Criticism of Globalization

Criticism of the IMF

Globalization and its critics:

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  In this book, Wolf explains:

  "[What] a market economy is, why it has a close and supportive relationship with democracy, why and how it raises living  standards, in what ways it depends on support from the state, how the market moves naturally and beneficially across frontiers and, not least, how such a global market economy brings both great benefits and challenges for global political relations." See, Wolf, "Why Globalization Works (I)," "Globalization of Market Systems."

  There is much, of course, that Wolf does not cover in any depth - even in this wide-ranging book. For example, domestic social and political institutions will determine the extent of the benefits derived from liberal transformation of domestic and international trade. Inequality - especially unequal access to the factors of opportunity - factors like education and property rights and credit - determine not only the distribution of those benefits, but also the extent of a nation's benefits. The extent of legal, political and economic empowerment of civil society is another obvious factor.
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  However, even initial - very tentative and partial efforts at liberal economic transformation produce a cornucopia of benefits. China's recent history provides ample proof of the vast and immediate benefits that flow from any meaningful effort to initiate liberal economic transformation reforms, as long as basic infrastructure and political institutions are in place. Trade liberalization materially adds to those benefits - as long as basic infrastructure and political institutions are in place.
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  It should also be noted that Wolf uses the term "liberal" in its traditional 19th century sense, and that is the way it is used in this book review.

Opposition comes from trades unions, farm lobbies and industrial lobbies - particularly the steel and textile industries - "determined to protect their vulnerable economic positions" at the expense of the public interest as a whole.

  The benefits of globalization - so clearly explained by David Ricardo two centuries ago - are as plain as the economic advantages of the U.S. federal union over the previous confederation of sovereign states - or the economic advantages of the European Union over the divided Europe of the first half of the 20th century. The collapse of the Soviet Union and all other attempts to administer non-market economies leaves systems of market capitalism as the only feasible economic systems, and it is axiomatic that the broader the market, the better the system.
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  Wolf readily acknowledges that trade liberalization is just one of many general policies needed to stimulate economic growth. Good governance, sound money and budgetary practices, infrastructure development, education, financial and legal institutions, and much more that he refers to but does not go into in detail in this book, are also necessary. However, that does not diminish the need for free trade. Free trade may not by itself be sufficient, but it is still necessary.
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  Nevertheless, opponents of "liberal capitalism" have proliferated. They make their voices heard and their influence felt. Among them are utopians who have been "liberated" from socialist dogmas "to dream, no longer constrained by anything happening in the world." More weighty are the many vested economic interests seeking shelter from import competition. These include trades unions, farm lobbies and industrial lobbies - particularly the steel and textile industries - "determined to protect their vulnerable economic positions" at the expense of the public interest as a whole.

The Opponents of Globalization:

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The more extreme versions of protectionist views - advocated by such spokesmen as Patrick Buchanan in the U.S. and Jean-Marie Le Pen in France - gain strength from the fact that many in government and business find milder versions attractive.

  The NGOs have been called "new millennium collectivists."

  "They include conservationists and environmentalists, fearful that the liberal world economy will sweep away hard-won domestic regulations or exacerbate perceived global environmental damage; lobbies for development, concerned about the overhang of debt or the devastation allegedly caused by the structural adjustment and liberalization imposed by the International Monetary Fund and World Bank under the so-called 'Washington consensus;' consumer groups, worried about product safety and consumer health; human rights groups, troubled by exploitation and the oppression in mainland China, Burma (sic) and other parts of the developing world; Church groups of all denominations; women's groups; and campaigners for indigenous groups and traditional ways of life.

  The most numerous and influential are the environmental, human and gender rights NGOs. Their arguments are simple, while the arguments in favor of globalization require some knowledge of economics and some analytical abilities, giving the former an advantage in the public fora.
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  Of course, there are also the old socialists and Marxists.

  They suffer under the "tyranny of the missing alternative." They still dream of bringing capitalism to its knees even though they no longer can offer any credible alternative.

  Undoubtedly more dangerous are the "mercantilists, nationalists and assorted anti-liberal groups of the right." The more extreme versions of these views - advocated by such spokesmen as Patrick Buchanan in the U.S. and Jean-Marie Le Pen in France - gain strength from the fact that many in government and business find milder versions attractive.

  "In all, anti-liberal attitudes that had foundered in the shipwreck of twentieth-century nationalism and totalitarianism are bubbling up, like flotsam, on to the surface of political life. Old preferences for the comforts of community over individual striving, for traditional ways over rapid change, for the beneficence of the state over the cold logic of the market, for collectivism over freedom and for the nation over the global economy have been reborn."

  A recent addition to this cast of opponents is the Muslim militants.

  "Osama Bin Laden's terrorists are passionate anti-liberals. Theirs is the latest of the totalitarian and authoritarian ideologies to have opposed liberalism over the past two centuries. - - - [Their] objective is power, just as was true of Mussolini and Hitler, Lenin and Stalin, Mao Zedong and Pol Pot. - - - Where Hitler promised a Third Reich, they offer a restored caliphate. These fanatics are weaker, for the moment, but would not remain so if they seized control of a state in possession of nuclear weapons, such as Pakistan." (These views are the same as those of FUTURECASTS. See, "Why Do They Hate Us?")

  The anti-globalization protesters, on the other hand, are a part of the modern world. "They are 'our children.'" They divide us in the face of our enemies.

  Except perhaps for WW-II, the U.S. has always fought its wars as an intellectually divided nation. Competition in ideas about policy is as essential as competition in economics, politics or religion - as long as it remains within the legal framework. Competing viewpoints challenge assumptions and keep a government on its toes.

It is "liberal internationalism" that they seek to demonize.

These charges are now supported by "an immense literature of complaint, - - - almost all of it distinguished by disregard for facts and professional economic analysis."

"When the ideologically impassioned left last took full command, it produced the monstrosities of Soviet and Marxist communism. If anything, its grasp on reality has worsened since then."

