Transcript

Steven Pearlstein

Jeff is the Stanfield Professor of International Peace at Harvard's Department of Government, and his previous book, "Debt, Development, and Democracy: Modern Political Economy and Latin America, 1965-1985," I have not read that book, but I have read this one, or most of it, and I can safely say that this one will outsell the previous one, Jeff.

MR. FRIEDEN: I hope so.
[Laughter.]

MR. PEARLSTEIN: Our discussant is Harold James who is a distinguished historian who has written pretty much on the same topic. His earlier book is "The End of Globalization: Lessons from the Great Depression," published in 2001. He holds a joint appointment at Princeton, at the Woodrow Wilson School, and its Department of History.

If she is able to get through on the Metro, we will also hear from Virginia Haufler, who specializes in international political economic, particularly the role of the private sector in world politics. Her most recently book is, "Public Role for the Private Sector: Industry Self-Regulation in a Global Economy," and she is an Associate Professor at the University of Maryland, in its Department of Government and Politics.

We will start with Jeff who will speak for about a half an hour. And the IMF being a soccer crazy institution, I will hold up a yellow card to indicate to the speaker that 5 minutes are left, and a red card that it is time to end.

Jeffry Frieden's remarks

MR. FRIEDEN: Thank you, Steve. It is a great pleasure to be here. I thank you all for coming, and I thank the Fund for inviting me and for organizing this event. I am fine with the time limit. I worry about the soccer cards, being a baseball fanatic myself, so if they do not work and I lose track of what a yellow card means, just throw things at me.

Jeffry Frieden

We are all familiar with globalization today, we are familiar with the extent to which international markets are integrated, markets for capital, markets for goods, to a lesser extent, markets for labor. There is a very widespread sense, although there are some concerns about the future, that the current level of international economic integration is a natural and normal state of affairs, that the world economy as it is currently organized and is likely to be organized for the foreseeable future, will in some sense go on forever.

That we have been here before is one of the messages of the book that we are here to discuss. For the decades, even generations, before 1914, the world was extraordinarily integrated in economic terms. As today, there were extremely high levels of movements of goods, movements of capital, information flows, transportation revolutions, and in a way that is quite different from today, there were extraordinarily large movements of people. In the years before 1914, there were many years, indeed decades, in which approximately half and even more of total British investment went overseas. There were many countries in the developing world in which foreign investment accounted for approximately half of total investment.

Approximately half of the population of Argentina 100 years ago was foreign born. The extent of immigration in the U.S. relative to the local population was about three times what it is today. The world economic was tightly integrated, in some sense on some accounts, even more tightly integrated than it is today. There was, of course, a gold standard that tied virtually every country in the world together in a common monetary order. By the decade or so before 1914, there were really only two countries of any economic significance that were not on gold, China and Russia. Almost everyone else was on a common monetary standard which had evolved over the previous 40 or 50 years, and which, again, most observers believed to the normal and natural course of events, and likely to continue for the foreseeable future.

Like today, there were, of course, tensions. People in industrialized countries, in the rich countries, noted a flood of cheap products that came in from rapidly developing countries in other parts of the world and threatened the livelihoods of many in the rich countries. In those days, the flood of cheap products was largely of farm products coming in from the pampas and the prairies of Argentina, Southern Brazil, the United States, Canada and Australia, and the people in rich countries whose livelihoods were threatened by this flood of cheap products were European farmers. But the threat was no less real for having a different origin than today. There was near starvation conditions in many parts of Europe, parts of Southern Italy, Scandinavia and other parts of Central Europe, and great fears about the impact of foreign competition on the struggling farm sector.

Like today, there were in many quarters concerns about a loss of national identity, there was what we would today I suppose call ethnic conflict and antiglobalization sentiment, so there were tensions and there were problems. The international economy in the decades before 1914 was not without its flaws and not without its tensions. Nonetheless, in the broad sweep of modern history, I think we say with some confidence that it was a system that worked. The world economy was integrated for many decades, even generations, economies grew, poor economies became richer, middle-income economies became rich, there was a striking degree of convergence of poor countries upon the rich countries, there was a great degree of macroeconomic and broader economic stability. The integrated international economic order of the generations before 1914 appeared to work remarkably well, and those who inhabited it could be forgiven for thinking that it was likely to go on forever. Yet, it all fell apart in the space of a few weeks in 1914.

After World War I ended, economic and political leaders set about trying to restore this successful international economic order, and most of them believed that all that had happened was a shock, a military shock, a severe one, that needed to be put behind and overcome. So in the aftermath of World War I, there was a flurry of very intense efforts to restore the pre-1914 classical international economic order.

