomenon of privatization, as outlined by Beatrice

Hibous piece analyzing the marginalization of the economic role of nation states to private actors

due to economic globalization, which resulted in continued imbalanced distribution of power and

wealth and criminal violence. In her Tanzanian example, Hibou states that liberation and the decline

in direct intervention did not mean the end of parasitic capitalism rents were transformed into


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the plunder of mineral an other natural resources and continued to benefit the 'container bourgeoisie'

that exercised power in an increasingly informal and non-institutional way. (pg 9,10, 2004). In

Morocco, the privatization of patronage dating back to the French protectorate through the

distribution of rents and a debureacratized access to economic activity has led to the explosive

growth of criminal activities such as counterfeiting, drug trafficking and prostitution, as well as an

informal economy of smuggling and unrecorded production, in what Hibou said has been claimed

to be the 'revenge' of the 'market economy. (pg 11,12)

Why, and how, state intervention works

If the unfettered pursuit of free markets through globalization has produced volatility, exploitation

and violence, what can state intervention do? Even Bhagwati, the worlds foremost free trader by

his own admission, spoke in favor of appropriate governance and stressed the need to put into

place institutional mechanisms to cope with the occasional downsides of globalization. (pg 222,

2004) There are several ways in which intervention can work and in this section, I will outline

positive strategies and examples of effective state intervention.

Bhagwati, in particular, distinguished between a passive, laissez-faire strategy of growth

often a catchphrase in neoclassical trickle down economics to policies that can transform

growth into an active, pull-up strategy instead. It required a government that would energetically

take steps to accelerate growth, through a variety of policies, including building infrastructure such

as roads and ports and attracting foreign funds. By supplementing meager domestic savings, the

foreign funds would increase capital formation and hence jobs, he wrote. (pg 54, 2004)

The East Asian Story: Along with other scholars, Bhagwati pointed to the successful East Asian

economies as the story of a virtuous interaction among beneficial policies: outward orientation,

high literacy, and emphasis on higher education. (pg 63, 2004). Noting that the East Asian

miracle economies such as South Korea, Taiwan and Singapore are not driven by officials trained


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as economists by IMF, Ha Joon Chang said they nevertheless knew some economics of Friedrich

List, Joseph Schumpeter and Albert Hirschman to name just a few, with the commonality of a

recognition that capitalism develops through long-term investments and technological innovations

that transform the productive structure, and not merely an expansion of existing structures, like

inflating a balloon. This deviation from the free-market view is what drove East Asian government

officials in the miracle years to policies that protect infant industries, forcefully mobilize resources

away from technologically stagnant agriculture into the dynamic industrial sector, and exploiting

what Hirschman called the linkages across different sectors (pg 249, 250, 2010). Summing up the

advantages of a state-led economy, Joseph Stiglitz compared the steel industry that the Korean

government created as among the most efficient in the world as compared to its private-sector rivals

in the US, while he pointed, while private, are constantly turning to the government for protection

and subsidies. (pg 2,3, 2002).

Chua, in advocating remedies to ethnic conflict brought on by free markets, also suggested

affirmation policies targeting root causes of group-specific market dominance, such as educational

reform and equalization of opportunities for indigenous population in Latin America. Such polices

are imperative if global markets are to benefit more than must a handful of cosmopolitan elites. (pg

526, 2002). In particular, she pointed to the relative success of what she acknowledged as a more

controversial strategy of direct government intervention in Malaysias New Economic Policy in

creating a substantial Malay middle class. While the countrys sweeping ethnic quotes on corporate

equity ownership, university admissions, government licensing and commercial employment have

not eradicated poverty for the majority of the countrys rural population, it has served a symbolic

function, with then Prime-Minister Mahathir Mohamad conceding, With the existence of the few

rich Malays at least the poor can say their fate is not entirely to serve rich non-Malays.(pg 527)

Critique


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Critiques of pro-interventionists would often refute the downsides of free market globalization by

pointing to positive statistical outcomes. In extolling the virtues of globalization and by extension,

on how it has been managed, Charles Calomiris cited figures from David Dollars World Bank

Policy Research Report on Globalisation, which showed that participation in global trade in the last

twenty years significantly narrows income inequality across countries, with catching up in income

gains confined largely to open economies that has presence for rule of law (pg 44, 45, 2002). He

also downplayed the success of East Asian economies, pointing to massive mobilization of savings

to finance domestic investment, and not productivity growth, as the key to East Asian expansion.