  Because the economic protest movement is so fractured, Wolf believes that it is best defined by what it is against than what it is for. The various factions share "the belief that globalization is essentially Western/American capitalism, which is an oppressive and impoverishing force." He points out that it is "liberal internationalism" that they seek to demonize.
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  The "more or less specific charges against market driven globalization" are listed by Wolf.

1. "It destroys the ability of states to regulate their national economies, raise taxes and spend money on public goods and social welfare.

2. In the process, it undermines democracy, imposing in its place the rule of unaccountable bureaucrats, corporations, and markets.

3. It amounts to an abdication of power by benevolent democratic governments in favour of predatory private corporations.

4. It has caused - and is causing - mass destitution and increased inequality within and between nations.

5. It is destroying the livelihood of peasant farmers.

6. It is depriving the poor of affordable medicines.

7. It is lowering real wages and labour standards and increasing economic insecurity everywhere.

8. It is destroying the environment, eliminating species and harming animal welfare.

9. It is causing, in various ways, a global race to the bottom, in which low taxes, low regulatory standards and low wages are imposed in every country.

10. It is permitting global financial markets to generate crises that impose heavy costs particularly on less advanced economies.

11. It enshrines greed as the motive-force of human behaviour.

12. And it is destroying the variety of human cultures."

  These charges are now supported by "an immense literature of complaint, - - - almost all of it distinguished by disregard for facts and professional economic analysis." Exceptions include works by economists Joseph Stiglitz and Dani Rodrick, and financier George Soros.
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  Wolf warns about the fantasies of mindless ideologues. 

  "When the ideologically impassioned left last took full command, it produced the monstrosities of Soviet and Marxist communism. If anything, its grasp on reality has worsened since then."

  The 20th century leftist debacles were not limited to communism. A whole host of other non-market socialist experiments were attempted with deplorable results - blighting the lives of hundreds of millions for generations. These utopian experiments are anything but benign.

  Critics are correct that no developed nation ever developed without a host of protectionist measures in place, and many are retained even in advanced nations.  Fortunately, policy perfection is not required since it is never provided. A cornucopia of benefits flow from even flawed economic virtues.

Particular complaints:

Liberalizing and globalizing economies have been developing and those that haven't participated remain mired in hopeless poverty that only the politically influential can escape.

• An "explosive growth in inequality" is blamed on globalization and the programs of the "neoliberals."

  The facts, as usual, perversely refuse to conform to these ideological expectations. Wolf marshals those facts in impressive detail.
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  In short, the facts are that liberalizing and globalizing economies have been developing and those that haven't participated remain mired in hopeless poverty that only the politically influential can escape. Living standards have in fact been rising impressively since 1982 - but only in liberalizing states.

  Perfection is definitely not required. As China and other transformation states have proven beyond any peradventure of a doubt, any meaningful market and trade reform effort reaps an almost immediate cornucopia of benefits, but weaknesses can limit the extent and distribution of those benefits and will eventually show up in the volatility of the inevitable business cycle and the persistence of economic problems..

  The lesson is clear. There is no substitute for free market, free trade capitalism. All other alternatives condemn people to hopeless poverty. To the extent that remaining poverty is caused by governments that can not or will not participate in liberal economic transformation, such poverty is not the fault of market reforms. To the extent that inequality is caused by the continuing poverty in states that refuse to participate in international commerce, such inequality cannot be blamed on globalization.
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  To the extent that inequality is a result of technological progress that increases the productivity of some more than others, such inequality cannot be blamed on trade reforms.

  The growth of inequality due to the technological advance within advanced nations undoubtedly exists, but is probably not as extensive as portrayed. As FUTURECASTS has repeatedly pointed out, the income statistics that show no growth in working class incomes for the quarter century after 1973 simply don't square with census data showing that even working class people increasingly own their own homes, that the size of their homes has been increasing and that their homes and apartments are being filled with more and higher quality creature comforts like air conditioning, microwave ovens, color TVs, and even modern electronics.
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  By including transfer payments and excluding the lowest strata of people who simply don't participate in economic activity in any meaningful way, much of even the statistical divergence disappears. Even more disappears with reasonable changes of assumptions about productivity growth and other indefinite factors that plague these statistics. See, "Economic Statistics: The Figures Lie." 

The incomes of poor developing countries, with more than half the world's population, [have been growing] substantially faster than those of the world's richest countries."

Dramatic improvements in health and lifespan and infant mortality and per capita food supplies and reductions of child labor have been widely achieved.

  India and China provide examples of nations kept for generations in hopeless poverty by alternative economic systems. These nations also provide examples of the vast and widespread benefits that begin to flow almost immediately after the initiation of liberal market reforms and reductions in trade barriers. These reforms have been far from thoroughgoing, Wolf points out, but in China they have been impressively continuous. Even partial market reforms delivered a cornucopia of benefits. (See, Chow, "China's Economic Transformation.") There is clear convergence of living standards between the peoples of these transformation giants and those of the advanced nations.

  "Never before have so many people -- or so large a proportion of the world's population -- enjoyed such large rises in their standards of living. - - - This then was a period of partial convergence: the incomes of poor developing countries, with more than half the world's population, grew substantially faster than those of the world's richest countries."

  These nations are, of course, growing from a distressingly low base due to their previous socialist and other nonmarket economic systems. Thus, the income gap in absolute numbers does keep growing, even as the percentage gains greatly favor the transformation states. As a simple matter of mathematics, convergence even in absolute terms will begin for those developing nations where the transformation reform effort continues. (Ireland provides an excellent European example of actual catch-up.)
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  Wolf goes into some detail concerning the problems of interpreting the relevant statistics. While the statistics used to measure world poverty are admittedly inexact and unreliable, the trends they show are unmistakable. Even more undisputable are vast gains in human welfare in the transformation states. Dramatic improvements in health and lifespan and infant mortality and per capita food supplies and reductions of child labor have been widely achieved.
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  He rightly dismisses as absurd those who criticize the spreading prosperity of market economies because some benefit more than others and some are initially left behind. Extreme poverty has in fact been falling dramatically since 1820 as capitalist market systems deepen and spread their benefits ever further. Studies show that subsistence living has declined worldwide from 80% to less than 24% of the population. Despite continued rapid population growth, even the absolute numbers of those limited to subsistence living have been in rapid decline since 1980.
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"What the successful countries all share is a move towards the market economy, one in which private property rights, free enterprise and competition increasingly took the place of state ownership, planning and protection.