Many of the attempts to do so involved things that could be regarded as precursors to the IMF-World Bank system, the League of Nations Economic and Financial Committee, the Bank for International Settlements, central bank cooperation. These were major efforts, they were serious efforts. They went on for years. There were conferences, there were treaties, there were changes in policies. But despite the optimism with which economic and political leaders confronted the period after World War I, nothing worked. The classical economic order that had persisted for generations could not be put back together.

The 20th century turned out to be largely an extended debate, ideological, intellectual, economic, political, even military, over what had gone wrong, and whether and how to fix it. I want to take some time so that we can ask ourselves what the problem was in the inter-war period, why was it that it appeared to be so difficult, and in fact in the event impossible, to restore and international economic order that had worked so well and that seemed to be the result of so much consensus among the world's leading industrial and military powers.

It was not for lack of technological advance, it was not for lack of innovative or inventive activity, because the 20 years after World War I saw some of the most remarkable progress in modern industrial and other technologies that the world had even seen, the automobile, the airplane, consumer durables like the refrigerator and the washing machine, long-distance telephony. In an globalization sense, the rise of the modern corporation and the rise of the modern multinational corporation all date to this period. In some sense, modern mass-production and modern mass-consumption were developed in these ill-fated inter-war years.

Also, there was innovative activity that had a long-term effect on people's livelihoods, the invention of sliced bread in 1928 which then became a benchmark for all future intentions.
[Laughter.]

And at a trivial but none-the-less important level, the invention of the zipper in 1923. So there was tremendous innovative activity in this period, and it was not for lack of technological change and technological progress that the international economy did not move forward. It wasn't even for lack of economic growth, because the 1920s were actually a period of quite rapid economic growth in the industrial countries and in most developing countries. International lending revived, international trade revived to levels higher than that before 1914 for a few years, so much so that the 1920s got names in many countries, the Roaring Twenties or the Jazz Age, the Baldwin Age, the Dance of the Millions in Latin America. It was not for lack of economic growth, it was not for lack of technological progress.

The core problem, I submit, of the inter-war period was political. The were, of course, international political problems. Those were obvious. The fact that two of the pillars of the pre-1914 classical order, France and Germany, which had cooperated and collaborated in economic affairs before, were now continuing World War I by economic means, was no help. The fact that the United States, by far the largest and most powerful economy in the world after 1918, withdrew from international political affairs into isolationism was also no help. So at the international political level there were clear problems that impeded the restoration of the classical international economic order. But the core problems were that domestic political and economic bases of the classical era were gone.

Remember, the foundation stone of the classical international economy, the gold standard era of the decades before 1914, was that in almost every country that participated, there was a consensus among those who mattered on the priority of international economic commitments, on the priority given to integration into the world economy. If a nation's integration into the world economy required adjustment under the gold standard, that adjustment was undertaken, and governments saw as their principal task facilitating the adjustment of the local economy to its international economic position or international economic needs.

Prices and wages were very flexible, and so this adjustment took place. It could be very costly; there were many episodes in the 50 or 60 years before 1914 in which in consequence of a national crisis, prices were pushed down 30, 40, or 50 percent, as in fact they were in the United States at times in this period. So international economic necessities were associated with a government commitment to restructure national economies in line with international economic commitments.

Andrew Mellon who was Treasury Secretary of the U.S. described what was needed in circumstances such as those of a panic or crisis. "We need," he said, "to liquidate labor. Liquidate stocks. Liquidate the farmers. Liquidate real estate. Purge the rotteness out of the system." And that was the attitude of most governments most of the time, that maintaining international economic ties could require sacrifice, it could be difficult in the short-run, but the long-run benefits far outweighed any short-run costs.

Why did this political and economic formula that had succeeded for so many generations not work? I think because by the 1920s it was no longer feasible economically or politically. There were economic trends that affected it. Between the latter part of the 19th century and the inter-war years, modern industrial economies shifted gradually and then with increasing speed away from an era of family firms, small firms and small farms, in highly competitive markets with disorganized and atomistic labor markets, to economies dominated by large, modern corporations and large well-organized labor unions.

In short, labor markets and goods markets were no longer as competitive as they had been. Wages and prices were not so flexible as they had been. While disorganized labor could not resist attempts to push wages down to deal with international adjustment problems, organized labor could. And while very small firms in competitive markets could not resist downward pressure on their prices, large, modern, oligopolistic corporations could. So on the purely economic front, wages and prices were not flexible as they had been before World War I.

