Sunday, November 2, 2008

Globalization and next best solutions

Harvard developement economist and blogger Dani Rodrik recently posted a brief review of a book by anti-globalization (or alter-globalization, the term that they now prefer) activists Robin Broad and John Cavanagh. Rodrik, as you'd expect from a top economist, is highly critical of the book, "Development Redefined":

As one might expect, the book takes swipes at the usual suspects: the Washington Consensus, the IFIs, the MNCs, Tom Friedman, and Jeff Sachs. Against the growth-focused and globalization-centered views of these institutions and commentators, Robin and John argue for a localized, community-based, self-sufficient model of development. What many others would celebrate as real development (for example the spread of commercial farming for export in the Philippines) they see as the destruction of local communities. They write: "We stand at a moment marking the end of what may well be the most destructive development era of modern history."

Can we be talking about the same era during which, according to World Bank calculations, the number of people in extreme poverty fell (in absolute terms!) by 400 million people? Broad and Cavanagh don't pay much attention to such figures because they seem to have a somewhat romantic view of the lives of rural poor, who apparently have a relatively decent quality of life until market forces in the form of international trade and MNCs encroach upon them.

Broad and Cavanagh responded to Rodrik's criticism in an essay that he posted on his blog. They conclude claiming, "...time and time again, the critics [of globalization] have been right. Witness the food crisis, the climate change crisis, the financial crisis, as well, of course, as the development crisis." I'd like to now respond to this:

"the food crisis" is nothing compared to the hunger before globalization. Compare hunger in China today to hunger in China before the era of globalization.

"the climate change crisis" – This is essentially due to reasons other than globalization, and certainly is possible to combat without getting rid of globalization. It's like saying that modern technology is the cause of climate change, so everyone should go back to living like cavemen. It would solve global warming, but it would cause mass starvation, and for the tiny percentage of the world that survived, it would make life harsh, miserable, and short, with an average lifespan of about 30 years. Economists would call discarding all technology a "next best solution" to the problem of global warming. It would solve global warming, but there are other ways to solve this problem at less cost, in this case at immensely less cost.

Global warming can easily be combatted effectively without getting rid of globalization, and in fact, because of the efficiencies and wealth creation of globalization, science and technology advance substantially faster, speeding up solutions, from safe nuclear, to solar, to exotic heat deflection and genetically engineered carbon eating algae. These solutions are also made cheaper by globalization, and therefore more widely adopted. The costs of solar, wind, and nuclear power, for example, are highly dependent on scale, and a global scale is far bigger than any local scale.

"the financial crisis" – again, not really due to globalization, and it's certainly possible to solve this and prevent future incidents without decreasing globalization. Transparency laws, good regulation, and smart central bank strategy would do it, and they're a far better solution than getting rid of, decreasing, or not increasing globalization. Diminishing globalization is again a next best solution.

"the development crisis" – My first thought when hearing this was that Broad's and Cavanagh meant the crisis from lack of development. My thoughts run this way because I care a lot more about people than rocks, trees, and butterfly eggs. I'm funny that way. The lack of development crisis has been tremendously decreased by globalization -- India and China are such large and amazing examples it would be hard to believe they could think otherwise. If, however, they meant environmental issues by "the development crisis", stopping globalization might help the environment – maybe – in the short run, but it's been overwhelmingly shown that the wealthier a country gets, after the point of basic industrialization, the cleaner it gets.

Environmental cleanliness is a luxury good. The wealthier people get, the more they're willing to spend on it, and globalization has been shown over the long run to be by far more effective than anything else in making poor countries wealthier – China, India, South Korea, Taiwan, etc., etc.

In general, free trade is extremely good for poorer countries over the long run, but it's very true that it depends greatly on the accompanying programs, laws, and governance, for example to make sure that the benefits are widespread and any negative effects are minimized. Nonetheless, as Nobel Prize winning economist Paul Krugman, a staunch liberal, wrote of Globalization in a 1997 Slate article:

These improvements have not taken place because well-meaning people in the West have done anything to help--foreign aid, never large, has lately shrunk to virtually nothing. Nor is it the result of the benign policies of national governments, which are as callous and corrupt as ever. It is the indirect and unintended result of the actions of soulless multinationals and rapacious local entrepreneurs, whose only concern was to take advantage of the profit opportunities offered by cheap labor. It is not an edifying spectacle; but no matter how base the motives of those involved, the result has been to move hundreds of millions of people from abject poverty...

It should also be noted that a lot of the non-free trade things added to free trade agreements are bad, like increased enforcement of drug patents for very poor countries, but the free trade part itself has been a crucial factor in lifting hundreds of millions out of the most extreme poverty. We just need to improve the side agreements, and make these agreements freer in the things that can really help the poor, like by dropping first world agriculture tariffs and subsidies.