The impoverished nations that still are not developing are invariably afflicted with bad governance, a lack of essential domestic institutions, and/or failure to participate in market economic reforms and international trade.

  The period of greatest increase in worldwide inequality was between 1820 and 1980 - the period when nonmarket and socialist states kept falling further behind advancing capitalist market states. The tip-off is that inequality between countries increased - not inequality within countries. With the beginning of the economic transformation movement in 1980, inequality between states has at last begun to decline - but only between the advanced and transformation states.

  "What the successful countries all share is a move towards the market economy, one in which private property rights, free enterprise and competition increasingly took the place of state ownership, planning and protection. They chose, however haltingly, the path of economic liberalization and international integration. This is the heart of the matter. All else is commentary."

  Even Bangladesh - hardly a model of reform - and long considered a hopeless economic basket case - has been visibly progressing since beginning to reduce barriers to trade. Holding it back is the level of corruption - among the worst in the world - and a host of other domestic problems - which makes the economic improvements that coincide with the reductions in trade barriers even more impressive.
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  The impoverished nations that still are not developing are invariably afflicted with bad governance, a lack of essential domestic institutions, and/or failure to participate in market economic reforms and international trade. Some, of course, are chaotic for lack of effective governance of any kind.
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The problem of the poorest is not that they are exploited, but that they are almost entirely unexploited: they live outside the world economy.

  There is also the "resource curse." Governments that obtain their revenues from exploitation of mineral wealth frequently don't give a damn about the commercial prosperity of their people. Nigeria and Angola are prominent examples of the 39 states identified by the World Bank as having failed to grow despite significant oil or mineral abundance. "Data on real GDP per head show that developing countries with few natural resources grew two to three times faster between 1960 and 1990 than countries with abundant natural resources."
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  Wolf explains several other factors that hinder or help transformation economies succeed. The adoption of appropriate and disciplined economic policies is among the most important.  There are also inherent geographic limitations - principally in the disease-ridden tropics and for landlocked states. He concludes:

  "Human welfare, broadly defined, has risen. The proportion of humanity living in desperate misery is declining. The problem of the poorest is not that they are exploited, but that they are almost entirely unexploited: they live outside the world economy. The soaring growth of the rapidly integrating developing economies has transformed the world for the better. The challenge is to bring those who have failed so far into the new web of production and profitable global economic relations."

• Differences in wage levels - that might render whole industries in advanced nations uncompetitive - are almost entirely offset by productivity per worker differentials.

    As productivity rises, so do wages. This phenomenon has been widely demonstrated. Wolf refers to experience in S. Korea and Japan, and asserts that China will have the same experience despite its vast manpower resources.

The U.S. is producing more manufactured goods than ever before. The increased consumption of services by wealthy nations dictates a proportionate decline in the manufacturing sector.

"Trade is not a zero-sum game. It is mutually enriching."

• Chronic overproduction - from a "glut" of new manufacturing capacity due to expansion in China and India.

  The fear that a glut of productive facilities will produce more than can be consumed is an old oft refuted Marxist fear that survives in this modern form. Leftist economists from Keynes to Paul Samuelson to Lester Thurow have suffered from this affliction. It exists in total disregard of the processes of creative destruction and the fact that China provides a rapidly expanding market as well as an expansion of productive facilities. As Wolf  points out, below, it exists in total disregard of the natural resulting adjustments in comparative advantage and terms of trade.

  The decline in "good factory jobs" - (jobs once viewed so negatively by Marx and many socialists) - is due to productivity increases and a natural shift from labor-intensive manufacturing to higher productivity capital intensive manufacturing, Wolf points out. The U.S. is producing more manufactured goods than ever before. The increased consumption of services by wealthy nations dictates a proportionate decline in the manufacturing sector.

  "[The] notion of an insuperable tide of hyper-competitive production laying waste the jobs, industries and economic activity of the high-income countries can be seen as hysteria. But this leaves aside one last possible meaning to the notion of competition among countries. When a developing country, such as China, sends goods to the U.S. or the EU, in line with its comparative advantage, the terms of trade - and so real incomes - of the importing countries improve. This means that the prices of their imports fall in relation to their exports. That, in turn, means that the importing country can buy more with what it produces. It is better off. That, indeed, is why China's entry into world markets is beneficial for the high-income countries that make the sophisticated goods and services the Chinese wish to buy. Trade is not a zero-sum game. It is mutually enriching."

  The increase in imports from transformation nations like China and India constitute one of the most important reasons why price inflation and interest rates have been kept low in the U.S. despite a long period of negative interest rates and massive monetary inflation.

  China doesn't just export. It imports - a lot. (It imports enough to get the Japanese economy moving again and to provide a huge market for the other Asian Tigers that were supposed to be crushed by Chinese competition.) There need be no chronic glut of productive facilities.

  However, a tendency towards over-expansion is in fact a part of the business cycle. Excess capacity is weeded out when inefficient productive facilities are eliminated - most noticeably during economic recessions - which is one of the important adjustments forced during economic recessions. However, this "creative destruction" is a constantly occurring phenomenon with or without international trade. The right to fail is as important as the right to succeed.

The real problem is that labor is still under-exploited in developing nations, leaving hundreds of millions behind in poverty.

Sanctions based on labor standards - such as those designed to combat child labor practices - in effect penalize poor nations for their poverty "while taking away the best ladder out of it."

• Exploitation of labor - is another old Marxian propaganda myth.