Perhaps even more important, there had been a striking political change in the modern industrial economies. Labor unions were now almost universal -- almost every industrial country recognized labor unions -- and so, too, were powerful labor and socialist parties. Business and farmers were organized. In some cases, democracy had grown out of the ashes of previous authoritarian regimes, countries that had been democratic before World War I were far more democratic after it. The franchise was extended, labor was better organized, parties were more representative, and those many countries that had been authoritarian before World War I were largely democratic. So given the political changes between the late 19th and early 20th centuries on the one hand, and the 1920s, the demand for social policies to deal with the effects of economic dislocation could not be ignored.

Governments could not simply wait for wages, prices, and profits to adjust downward to right an economy in crisis. Keynes pointed out in the early 1920s that in his view, it had become exceedingly dangerous to apply the principles of an economics worked out on the hypothesis of laissez-faire and free competition, to a modern society which appeared to be rapidly abandoning these hypotheses.

In addition to these underlying trends, there was also a continuation of the stress that I referred to before, this international competitive pressure on the industrial economies. Remember the flood of products? It was easy to ignore the complaints of European farmers in the 30, 40, to 50 years before 1914. To a large extent they were ignored, and to a large extent they went away. They went away by immigrating, 50 million Europeans immigrated in the decades before 1914. Some of them moved from their own countrysides to their own cities. But European farmers did not have the political weight or political expression that they had gained by the 1920s, and the same thing was true with European small business. And it is no coincidence, I think, that as democracy was extended in the industrial countries of Central, Southern, Eastern, and even Western Europe, the principal bases of support of fascist movements came precisely from the farm communities and small businesses who felt, in some cases rightly, that they had been harmed by the international economy and wanted to be protected from it, who had not been represented before and now were represented by the Nazis and the fascists.

In some sense, the first era of globalization worked because governments were willing to undertake and able to undertake the sacrifices and commitments necessary to carry out economic adjustments. Those adjustments were economically and politically feasible. And that first era of globalization could not be rebuilt because economic and political conditions had changed to make it effectively impossible to carry out these adjustments. So neither the economic nor the political realities were such as to allow governments to force the adjustments that a return to the classical economy would have required.

In this situation, alternatives came forward. The alternatives took seriously in some sense the organization of the classical gold standard style economy. The classical economy had been organized around the principle that global integration was paramount, and things like social reform, national building, or nationalism were secondary in importance, if important at all, that what mattered first and foremost was maintaining global economic integration.

The alternatives that emerged in the inter-war period agreed with this. Some said, you are right, global economic integration is inconsistent with social reform, and we choose social reform. And the Soviets cut themselves off from the rest of the world and undertook massive social change, if you want to call it reform, in the Soviet Union. And others said, you are right, global economic integration is consistent with national building and nationalism, and we will jettison global economic integration and embark on a course of economic nationalism, as did the Nazis in Germany, and fascists throughout Southern, Central and Eastern Europe, and the Japanese, and many in the developing world as well. These were the dominant alternatives offered in the 1930s, all based on direct opposition to the classical view.

The vantage point of the late 1930s was not an enthusiastic or an optimistic one from the standpoint of today. Looking around the world, what you saw was an ever-increasing march of countries committed to economic nationalism, to autarchy, to self-sufficiency, and increasingly hostile to any attempts to build an integrated global economy.

There was another alternative which formed very gradually and haltingly over the course of the 1930s, and that is the rise of what I would call social democracy, and not to give it any partisan connotation, but just to indicate that it arose in democratic societies and was associated with a strong commitment to social policies. It was only powerful, certainly not predominant, but powerful, in a fringe of Western European countries, Great Britain, Canada, North America, Australia and New Zealand, but it did by the late 1930s seem to have captured something inherent in how modern capitalist economies had evolved. It was based on an acceptance of the principal actors in a modern industrial society being big business and big labor, and it was based on an acceptance of democratic political institutions.

It was further based on what might be called class compromise, on the notion that labor and capital could work out an agreement on what mattered to them most, that business could obtain from labor a commitment to a market society and a market economy, while labor could obtain from business a commitment to social insurance and social policies to cushion the effects of domestic and international markets. I don't think anyone could have foreseen the extent to which social democratic and the welfare states grew after World War II from the vantage point of 1936, 1937, or 1938, but whether in New Deal America or in socialist Sweden, it seemed that there were continual stirrings in the industrial democracies towards this form of compromise, towards this form of squaring the circle between market and social policies.