Calomiris also linked haphazard management practices of Asian banks designed to encourage

imprudent lending, and a lack of market discipline, as the cause of the Asian Financial Crisis that

slowed Asian economies. To Calomiris, the fact that Asian banks are protected and often supported

by the state is an illustration of the pitfalls of cozy relationships between the state and banks that

typically act as financial engines of the economy. (Pg 59. 60, 61)

William Easterly, who has argued against the unchecked power of states against individual

rights, also warned that too much focus on the well-being of the nation which is a typical

conceptual justification for state intervention in economic policies instead of focusing individual

rights, might promote nationalism and intolerance at the expense of ethnic minorities. Taking a

decidedly different stance from Chua, Easterly sees the focus on national policies which

expropriate(ing) the excess profits of the capitalists as the cause of ethnic strife more so than

market capitalism itself, and attributed the mass killings of the Chinese in Indonesia in the 1960s as

an example of autocrats manipulating hatreds toward non-national groups to consolidate their own

power.

Despite stressing that his piece is not set up as a market-versus-state debate, Easterly

argument seems to point to the pitfall of too much government intervention when he spoke about

the virtues of spontaneous solutions versus conscious design. In favor of the former, Easterly


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quoted Lawrence Summers talking about Friedrich Hayek Things will happen in a well-organized

efforts without direction, controls, plans. Thats the consensus among economists. Thats the Hayek

legacy. (pg 33, 2014). His arguments are also buttressed by Bhagwatis claim on how the poors

accesses to investment are best ensured by bureaucrats are replaced by markets wherever possible.

The anti-market protesters do not adequately appreciate that, as has been documented by numerous

development economists who have studied both the working of controls and the rise of corruption

in developing countries, far too many bureaucrats impose senseless restrictions just to collect bribes

or to exercise power. (pg 58, 2004)

Counter Critique

While Calomiris, Bhagwati and Easterly have shown the virtues of some form of market

liberalization, they are mostly discussing the issues in a domestic context, whereas in the

international domain, I will cite Stiglitzs argument that each of the most successful globalizing

countries determined its own pace of change; each made sure as it grew that the benefits were

shared equitably; each rejected the basic tenets of the Washington Consensus, which argued for a

minimalist role for government andrapid privatization and liberalization. (pg 2, 2002). Meanwhile,

in articulating the dependency theory, Ferraro (pg 62, 2008) notes that the dependency theorists rely

upon a belief that there exists a clear national economic interest that can and should be articulated

for each country, but focused by addressing the needs of the poor within a society. While he

acknowledges the difficulties in determining what is best, his points can counter Easterly charge

that focusing on national development can lead to manipulation by autocrats the theoretical

solution is to articulate what should be the lofty end goals of national development, and tailor

policies accordingly.

In conclusion, my essay has sought to show that globalization can be beneficial in helping

states address underdevelopment and inequality, but only if viewed within the right framework

approach and managed properly, although empirically, the converse framework of a neo-liberalist


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approach to globalization has led to underdevelopment and inequality.I have also shown that the

state assuming a bigger role in economic development of a country, which, coupled with strong

institutional mechanism and functional capabilities, can give developing countries a more equal

footing in the international economy, optimize their international economic integration, and even

enhance global economic governance.

Bibliography

Jagdish Bhagwati,In Defense of Globalization(New York: Oxford University Press 2004) pp.3-28,

51-68, 221-228.

Ha-Joon Chang, 23 Things They Don't Tell You About Capitalism(New York: Bloomsbury Press

2010) pp.242-264.

Amy Chua, A World on the Edge, The Wilson Quarterly(Autumn 2002).

William Easterly, The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the

Poor (New York: Basic Books 2014) pp.3-42.

Vincent Ferraro, Dependency Theory: An Introduction, in Giorgio Secondi ed., The DevelopmentEconomics Reader(London: Routledge 2008) pp. 58-66.

Beatrice Hibou, From Privatizing the Economy to Privatizing the State, in Beatrice Hibou, ed.,

Privatizing the State(New York: Columbia University Press 2004) pp.1-47.

Charles Calomiris, A Globalist Manifesto for Public Policy: The Tenth Annual

IEA Hayek Memorial Lecture,Institute of Economic Affairs(April 2002).

Dani Rodrik, TheGlobalization Paradox:Democracy and the Future of the World Economy (New

York: W.W Norton 2011) pp.184-233.

Joseph Stiglitz, Globalism's Discontents, The American ProspectVolume 13, Issue 1 (January

2002)

Joseph Stiglitz, Freefall: America, Free Markets, and the Sinking of the World Economy (New

York: Norton & Company 2010) pp.210-237.


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School Essay on Globalization