  In fact, those factory jobs and low wages in developing nations are pulling hundreds of millions out of desperate poverty and are a huge benefit to the workers who desperately seek them. They are - in fact - the ONLY route out of poverty possible for billions of people - and ALWAYS constitute less exploitative relationships than the socialist, communist and other nonmarket alternatives that preceded economic transformation efforts. (See, Muravchik, "Heaven on Earth," and Meier, "Black Earth,") 

  Indeed, the real problem is that labor is still under-exploited in developing nations, leaving hundreds of millions behind in poverty.

• The lack of trade union rights - in many countries is also deplored.

  Unfortunately, where strong labor union rights exist - as in India - they have clearly inhibited development. They protect the few in unionized jobs but block the economic development that provides good jobs for the many. South Korea, Taiwan and now, China follow the path of labor market flexibility. Rigid labor markets are a prescription for unemployment and a brake on development even in advanced countries like those of the EU.

• Child labor - is a much deplored feature of transformation nations.

  However, child labor can only be reduced by economic development. Rising incomes - and only rising incomes - mean fewer, better educated children. In poverty stricken nations, the alternative to child factory labor is child workshop labor or agricultural labor or prostitution - or worse. Sanctions based on labor standards - such as those designed to combat child labor practices - in effect penalize poor nations for their poverty "while taking away the best ladder out of it."

The domestic activities of poverty-stricken peoples - their rapid population growth and inefficient use of resources - cause far more damage to the environment than occurs in more prosperous nations.

Environmental concerns are ignored in nations that do not participate in globalization and that do not facilitate domestic market directed commerce.

• Environmental impacts - give rise to objections that are dealt with in detail by Wolf.

  In brief, only a degree of prosperity can support concerns for the environment - and only markets and trade provide prosperity. The domestic activities of poverty-stricken peoples - their rapid population growth and inefficient use of resources - cause far more damage to the environment than occurs in more prosperous nations.
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  Thus, even a zero growth regime won't reduce environmental impacts - and no nation will accept a zero growth regime that blocks all hope of eliminating widespread poverty.
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  In both advanced and transformation nations alike, environmental regulations keep getting stronger. Environmental concerns are ignored in nations that do not participate in globalization and that do not facilitate domestic market directed commerce. The spread of democracy in prospering nations empowers civil societies and their environmental concerns.
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  Complaints that the World Trade Organization has ruled against enforcement of environmental standards are clearly false. It was a far different practice - discriminatory application of environmental standards - that was struck down.

• Localization and self sufficiency - advocated by the "new millennium collectivists" - is rightly characterized by Wolf as "absurd."

  This extreme autarky would reduce the world to the economic level of N. Korea. Communist China's "Great Leap Forward" was a rigorous effort at localization and self-sufficiency. It resulted in tens of millions of deaths from starvation and widespread environmental degradation from the desperate misuse of local resources - and negative productivity as the inputs consumed exceeded the outputs produced. Development of impoverished nations would cease and become impossible. Self sufficient localization can produce only tyrannical dystopias.

• "Infant industry" promotion - provides a more serious reason for restraints on international trade.

  However, most "infant industry" protectionist and subsidy policies have produced perpetual economic children that continuously burden the rest of the economy. Only if the favored industries are required to compete in international markets without subsidization do they have a proper mix of incentives to promote growth.

• Import substitution policies - impose increasing burdens on an economy and additional costs that undermine the international competitiveness of export industries.

  On the other hand, export oriented policies require flexible and efficient practices for success in competitive world markets. For newly developing countries, export markets are in effect limitless and provide practical routes for development. Wolf is not unsympathetic towards export-forcing practices for developing countries.

Undeveloped nations correctly perceive many of these suggestions as attempts to shut their exports out of world markets. The complaints and suggestions are just tactical subterfuges by antitrade activists.

Far more damage is caused to poor nation economies by the barriers raised by poor nations against trade from each other - as well as by their import barriers in general.

In the current trade environment, many developing nations have in fact been able to prosper through economic transformation policies and participation in globalization.

• World Trade Organization controversies - are also covered in detail by Wolf.

  The formation of the WTO and the development of its procedures were the results of many compromises and practical policy decisions. That it is far from ideal is readily conceded, but many of the suggested alternatives could not possibly get off the ground, and many would lead to impossible procedural bottlenecks. Undeveloped nations correctly perceive many of these suggestions as attempts to shut their exports out of world markets. The complaints and suggestions are just tactical subterfuges by antitrade activists. However, Wolf does note several changes that might be practical.

  "[The WTO] is not a tyranny; on the contrary, it is extremely weak. It is not undemocratic; on the contrary, it is an expression of democratic choices. It can be improved. But, without it, the big powers would do what they want to an even greater extent than they already do. It would be senseless, if not insane, to prefer that."

• Rich nation trade barriers - especially those that block poor nation exports - are rightly castigated by Wolf.

  Trade barriers against imports of agricultural products and labor-intensive manufactured products are especially harmful to poor nations. (As FUTURECASTS has repeatedly stated, it is unconscionable for wealthy states to impose barriers to poor nation exports.)
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  European and U.S. anti-dumping measures are particularly reprehensible, and agricultural subsidies particularly harmful for a multitude of reasons. However, as Wolf notes, far more damage is caused to poor nation economies by the barriers raised by poor nations against trade from each other - as well as by their import barriers in general.
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  Failure to prosper is almost always due primarily to domestic policy and governance failures. In the current trade environment, many developing nations have in fact been able to prosper through economic transformation policies and participation in globalization.

What is remarkable, in fact, is not how strong companies are, but how weak.

"In all, the inability of companies to control their destiny is remarkable - and, for believers in the disciplining power of competition, encouraging."

Comparisons of the productive power of corporations with the coercive power of governments is ludicrous.

• The power of large corporations - is a persistent theme of left wing propaganda mythology that Wolf easily and thoroughly debunks.