That, in fact, turned out to be in some sense the basis of the Bretton Woods system. The domestic compromises worked out in the 1930s were very similar to and closely related to the kinds of compromises devised by Keynes, White and others, as the Bretton Woods system was designed. Unlike the classical gold standard era with its clear international commitment above all, or the ill-fated inter-war experiments with their clear rejection of international economic integration, the post-war system had a character similar to that of social democracy domestically and was one of compromise: compromise between economic integration and social welfare policies, compromise between an integrated global international economy and a maintenance of the ability of national governments to pursue their own autonomous macroeconomic policies.

Compromises at every step of the way. The international monetary order is a good example. It was a modified gold standard which maintained some of the stability of the gold standard, but added a great deal of flexibility. One of the people who became one of the architects of the Bretton Woods monetary order, said early on in the mid-1930s, looking at the disarray that then prevailed, that what we need is a union of what was best in the old gold standard, corrected on the basis of our experience to date, and what seems practical in some of the contemporary doctrines of managed currencies, and in the international monetary realm, that was the kind of compromise that was worked out.

In international trade, liberalization was undertaken, but it was gradual, it was partial, it did not include agriculture and services, it allowed for regional agreements. On issue after issue, the Bretton Woods system, which was committed to international economic integration, permitted also the kinds of compromises that overcame the political resistances of the inter-war era years, and this compromise was successful. International economic integration advanced, social programs advanced, and the world, at least the industrialized world, experienced its most rapid, most stable growth in history.

I will gloss over that, because success is always a lot less exciting than failure, to point out that after 25 years of extraordinary success, problems began to arise, and perhaps Bretton Woods was in some sense too successful. The compromises allowed for a gradual increase in economic integration, and as that economic integration increased, it made some of those compromises increasingly difficult to manage, increasingly unworkable.

On the monetary front, we are all familiar, I think, with how the extraordinary success of the Bretton Woods monetary order gradually led to increased integration of financial markets, and as global finance was reborn in the 1960s and into the early 1970s, it became more and more difficult to sustain the fixed-rate system that was Bretton Woods. So to a certain extent, the compromises that we associate with Bretton Woods were successful enough that they undermined the compromises themselves.

The successful system broke down starting with the international monetary order, of course, and soon all of its components seemed to be under threat. There was a resurgence of trade protection, and for the first time since 1930, major protectionist trade bills worked their way through the U.S. Congress and almost achieved passage. There was an increase in nontariff barriers. There was a collapse in the early 1980s of international financial markets with the debt crisis, there was increased monetary and fiscal disorder, and by the early 1980s, I think it was not clear which way the world economy was going to move forward. There was continued controversy over whether the response to the breakdown of Bretton Woods, the collapse of this compromise, was better seen as pushing countries inward, either into themselves or into their regions, or outward into ever further international economic integration.

After 10 or 15 years of conflict and of controversy, I think the latter position emerged victorious, that is, that there were both arguments for and support for redoubling efforts in international economic integration, realized first in the advanced international countries, then, gradually but very strikingly, in the developing countries that over the course of a decade turned away from import substitution and economic nationalism, and towards globalization. And it emerged most strikingly of all, in the former centrally planned economies which by the late 1980s and early 1990s were clearly on the path to abandoning central planning, and integrating into the world economy. So by, say 10 or 12 years ago, I think it was clear that we were in another era of globalization, if you will.

But I think the underlying issues that constitute the core problems of the contemporary international political economy were not truly resolved, and they harken back to the problems of a century ago. As a hundred years ago, global economic integration provides enormous benefits, but it also imposes some very severe costs on people, on regions, on firms, on whole countries. The sorry experience of the inter-war years showed, I think, that one could ignore the discontent of those harmed by the international economy at the peril of sitting governments, that ignoring that discontent could quickly and stunningly lead to a reversal of fortune for those who benefited from it.

The first era of globalization had an economic order and a political order that did very well at reflecting, representing, and responding to the needs and desires of those who did well in the international economy, and that was fine before 1914, because these countries were not typically particularly democratic, and because those were the people that mattered. That political and economic order did not do well at reflecting, representing and responding to the needs and concerns of those who were harmed or felt they were harmed by the international economy. By the 1920s that was not all right, and that was at the core of the problems of the inter-war period.

Today I think, once again, the benefits of global integration are palpable and very widely enjoyed, but the costs, too, can be serious. Today, unlike a hundred years ago, representative democracy is the norm, and not just in the industrial countries, but in many, many developing countries, and that I think is a good thing.

It is not uncommon to point to the tensions in contemporary globalization, to point to movements that raise questions about contemporary globalization. I think the prevailing view is that the appropriate response to such questions is to rely upon persuasion. And here what is often invoked is another quote from Keynes, which is I think probably one of the few quotes from Keynes I disagree with. Keynes said, very famously, "The ideas of economists and political philosophers are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist."

