Cover detail from IMF Finance & Development journal
IMF in radical challenge to “accepted truths” on globalization
The IMF has published a new feature on globalisation. It promotes a radical debate, with contributions from leading economists and public figures – not least TUC General Secretary Frances O’Grady – and no-one defends the status quo.
This blog summaries the contributions, with a few observations of my own.
Globalisation as a natural process?
Most see globalisation as a natural – and so inevitable – process. Alan Blinder (Professor of Economics) provocatively asks:
Are you for or against globalization? It’s a silly question, really, rather like asking whether you favor or oppose the daily sunrise. It will happen anyway.
All contributors now recognise that we need some protection against “the downsides like poison ivy and sunburn” (as Blinder continues).
Sebastian Mallaby (Senior Fellow for International Economics at the Council on Foreign Relations) presents the process of both trade and financial integration as not only natural but also self-correcting. So, on finance: flows of international capital may have collapsed, but they were excessive before the collapse. And this is a good thing.
… there has there has been a reappraisal of the case for cross-border finance. For one thing, some of its theoretical advantages appear to be just that: theoretical. … The textbook case for financial globalization exists mostly in textbooks.
In contrast trade is understood as more unambiguously beneficial, and furthermore any recent reduction mainly down to statistical factors (not least the strong dollar and weak commodity prices). For Mallaby “because trade is so beneficial, the current backlash against it is damaging”.
Impacts on income distribution
Paul Krugman is more sanguine. He argues that the gains from free trade can be exaggerated; only ‘extreme protectionism’ genuinely threatens prosperity. He stresses the negative effects of free trade on income distribution:
Trade can have strong effects on income distribution within nations, creating losers as well as winners.
Krugman sees ‘globalization’ (understood solely in terms of trade) proceeding ‘remarkably smoothly’ from the 1940s into the 1980s, but then a very different story since the 1990s:
… we’ve seen a huge surge in North-South trade, that is, trade between countries at very different levels of development, with very large differences in wages. This trade still expands real income on both sides, but it has produced much bigger effects on industry employment and, probably, the distribution of income between labor and capital than the trade growth from 1950 to 1980. Chinese exports really have displaced millions of U.S. manufacturing jobs; imports from developing economies are an important reason, although not the only reason, for stagnating or declining wages for less-educated workers.
While accepting big gains for the “third-world middle class” (the idea associated with Branko Milanović’s so-called elephant), he finds that cold comfort for first world workers “who find their lives getting harder, not easier”. Overall he concludes:
But if we can avoid that kind of plunge [into a global trade war], the best attitude might well be to treat globalization as a more or less finished project, and turn down the volume on the whole subject.
Maurice Obstfeld (IMF chief economist) is more deferential to the “fundamental insights” on free trade. But again he details adverse distributional outcomes, which are seen as a result of technology and skill premiums. Under these processes certain people are best placed to take advantage of technological change and so move increasingly ahead in terms of wages. Workers therefore need protection:
Policies that help people adjust include educational investments to create a nimble workforce, expenditure on needed infrastructure, investment in health, improved availability of housing, lowered barriers to entry for new businesses, and well-functioning financial markets. Such policies have the added benefit of also supporting growth.
David Lipton (IMF First Deputy Managing Director) re-iterates this conclusion, warning that the situation today is a “unique challenge for policymakers”:
Responding to today’s challenges ultimately boils down to the right policies. We must focus first on stronger growth: a larger slice of the pie for everyone calls for a bigger pie. Second, more inclusive economic growth demands policies that address the needs of those who lose out from a financial crisis or technological change or globalization.
The symposium also includes a number of case studies, showing not only the hardship but also the resilience of workers in countries across the world. Kumi Naidoo (Launch Director of Africans Rising, formerly head of Greenpeace and CIVICUS) offers a frank and sobering account of globalization from the African perspective:
In Africa today, it is a tale of foreign interests undermining domestic control… So our globalization is a story of very few winners and billions of losers; of unequal partners, inequality, and suppressed development; and of continued exploitation and exclusion. The rules are not working for us; they never have. But African governments don’t dare question the system for fear of gambling away the financial well-being of their economies.
The role of finance
For me the most valuable contributions are those that go beyond the natural evolution hypotheses and emphasise in particular the role of finance as distinct from trade. Harold James (IMF/Princeton historian) takes a longer view, including on the relations between globalisation and financial crisis. He observes that more capital flowed around the world under the C19 gold standard than in the two decades after WWII, but the former (more globalised) period was more prone to financial crises. His fundamental point is that
…the volatility or breakdown of finance prompts discussion about the operation of the international system and greater sensitivity to the power dynamics of the global stage.
James focuses in particular on institutional change after a financial crisis in 1907, motivated in particular by Max and Paul Warburg:
The two Warburg banking brothers on both sides of the Atlantic energetically pushed for German-American institutions that would offer an alternative to the British industrial and financial monopoly
And now in turn he sees challenges to US hegemony over the past century:
It is hardly surprising that the targets of this intense financial diplomacy look around for alternatives to the dollar and the international financial system. As an immediate response to the financial crisis, Russian President Vladimir Putin, speaking in Sochi in September 2008, conspicuously revived French critiques from the 1960s of the exorbitant privilege of the U.S. dollar — that because of its status as the global reserve currency it is not subject to the same market constraints as other currencies.
Whilst US dominance may have been a constant in the century from 1907 to 2007, the trajectory was far from a continuous natural evolution. The world order of the Warburgs and other financial institutions collapsed into the great depression, and after the WWII a very different model emerged.
Frances O’Grady sees the IMF debates as a way to a renewed global model serving the interests of working people rather than capital:
The welcome re-examination of capital account liberalization and fiscal consolidation has brought into focus the question of how global finance can better support the productive economy, and the desirability of an international approach that allows space for governments to pursue this within their own country. Many have seen the reforms of the Bretton Woods era after World War II as aiming at that goal, during a period when working people saw significant gains in their living standards. The trade unions played an active role in developing that consensus; our aim is to once again play a role in developing a globalization that works for working people.
My personal view is that the trajectory of the post-war economy should be understood primarily on the basis of the approach to finance, with trade as symptom not a cause. I take my cue from J. M. Keynes:
… if nations can learn to provide themselves with full employment by their domestic policy … there need be no important economic forces calculated to set the interest of one country against that of its neighbours. There would still be room for the international division of labour and for international lending in appropriate conditions. But there would no longer be a pressing motive why one country need force its wares on another or repulse the offerings of its neighbour … International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful, will merely shift the problem of unemployment to the neighbour which is worsted in the struggle, but a willing and unimpeded exchange of goods and services in conditions of mutual advantage. (General Theory, Chapter 24)
The Bretton Woods system permitted countries to pursue an expansionary agenda, based on monetary and fiscal policies aimed at strong domestic demand. Trade did indeed flourish in conditions of mutual advantage. Financial globalization then harked back to the system of the Warburgs. Domestic demand and production were neglected, and nations were forced once more to over-rely on international trade. In international markets for labour and products, conditions have often resembled a race to the bottom.
But the fault is not primarily with product and labour markets: it is with finance.