Business

Saturday June 2, 2012

Free trade may not allay poverty

Review by ABBY WONG


Globalisation is only good if social, economic needs can be tended to at national level

Title: The Globalization Paradox: Democracy and the future of the world economy
Author: Dani Rodrik
Publisher: WWW Norton

EVEN economics has its own narratives. Many of them are complex, counter intuitive and at times indecipherable. Yet, there is one so simple and promising a fad that anyone questioning its validity will be forlorn and frowned on. This narrative makes individuals rich, and enriches a nation, provided, that is, it opens all its doors to globalisation, liberalises its trade, reduces tariffs, lifts barriers, embraces liberalised capitalism, and restricts government intervention. Sounds like a potent and viable path to economic growth as well as salvation. Don't you agree? Author of this book urges you not to.

A Harvard professor incredulous of glorified stories globalisation brings, Dani Rodrik criticises his fellow economists for their self-serving interpretation of economic narratives, which in turn have guided and shaped economic policies around the world.

According to him, proponents of globalisation rely too much on rigid textbook theories, while advocates of free market mechanism have been sheltering the ominous consequences resulted by over-the-top capital liberation.

“The profession has stopped thinking critically, and, as a consequence, makes poor quality arguments justifying their consensus,” writes Rodrik wryly. The path to endless global economic growth is littered with casualties and crises, and globalisation is no longer what it is cracked up to be.

If that is the case, why haven't then we stopped believing in this grand narrative, and realised that there is a hefty price to pay to liberate capital and globalise trade? It is because both capitalism and globalisation are the reigning fads of modern world into which both have undeniably created wealth. Rodrik is not fully convinced, and he explains why in this wonderful book in which history, finance, trade, economics, politics and sociology coalesce.

Rodrik starts by looking back. This current stage of frenzied globalisation and capitalism can be traced back to colonisation, Industrial Revolution, Gold standard era and Bretton Wood regime. Along all these is the emergence of institutions such as IMP, World Bank, WTO with well-intended objectives but rendered ineffective due to their unflinching faiths in globalisation and free capital mobility.

What economists will not tell us is that if we are low skilled, less educated, and immobile, liberalised international trade is bad news for us. The more open an economy is to international trade, the less control policy makers have in promoting enterprises, safeguarding domestic interests, taming instability and curtailing risks. Inability of governments to respond to domestic grievances will result in cost far exceeding benefits of globalisation. Ask a factory worker; he or she will tell you the truth.

Likewise, economic crises created by liberalised capital market abounded. The most severe ones were the “Tequila Crisis” in Mexico (1994), the Asian Financial Crisis in 1997, which spilled over to Russia (1998), Brazil (1999), Argentina (2000) Turkey (2001), and eventually the subprime crisis (2008). Yet, as IMF continues to goad countries to remove domestic impediments on international finance, and the US pushes its trade partners to renounce capital controls, the world thrives and the freedom to trade and loan is as important as our religious faith. Global financial market follies multiplies, and most believed, and still do, that market failures are non-existent unless proven so.

Rodrik does have faith in the power of globalisation to lift millions out of poverty and create widespread good; it is hyper-globalisation that he is weary of. Globalisation is good only if it allows plenty of space for governments to respond to social and economic needs at home. That in fact was the Bretton Woods model where international economic policy is subservient to domestic policy objectives.

Globalisation paradox exists, hence, between the crack of reality and idealism. Ideally, it should bring proper economic benefits across a wider spectrum of population with international rules put in place to protect all players, while still allowing policy makers manoeuvrability. In reality, however, the true powers of globalisation is said to be harnessed only when there is a complete free flow of capital with very minimal government interference.

Anyone who disagrees must look at India and China in their synergistic take on globalisation. Both countries have prospered by resisting conventional advice in opening their economies, and by being selective in which part of the deal they took up. They lend money rather borrow, and pursued mixed economic strategies with strong state intervention and regulation with clearly defined goals for their own societies. Latin American countries, on the other hand, have not had such policies and have been terribly trodden by globalisation.

Cogent and well-written, this book can be an addendum to Adam Smith's The Wealth of Nations as well as Ayn Ryan's infamous Atlas Shrugged. It may not be an ideal proposal to an imperfect world, but its worthiness lies in Rodrik's ability to bring to light a truth easily overlooked amid hype and craze free trade does not necessarily lift all boats out of the sea of poverty. Rodrik's simple prose makes a complex issue digestible, and his voice is robust albeit the occasional lonesomeness. He speaks against a flawed narrative, and against his brethren who cheers the world on to hyper-globalisation.

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