In that context, there is a very widespread view that the way forward involves convincing people of the long-term benefits of globalization, of persuading them of how important the international economy is to national well-being, national security, to social cohesion, to peace. All those things are valuable and desirable, and I certainly would not want to be convincing anyone of the opposite, but I think the fact is that persuasion in this context will not work, because there are real, concrete, and accurately perceived interests at stake. They may be short-term interests, they may be interests that do not take into account the longer-term benefits if global economic integration, but they are, nonetheless, interests, and they are powerful and they are important.

In the aftermath of the previous era of globalization, there were many attempts to try to persuade people that the classical order should be restored, attempts to focus on persuasion. To ignore the costs, or not respond to them in a more forceful way, led to a terrible backlash, a backlash that was understandable if not justifiable, and certainly not wise.

Attempts by those who protested globalization to ignore its benefits led to terrible policies. So supporters of the classical order ignored the critics and the losers, if you will, in an attempt at simply to persuade them of the rightness of their course. And the critics ignored the value that had been gained by international economic integration in the generations before 1914. The alternatives to international economic integration were tried and found wanting.

But I think today there is far too little recognition that an integrated global economy is not a natural or normal state of affairs, it is a highly political, potentially highly controversial a choice, a choice made by governments, a choice made by political movements, a choice made by parties and people. Choices can be made, and choices can be unmade.

I have no panacea, certainly I cannot think of any, for dealing with the tensions that arise from international economic integration, but it seems clear to me that this is the world's central issue today. The core problem of the 20th century, I think, was whether and how to restore the international economic integration that had worked so well for generations before 1914. The core problem today will be, perhaps already is, how to build and sustain an international political and economic order, and domestic political and economic orders, that can do two things at once, that is, allow societies to reap the fruits of international integration, the integration of goods, capital, and labor markets, while maintaining the commitment to social cohesion and social insurance that is necessary to cement support for a globalized international economy.

I will leave you with that thought, and thank you very much for attending.
[Applause.]

MR. PEARLSTEIN: Things to think about certainly as we sit in the town that is considering an immigration bill, that is worrying about the facts that trade talks are dead, which they are; when yesterday people in France were demonstrating in the street, ostensibly about a new labor contract, but really about their view about Anglo-American, as they call it, capitalism, whether they like a different view or a different model. So they're all very relevant things to what we are thinking about here, and also relevant in the context of whether and how to reform international institutions that were really of an earlier era, of that compromise era that you described, and how they fit in if we are moving to a more globalized era again in the future.

For those of you who came in a little late, Harold James is an historian from Princeton, and we will start with him, impolitely. We should let the ladies go first, but we will go last in, last out. So why don't we do that, Harold?

Harold James's remarks

MR. JAMES: Thank you, Steve. It is a great pleasure to be here again and to see some old friends in the audience.

Audience at Frieden book forum

It is also very nice to talk about such an interesting book as the one that Jeff Frieden has just produced.

It seems to me that Jeff has done a wonderful job in presenting what I think is now almost the orthodoxy among analysts of the 20th century and its experience, that is, that there was a period of globalization, big integration, big labor flows, big capital flows, big flows of goods, before the First World War, so a kind of U-shaped pattern in which it all collapses either during the First World War or in the Great Depression. There is a brief episode which Jeff described very nicely at trying to restore this pre-war world in the 1920s, but that failed in the Great Depression, and we reached the bottom of the U in the 1930s with depression, war, violence, and collapse. And after 1945 it look a lot of effort to rebuild this, and we find ourselves in the second half of the 20th century and the beginning of the 21st century on the upward branch of another U.

The central message of the book, as I took it, was the one that Jeff just enunciated very eloquently, that globalization produces discontents, as Stiglitz said, taking the phrase from Freud's work "Civilization and its Discontents". These discontents need to be managed, and unless those discontents are managed adequately, the system is not sustainable.

I think that is very nice, but I have a big question about all this, that is, can governments actually do this? It seems to me that the answers that Jeff gives looking back historically are not altogether clear. We would like, I think, to know what exactly it is that governments should do to ward off the discontents of globalization. What should they do? Should they protect their industries? Should they try and seal off their frontiers, stop immigrants coming in, stop goods coming in, stop capital coming in? That was the story, really, of the 1930s, so that attempt at government regulation is the story of the collapse, actually, of globalization in the inter-war period.