  Wolf exposes the obvious misuses of statistics and the semantics games that frequently compare apples to oranges. He easily shreds the left wing nonsense over corporate market power and the ability of advertising and branding to enslave customers.
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  The obvious fact is that markets are more powerful than even the largest corporations, and frequently cut them down in size or even eliminate them altogether. Notions of market control are greatly overstated as a part of standard left wing propaganda mythology. Corporations that do not slavishly follow market dictates and do not seek to satisfy their customers are not long for this world.

  "[Corporations] do not control their customers. They are controlled by them. That is why blackmail by activists is successful. What is remarkable, in fact, is not how strong companies are, but how weak. In front of the protests of a small number of Greenpeace activists and some hooligans, principally in Germany, the British government and Shell abandoned a perfectly sensible plan to dump the Brent Spar oil platform at sea in favor of a costlier and less environmentally favourable one of onshore disposal. This is a story not of arrogance but of timidity, not of strength but of vulnerability."

  That there is some abusive conduct is, of course, without question. However, more of it is punished - and punished quicker and more thoroughly - by market disciplines than is the case with the abusive conduct of political entities. Indeed, most of the left wing complaints about  corporate power are actually complaints about their need to follow market directives rather than the directives of politicians and bureaucrats and influential ideologues and special interests.
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  Apocalyptic fears about corporate concentration - (feverishly viewed as imminently disastrous by Karl Marx a century and a half ago) - continue to fail to materialize in reality. Monopolies and substantial cartels with market power do exist - but almost always because of government connivance.

  "The evidence bears out the proposition that companies do not dominate markets, but rather that markets dominate companies. Privatization and international economic integration have made markets more competitive and so companies less powerful within their markets. - - - If we look at the world as a whole, the effective contestability of markets has increased almost everywhere since the early 1980s. Just think of what has happened to commercial banking and insurance. Concentration measures do not capture this increase in competition well: there may, for example, be only two serious competitors in the supply of civilian aircraft, but there can be little doubt that they compete fiercely. In a global world economy, complacent incumbents are unlikely to last long."

  Indeed, studies demonstrate constant churning among the biggest companies, as the markets punish the laggards. "In all, the inability of companies to control their destiny is remarkable - and, for believers in the disciplining power of competition, encouraging."
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  Comparisons of the productive power of corporations with the coercive power of governments is ludicrous. Corporations retain their economic strength only so long as they produce what their customers want. The primary left wing objection is really that corporations need not be slaves to governments - that they are to some extent free to vote with their feet to flee particularly abusive or incompetent governance - including governance based on left wing concepts. If they can't do that,  they can decline or fail.
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Cheap labor is not enough to attract investment where governance is poor and corruption high.

FDI does not go to the world's poorest and least regulated countries, but to its richest and most regulated.

  The corporate "exploitation" myth is here, too, easily debunked. Economics is a "positive sum" game. Poor workers in poor nations eagerly seek jobs with transnational corporations 'in the - almost universally fulfilled - hope of obtaining higher pay, better training and more opportunities than would otherwise be available to them." Again, the problem is not too much exploitation, but too little.
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  If the governance and economic environment in undeveloped nations were improved, more corporations would find them attractive places to do business, and the corporations and local workers would prosper together. Unfortunately, because of wretched economic environments in undeveloped nations, the vast majority of foreign direct investment is between wealthy and successfully developing nations despite the cheaper labor available in undeveloped nations. The poorest, slowest growing nations attract perhaps 2% of all foreign direct investment.
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  Indeed, effective rule of law seems to be the primary factor for attracting foreign direct investment.

  "The great bulk of direct investment continues to go to countries with high labour costs and strong regulatory regimes, not least on the environment. But these are more than offset, in the eyes of investors, by the benefits of political stability, personal security, excellent institutions, highly skilled workers and large markets."

  Cheap labor is not enough to attract investment where governance is poor and corruption high.  "Inward investment in the poorest countries is only likely when there are natural resources."

  "The principal conclusions remain. FDI does not go to the world's poorest and least regulated countries, but to its richest and most regulated. Among developing countries, the largest flows have been to economically dynamic countries, not to the poorest and most stagnant ones. The big exception is flows to develop natural resources, which must go where those resources are, however badly governed the countries may be. There is no evidence that FDI impoverishes its recipients, though it can do so in the wrong policy context -- or in the context of the natural-resource curse."

The many benefits of FDI include employment, technology transfer, management techniques, competitiveness in export markets, increased wages and improved working conditions.

  The many benefits of FDI are readily observable. These include employment, technology transfer, management techniques, competitiveness in export markets, increased wages and improved working conditions. Inward investment even forces up wages in domestic plants. Studies show that wage rates of transnational corporations in undeveloped nations are twice those of domestic employers. They even pay more in advanced nations.
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  The benefits of these jobs for women in poor and developing nations are huge.

  "Bangladeshi women, as is true of other female workers in Asia and Latin America, indicate that factory work offers a measure of autonomy, status and self respect. As female participation and female incomes rise, a higher proportion of family incomes tends to be spent on education, health and nutrition. Working in factories postpones marriages and increases the resources future wives bring into marriage. - - - No case can be made for depriving these people of this opportunity, unless one can offer a credible alternative."

  Likely alternatives include total dependency as a house wife or despised daughter, prostitution, workshop or agricultural labor or begging.
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The U.S. receives as much FDI as it provides. There is no net FDI.

  The outsourcing myth concerning FDI blames it for the exporting of U.S. jobs. However, the U.S. receives as much FDI as it provides. There is no net FDI. Moreover, FDI stimulates exports, another major creator of jobs. And the U.S. economy benefits greatly from shifts out of commodity manufacturing into higher value added activities.
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  The greatest losers from globalization and FDI and outsourcing have been those who were benefiting from monopoly rents - both manufacturers and labor unions - in such industries as steel and autos that now face international competition and accelerated rates of change. "The position of a labour aristocracy within the U.S. has been eroded by increased global competition in the era of globalization, in which the possibility of outward investment has played a modest part."