Harold James

Second, should governments regulate more the form of enterprise, the form of business? That is, again, an answer that has been given by some people, and in a way I think it is suggested by the title of the book, that there is such a thing as global capitalism. If there is global capitalism with transnational corporations operating all over the world, doesn't that call out for some kind of regulation at a level that is not at the level of the nation-state, but at a bigger level?

In that regard, I would have liked it if in the book there had been more discussion over the differences between different types of economies and whether there really is a kind of one-size-fits-all measure of accountancy standards or financial regulation that can deal with this. We have very different types of corporations in Continental Europe and in Asia than in the United States or in the United Kingdom. Capitalism is actually in that sense, it seems to me, less global than Jeff suggested. And when he said, for instance, that the story of the 20th century is the story of the decline of family businesses, I am not sure that he is even right. Many very successful countries are dominated by family businesses -- half of the capital of the Stockholm Stock Exchange is controlled by one family alone -- and the role of family businesses in very dynamic economies, in India or China, is a very prominent one. These are not, actually, necessarily replications of the Anglo-American corporation. So that goes to the question of what sort of regulation is necessary.

Thirdly, and I think most obviously, because Jeff talked about Keynes and the legacy of Keynes, should governments faced with these discontents of globalization engage in big-scale, macroeconomic steering of the economy? There, the 1920s and the 1930s are actually a very interesting and a very salutary model. Jeff is actually quite divided in the book as to the lessons that you can learn from this, because at one point he tells us that the collapse of the German economy in the late 1920s and the early 1930s, one of the really terrible political events as well as economic events which led to the rise of the Nazi dictatorship, was avoidable. He says, "Even modest measures to stimulate the economy would have been enough to stop the Nazis' electoral advances." But then just a few pages on, he produces a kind of iron law, that "Every country," he says, "that was indebted in the 1920s went into dictatorship and went into the control of the national economy, and regulated and closed off the markets." "Every debtor country," he says, "went the way of fascist or nationalist or autarchy."

That, I think, raises exactly the central issue: when you are in this world, what are the political alternatives? Can you really find some way to escape from these terrible political pressures? I must say if I am asked as an expert on the inter-war period which of those two verdicts I agree with, I agree very much more with the second verdict than with the first verdict: there was a kind of inevitability about this collapse given the momentum and the pressures of that period. But that raises exactly the question then: what to do about it?

One area where I think we might -- particularly in this building -- want to reflect on: is it possible to produce different kinds of solutions at an international level, is there such a thing as an international pubic good, how do we provide these international public goods, are there ways of binding governments so that they will not do destructive things? Because part of the story of the Depression characteristically was that each government did things which were, they recognized at the time, second-best alternatives. Cumulatively they produced a big catastrophe, but could they have been prevented from taking these second-best alternatives by being steered because they had better knowledge. That's one answer that I think is out there, more knowledge about the state of the international economy and its interaction, more prevention of imminent crises. Again, it is told quite nicely in the book that the inter-war story is a story of financial crises in 1931 that cascaded out of control. You can see similar instances in the post-war period in which there were these threats -- in 1982 in the Latin American debt crisis for example - but they did not cascade out of control and we did not as a consequence have another Great Depression because of -- it is a nice thing to say here -- institutions such as the International Monetary Fund.

So I think there are solutions, but they are much more difficult than I think at first sight.

Let me turn to how the lessons of the book reflect on the debates that we have been having over the last few years. There is a widespread sense, I think, that globalization is in some kind of difficulty at the moment. There is a widespread sense that economic nationalism is increasing; `economic patriotism', as it is redenominated now in Europe, has become the subject of an enormous debate.

It seems to me that there are really two alternative ways of looking at the world that are around at any time. They were around before the First World War and the inter-war period as well, and they are around today. One version of that vision can be called globalization, and that involves the acceptance of an international order, of internationalism. If we ask what is meant by this concretely, we mean, I think, that we obey some sort of rules and that there are common rules and standards that we share across the international community. The gold standard is a very nice illustration of such a rule, and it was backed by legal order in which it was possible to settle disputes in courts in London before the First World War, or New York in the current era. Globalization depends on a vision of rules, and if we want to accept that world, we have to think that we live within the world of the rules and we take them as valid.

But there is a radically different version of the way in which we perceive the world, and that was very powerfully there before the First World War, and it has come back very powerfully. That sees the world not in terms of rules but in terms of arbitrariness and in terms of empires. The period before the First World War was, after all, the period of the great imperial races of Britain and France cutting up Africa; of Japan and Germany coming later and thinking that they had missed out on their colonial missions. In the world of empire, rules are not something that are not universally agreed, but rules are imposed by a hegemon to reflect the interests of that hegemon, and those who have those rules imposed on them do not feel that they are morally binding and do not feel that they are legitimate.

In the world after the Second World War, thinking about empires largely disappeared with the decolonization of the great European empires, but it has come back, I think, in the discussions of the 1990s, and particularly after 2000. I did a LexisNexis search -- using this mechanism for finding articles in all of the world's English-language newspapers -- for the references to `globalization', and not surprisingly, I think, each year during the 1980s and 1990s, there were more references to globalization than in the last year. But what is really surprising is that since 2000, there have been fewer references to globalization each year according to the data of LexisNexis. On the other hand, if you put `imperialism' or `empire' or anything like that in, you get a big increase in references since 2000. The world thinks more of empire now than it does in terms of global rules, and as it thinks of empire, it thinks that the global rules are arbitrary, do not need to be observed, and that there is nothing good, for instance, in these mechanisms for securing global goods on an international level.

These views, I think, are actually alternatives to each other that cannot be held at the same time, as it were. If you know those famous drawings of M. C. Escher, there are boxes that you can either see popping up at you, or going down into the page, but you cannot see them both at the same time. You either think that we live in a rule-based world, or that we live in a world in which rule is arbitrary, and it is great powers or it is the United States that makes the rules to its own advantage and does not care of the good of the rest of the world, and it seems to me that that is exactly the transition that we are in at the moment. That is one of the reasons that the book's coming out, I think, is timely. It is one of the reasons to be very worried, because the more people think in terms of this world of empires and imperialism, and the less people think of the world in terms of globalization, the more likely it is that they will reject the international public goods on offer, and the greater the likelihood that the world will become more and more dangerous. Thank you.
[Applause.]

MR. PEARLSTEIN: Thank you, Harold. Our next discussant is Virginia Haufler who is an international political economist at the University of Maryland, where she teaches government and politics. Virginia?

Virginia Haufler's remarks

MS. HAUFLER: First I would like to apologize to Jeff and the panelists and all of you for arriving late. There was some emergency at Union Station which, of course, makes you think of terrorist attacks immediately, and found myself stranded there with only 15 minutes to figure out how to get from there to here. I came close, but not quite.

I was very pleased to be invited to participate in this discussion today, and eager to accept. At least I was eager until I received the book in the mail, all 500 plus pages of it, and realized I had 10 days to read it, including 3 days of attending a conference in San Diego where this would be my pool-side reading.
[Laughter.]

MS. HAUFLER: However, as I said, I was eager to participate in this. I know Jeff, I admire his work, and I was not disappointed. This was not a painful task at all. This is an engaging read. I was particularly impressed by the fact that he was able to convey very big changes and evolutions over time, while providing a lot of rich detail about particular people, places, and issues. So, it is a very engaging read, and I highly recommend it.

Virginia Haufler

One of the things I really liked about this was that I got the invitation to do this literally within hours of participating in a discussion of Tom Friedman's new book, "The World Is Flat." Tom Friedman is a journalist very grounded in the present, very excited by what he sees about globalization. Jeff Frieden provides a nice corrective by giving us more historical grounding, and raises some cautionary notes about the future of globalization.

I should also say that one of the strengths of this book, and one that does not surprise me at all given Jeff Frieden's interests, is that it provides us with a truly global economic history. It included regions and states outside of the United States and Europe. There is a lot of rich detail about globalization and international economic integration from the standpoint of the perspective of many different areas in the world.

I should also say that, although the general public may not appreciated it, I really liked the use of statistics. He provides a lot of comparative statistics integrated into the text, not too many actual tables of statistics, but ones that really give you a feel for the starting point for many countries with regard to their opening up to the world economy. For instance, statistics that tell you that Africa was only 10 percent industrialized compared to other countries when it began integrating into the world economy, while the United States when it opened up was more like 50 percent rural and 50 percent industrialized. So it provides a lot of comparisons that really give you a feel for which countries start at a better place when entering the world economy.

When I was preparing my remarks, however, I did not prepare remarks on more the historical aspects of this book because we have a genuine historian on the panel. So what I wanted to focus on are the choices that in fact the panelists already have focused on to some degree.

The main take-away point for me, and I think all of you listening today, is that market integration needs to be embedded within society through mechanisms and policies that ensure that the losers from globalization are compensated, and that the concerns about the negative effects are addressed. Without that, I think there is a danger that globalization will be reversed. And of course, we already had the comment about riots and strikes in France. We could also look to the recent elections in Latin America where representatives of the poor and dispossessed are gaining power. We can look at the Middle East and the anti-Western sentiment there. So we have a lot of evidence that this is not a time in which people are sitting back and saying we want more globalization.