  "Economic change always imposes losses, as well as gains. In a properly run market economy, gains outweigh losses. But the net gains from any individual market-driven change are usually small in relation to the gross gains and losses. The closure of a plant, to be replaced by one in another country, is a particularly visible symbol of such rapid change."

  The flexibility to accommodate competition and change is one of the most vital requirements for the maintenance of prosperity.

The broadest trends in government economic policy have frequently been against the immediate interests of incumbent major corporations.

  The political power of the corporation in advanced democracies is much overstated. The broadest trends in government economic policy have frequently been against the immediate interests of incumbent major corporations. Health, safety and environmental regulations have been strengthened - markets have been opened to foreign competition - legal liabilities have been greatly expanded - cartel schemes have been aggressively fought - suppliers to government monopolies have failed to block privatizations - to mention just a few obvious trends - all proving that modern democracies are not at risk of becoming dominated by corporate interests.

  "The bottom line is that corporations have influence, but not decisive power. Moreover, many other forces have influence in contemporary democracies. Nor is there any simple means of excluding corporate interests from democratic politics."
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  "It is right to be on guard against the power of special interests. It is wrong to assume that any one group dominates."

Big government keeps getting bigger. Tax revenues keep increasing, as does the tax take from corporations and income taxes. Social spending continues to rise. Environmental regulations keep getting tougher.

Despite the mobility of capital - the factors of comparative advantage have been getting stronger rather than weaker.

  Indeed, rather than racing to the bottom during the age of globalization, the advanced democracies continue to race to the top in the percentage of their GDP that is comprised of government spending. Big government keeps getting bigger. Tax revenues keep increasing, as does the tax take from corporations and income taxes. Social spending continues to rise. Environmental regulations keep getting tougher. Nevertheless, neither capital nor the highly skilled and paid people are fleeing.

  Tax and regulatory burdens can reach levels that are sufficiently oppressive to cause businesses and people of means and talent to vote with their feet against such governance. This is more likely within the U.S., where different states offer different business conditions, and factors of production can move without leaving the country. The burden levels needed to drive businesses abroad have proven to be surprisingly high.

  The reasons why the facts so deplorably refuse to conform to anti-globalization propaganda is that - despite the mobility of capital - the factors of comparative advantage have been getting stronger rather than weaker. The differences between countries in such factors as natural resources - social, physical and human capital - knowledge - governance - wealth - has never been greater. These differences remain even among wealthy nations. They explain, for example, why Britain provides a global financial center and Germany provides excellence in engineering.

  "[The] bulk of resources that make the difference between wealth and poverty are immobile. This is not just because there are legal restrictions on the mobility of people, but because the people of high-income countries do not, for the most part, want to move even if the taxes at home are higher, because they are satisfied with the bundle of amenities they are able to consume. - - - Moreover, the incidence of taxation depends on how mobile particular activities or factors of production are. It is easiest therefore to tax immobile land and labour and less easy to tax mobile labour and capital. Corporate capital falls in between."

• The contention that globalization allows markets to destroy states is another myth easily debunked by Wolf.

  International competition does force changes in domestic policies and institutions, but this is just an extension of domestic market pressures.

  "[Moreover, because] integration increases economic opportunities and wealth, it also strengthens the legitimacy and so stability of states. Not coincidentally, the world's most stable countries are the prosperous, market-oriented democracies."

  Fears of loss of national competitiveness are based on "an elementary howler." They apply "what economists would call 'partial equilibrium' reasoning to a general equilibrium question."

  "[Like] every other institution, governments will be forced, by greater openness, to provide value for money to those who pay for their services. They will have to relate the taxes they charge a little bit more closely to the amenities they provide. This is bad news only for predatory states, or the interests that want them to be predatory."

Market constraints on government actions are far more likely to be beneficial than not.

States that do not abuse their powers retain a great deal of freedom of maneuver, and the prosperity of market commerce and globalization provides vast resources for state purposes.

• The notion that Keynesian stabilization measures are undermined by world markets is correctly rejected by Wolf.

  Monetary inflation and budgetary deficits were getting nations into trouble long before globalization - (and, indeed, long before John Maynard Keynes). Wolf correctly points out that the collapse of the Soviet Union and the transformation of Maoist China proves that "regulatory competition among countries will affect the closed as much as the open." (Keynes was blatantly wrong in asserting otherwise. See, Keynes, "The General Theory (II)," segment on "Foreign Trade.")
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  And - most obvious of all - market constraints on government actions are far more likely to be beneficial than not.

  "[Globalization constrains governments] in valuable ways and so makes them better able to serve the properly defined long-run interests of their citizens. - - - As long as a government provides services that residents wish to enjoy, it can continue to tax, regulate and intervene. International integration merely tends to make policy more transparent and government more predictable, both of which are desirable."

  Governments retain their important and essential sovereign powers. Indeed, it is state domestic policies and institutions that enable citizens to reap the benefits of globalization. Failed and corrupt states are "shunned" states. States that do not abuse their powers retain a great deal of freedom of maneuver, and the prosperity of market commerce and globalization provides vast resources for state purposes.

"Given the deep-seated difficulties inherent in any financial system, - - - liberalization is bound to be a far trickier matter. Too often it has created opportunities for blunders matched by equally spectacular malfeasance, by both suppliers and recipients of [debt] capital."

Foreign finance offers massive benefits, and competition from foreign banks in domestic markets has stimulated substantial improvements in domestic banking.

• Crises of financial capital have become increasingly contagious and prone to afflict international commerce.

  Wolf points out that it is bank capital - loans by commercial banks - that has proven to be the most unstable form of capital for developing nations. In the financial crises of the early 1980s as in the last half of the 1990s, net flows of FDI remained remarkably stable - rising throughout the Asian Contagion. However, commercial banks recklessly lent money to financially immature states and then catastrophically withdrew it in panic.

  Adam Smith cautioned that prudent uses for bank capital were limited. However, in the 1970s, the World Bank - pursuant to Keynesian stupidity and the usual level of catastrophically incompetent direction the world had come to expect from Robert S. McNamara - decided otherwise and directed a flood of loans to third world governments. The money was predictably misused, leaving third world nations still impoverished and financially bankrupt.

  There is evidence, Wolf notes, that FDI and portfolio investments "have a strongly positive impact on growth." However, that is not true for debt-creating flows such as loans from commercial banks. (Many Keynesian economists still refuse to acknowledge the limitations of debt capital.)
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  Far more than capital flows, it is domestic policies and institutions that determine growth. It is poorly executed liberalization that results in crises - well executed liberalization that maximizes growth. 

  "While openness to trade is normally beneficial and requires few complementary policy changes, the same is not true of finance. Given the deep-seated difficulties inherent in any financial system, - - - liberalization is bound to be a far trickier matter. Too often it has created opportunities for blunders matched by equally spectacular malfeasance, by both suppliers and recipients of [debt] capital."

    The benefits of mature  financial systems are vast and obvious. (Even Marx had to recognize these benefits - although he had to stupidly insist that such "benefits" have no "value" to preserve his industrial labor use-value propaganda myth.) The primary impact is an increase in productivity. Yet almost all developing countries have tiny financial markets - far too small to support growth of domestic producers sufficient for them to become competitors in international markets. Thus, foreign finance offers massive benefits, and competition from foreign banks in domestic markets has stimulated substantial improvements in domestic banking.
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The reforms forced by these crises have - to the extent they were implemented - invariably been beneficial to the domestic financial systems and their regulatory regimes.

  The reasons for the major financial crises of the last quarter century are predominantly found in domestic policy and institutional weaknesses, Wolf perceptively points out. "Not infrequently, the role of the foreign capital was to reveal the rottenness of the financial system."
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  Furthermore, the reforms forced by these crises have - to the extent they were implemented - invariably been beneficial to the domestic financial systems and their regulatory regimes. South Korea, Mexico and Chile are examples of nations that benefited greatly from such reforms.

  "Indeed, it is hard to think of any financial system that has not advanced through the fires of repeated crises."

  Certainly, the U.S. has experienced its share of such crises on its way to its current sophisticated financial system.

  In any event, capital controls are increasingly difficult to maintain, ineffective and corrupting. "The scale of capital flight from countries with controls can be enormous." The existence of controls deters repatriation of capital and in many other ways is counter-productive.
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  However, liberalization does require care. Regulatory and legal reforms must compliment capital market reform. Bankruptcy laws, conflicts of interest, and the spectrum of government guarantees have to be considered for appropriate reforms.
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The IMF:

• IMF remedies are "one-size-fits-all," and involve a lot of pain.

  However, these financial crises almost always involve some version of the same malady - spending in excess of revenue and borrowing the difference until credit collapses. Similar ailments require similar remedies - the cutting of spending to sustainable levels - which during a crisis is always very low.
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  The IMF doesn't inflict the pain. It arrives on the scene after the stricken nation has inflicted the pain on itself. By providing funds, the IMF mitigates the pain. By requiring conditions of prudent budgetary, financial system and monetary system policies, it imposes necessary discipline - and gives local political leaders a scapegoat to help them deflect criticism.

• IMF analysts failed to foresee and warn of any of the impending crises.

  Here, the IMF is guilty as charged. In particular, it failed to analyze weaknesses in the financial  practices of domestic financial institutions and corporations and problems related to their governance. Trouble can pile up in these areas as easily as in government budgetary and monetary practices. The IMF also failed to warn of the dangers of financial liberalization for immature financial systems.

The IMF is thrown into crisis situations where it must take action under the pressure of events.

Several countries actually discouraged foreign ownership - discouraged the foreign equity capital that could have provided a basis for stability.

• IMF crisis interventions were flawed - turning liquidity problems into insolvency problems by frightening creditors into panicky attempts to abandon ship.

  Wolf reasonably notes that such criticism is made with the benefit of hindsight. The IMF is thrown into crisis situations where it must take action under the pressure of events. Nevertheless, hindsight evaluations are useful in planning future responses.
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  Moreover, the principle causes of the crises were not just found in flawed liberalization policies. Indeed, the flawed policies frequently were astoundingly retained "well beyond the bitter end." Several countries actually discouraged foreign ownership - discouraged the foreign equity capital that could have provided a basis for stability.
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  South Korea in particular, "actively encouraged short-term borrowing." Thailand and South Korea persisted in doomed efforts to maintain their fixed currency exchange rates until their reserves were exhausted, while concealing the facts. The extent of the short-term foreign currency liabilities in Indonesia, Thailand and South Korea were also kept secret until well after the crisis broke. The extent of corruption was also kept secret. (See, Backman, "Asian Eclipse.") These were not matters for which the IMF was responsible.
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  Nevertheless, Wolf now believes that the budgetary belt tightening forced on the afflicted nations was premature, and the extent of the reform conditions imposed was too great. The IMF has since cut back its requirements in both areas.
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  However, more dubious is the charge that interest rate increases designed to stabilize stricken currencies instead caused insolvency and instability - that capital flight should have been stopped with capital controls - and that the IMF emergency loans created moral hazard problems because of their use to pay off creditors.
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  There is just no way to determine the feasibility of alternative strategies. Economics is not a laboratory science.

  "When a crisis of confidence of this magnitude occurs, especially one that destroys domestic confidence, as was the case in Indonesia, there are no painless escapes. The big mistakes were made by almost everybody involved before the crisis hit. After the crisis started, all options were difficult."

  Studies now show that interest rate increases were NOT the cause of output collapses. In Indonesia, they were actually not implemented, and remained negative in real inflation-adjusted terms. In S. Korea, it was a contraction of credit flows from an insolvent banking system that did the damage. Nor is it certain whether defaults on indebtedness to foreign banks would have been less burdensome than using IMF loans to pay them off at taxpayer expense - the subject of the paragraph, below.

The decision to use IMF funds to prevent defaults on bank loans was a political decision of the governments of the afflicted nations, not an IMF decision. In the long run, such decisions may well prove to be correct.

• IMF interventions create "moral hazard" that induces imprudent lending practices.

  These crises inevitably inflict considerable pain even with IMF interventions. Portfolio equity and bond investors took big hits, and all the involved governments except in Malaysia fell as a result of the crises. These crises readily cost afflicted nations well over 10% of GDP.
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  Nor is it in the interest of developing nations to default on bank loans and thus face higher interest rates for subsequent borrowing. (Access to financing is always essential for the export trade which is relied upon to get stricken states out of their crisis situations.) The decision to use IMF funds to prevent defaults on bank loans was a political decision of the governments of the afflicted nations, not an IMF decision. In the long run, such decisions may well prove to be correct.
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  Moral hazard exists because of government guarantees, Wolf points out, not because of IMF policies and practices.

• The IMF is an instrument of G7 - and particularly of U.S. - policy.

  This is obviously true. It is also inevitably true that he who pays the piper will call the tune.
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Reform of globalization policies:

Managed floating exchange rates combined with monetary policies targeted at price inflation have largely replaced fixed and adjustable-peg exchange rate policies.

Financial market fragility will always remain as long as they are afflicted with "uncertainty, asymmetric information, adverse selection and inability of principals to control their agents." Banking systems will always bear the risks of intermediation between short term lenders and long term borrowers

  Reforms needed to prevent or mitigate future crises are now being encouraged by the IMF and World Bank. These include improved transparency in government financial accounts, and higher regulatory standards for government and commercial financial systems. The IMF staff now publishes evaluations of individual economic systems.
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  Managed floating exchange rates combined with monetary policies targeted at price inflation have largely replaced fixed and adjustable-peg exchange rate policies.

  This new policy mix eliminates the risk of sudden monetary collapse but at the cost of an increase in short term currency risk. It is NOT capable of fending off the development of the currency weakness, an increasingly virulent business cycle, and the stagflation that must arise as a result of Keynesian monetary expansion and budgetary deficit policies - something that will come as a shock to both modern Keynesian economists and the political officials responsible for such economic policies.

  However, financial market fragility will always remain as long as they are afflicted with "uncertainty, asymmetric information, adverse selection and inability of principals to control their agents." Banking systems will always bear the risks of intermediation between short term lenders and long term borrowers. Sound banking regulation and adequate capital requirements are essential for prevention and mitigation of financial crises.
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  A multiplicity of sovereignties "of very different quality and perceived trustworthiness" creates widely divergent currency risks, conditions for international capital flows, and inevitable problems for contract enforcement and management of insolvencies. The normal rule is that, "no borrower can have a higher credit rating than its government."
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  Crisis intervention policies have been reformed to vary according to the various degrees of crisis seriousness. However, there are generally unique aspects imbedded in the familiar characteristics of each crisis. How effectively these policy changes will be implemented remains to be seen. Wolf relates some of the difficulties of implementation in the essentially lawless international arena.
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  Indubitably, many of these difficulties can be materially reduced by less reliance on debt capital and more encouragement of equity capital. Instead of discouraging equity investments, developing nations should encourage them - in particular, inward direct investments. "Factories do not walk."

  Equity - ownership - capital is far more flexible and resilient than debt capital, and provides the foundation upon which debt capital depends for stability. See, "Capital as Purchasing Power."

  Wolf cogently explains the obvious impracticality of the "Tobin Tax" on currency transactions, and offers some suggestions for prospectively avoiding the "odious debt" problem bequeathed by "illegitimate regimes."

  The procedural suggestions for avoiding "odious debt" are probably impractical. They would probably be used to cut off funds to small beleaguered states like Taiwan and Israel, rather than well connected despots like Saddam Hussein.
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  Wolf concludes that the world can't afford such crises. It had better get used to them. As long as a complex world is managed by flawed human beings, periodic economic and financial crises of one kind or another are inevitable. The business cycle cannot be "obsoleted."

Rather than expanding the role of the WTO, Wolf warns that it has already strayed too far from its core purposes.

  Wolf does accept some reforms advocated by the critics. These include:

• Permission for infant industry promotion - but not necessarily protection - in developing countries.
• Rich nation acceptance of imports of poor nation exports.
• Practical consideration of the risks of liberalized financial systems.
• Awareness that global institutions can be subject to capture by special interests.
• International regimes to deal with global environmental problems.
• "The need to set the argument for international economic integration together with those for sound public finances, macroeconomic stability, financial stability, adequate investment in education, health and infrastructure, encouragement for innovation and, above all, the rule of law."

  Other complaints are rejected as "hysterical nonsense."

  "Transnational companies do not rule the  world. Neither the WTO nor the IMF can force countries to do what they would prefer not to do. Crises do not afflict sound financial systems. Global economic integration does not render states helpless. Nor has it created unprecedented poverty and inequality."

  Wolf offers "Ten Commandments" for globalization. The two most important stress (1) the importance of market directed capitalism as the "only arrangement capable of generating sustained increases in prosperity" and supporting stable democracies and individual liberty, and (2) the still essential role of the state as "the locus of political debate and legitimacy" and the source of the legitimacy and authority of "supranational institutions."
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  He stresses the growing need for international arrangements to deal with global issues, but warns they must be individually implemented and narrowly focused to remain effective. Rather than expanding the role of the WTO, he warns that it has already strayed too far from its core purposes.
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  He favors international organizations and arrangements that encompass fewer states. They should be restricted to the more substantial states rather than including every little state. This is needed for higher standards and increased effectiveness which become impossible if a host of minor states can block action.
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  He affirms the obvious advantages of capital market liberalization, but stresses the care needed to avoid financial crises. (Market directed global capitalism offers massive benefits, but markets are remorseless in punishing undisciplined and impractical policies and practices.)