Although I should say, interestingly enough, that public opinion surveys around the world do indicate that people want more globalization. They also, however, want a lot of other things that did not exist in the 19th century, did not exist in the 1920s, demands that I think provide a whole array of problems facing governments today, issues of the environment, human rights, labor standards, things that were not even considered, I think, back in those times.

So when we sit down and ask `what are the choices', I think in some ways Jeff does not boldly enough lay out our choices. One choice is that we can abandon globalization. Some people argue that this is impossible. I would guess that Tom Friedman would argue that we have gone too far down that road and we cannot turn back. However, I think Jeff Frieden's book provides us with evidence that it is possible that political forces will work against further global integration, that it is not impossible, it is a choice, not a fact.

Another possible choice is to strengthen national regulation and social safety nets. Despite concerns about a race to the bottom among countries trying to compete for global capital, careful empirical analyses demonstrate that in fact this race only occurs in a few sectors of the economy, and that it is not as widespread as some would have you believe. Not all governments, however, are capable or, in sad cases, willing, to provide the necessary protections to their own people. In fact, Jeff Frieden points out in a number of places in his book that the lack of development in many countries is due to misrule. It is a major obstacle to development, and, of course, a major obstacle to further globalization.

The capacity of countries to provide services to their own people is, in fact, something that is very much on the agenda of the World Bank, and, I would guess, the IMF also. Many donor agencies today have extensive programs on good governance, on capacity building, on trying to assure better governance in countries that appear to be left behind by globalization. It is not clear how effective these programs are as yet, and some would argue that it is still too little, and in many cases, much too late. There is also some debate about whether international integration of these countries will allow the weaker states the breathing room to build up their state institutions.

So if we cannot actually look at national regulation and social safety nets in many cases in order to address the concerns and issues that feed the antiglobalization factions, I think another choice is, of course, of strengthening global governance. Many critics of capitalism argue that we need to establish global regulations, we do not have sufficient regulation, for instance, of capitalism to sort of save it from itself. There is some movement in this direction. For instance, after repeated financial crises, the IMF and many others have repeatedly discussed how to reform the international financial architecture to prevent, not just react to, but to prevent financial crises, and, of course, the IMF has established much more surveillance, monitoring, and transparency in an effort to take a more preventive role. However, many people do argue that this is, again, not sufficient.

We do see the impulse toward global regulation in the trade arena also, what some people refer to as the "trade and" agenda, trade and environment, trade and human rights, "trade and." This is an attempt to incorporate these other issues into trade agreements at the international level so that they apply to everyone participating in the global economy, and in order to connect free trade to social protections. There are also, of course, discussions about reforming the WTO so that it does not favor in its rules the richer countries. Again, there has not been significant movement on the "trade and" agenda, and recent efforts to move the WTO negotiations forward do not look as if they will be successful.

Both the World Bank and the IMF I think have been under a lot of pressure to integrate social and environmental concerns and protections into their policies, and both are, in fact, now addressing some of the issues that critics have raised about the impact of the World Bank and the IMF on, especially, less-developed countries. For instance, the IFC recently revised its safeguard policies on social and environmental protections. But, again, many people argue that it is little bit late and not enough.

The final choice I'd like to discuss is what I would say is not one single thing but a series of trial-and-error attempts to come up with some innovative new forms of global governance. They are novel in that they are not strictly private or public. Here I am focusing primarily on the role of international corporations. Many people argue that what we have today is not global capitalism, that it is global corporate capitalism, based on the decisions and interests of major companies. There is no comprehensive investment regime internationally, despite repeated efforts to establish one. Although some people would argue that the WTO is sneaking some investment into their TRIMs and TRIPS agreement in ways that perhaps are creating an international investment regime, but not one that addresses the concerns that many people have. Activists have pointed, for instance, to the horrors of sweat shop labor, environmental destruction, human rights abuses, and violence that have often accompanied investment, especially in the peripheral areas of the world.

This has spawned a transnational corporate accountability movement that has generated what I consider to be innovative solutions or initiatives to regulate corporations without direct governmental participation. Kofi Annan in 1991 explicitly made the argument to business at Davos, at the World Economic Forum, that if they do nothing to rein in the negative side effects of their globalized industries, that they would lose the benefits of globalization, it would be turned back. The result was the establishment of the U.N. Global Compact, a compact between business and the United Nations, to uphold originally nine, now ten principles drawn from U.N. standards and norms.

Corporate social responsibility has become a buzz word. It means many things to many people, not always with great substance. But there is, in fact, a whole movement to try to persuade business that it is in their long-term interest to support global capitalism in general by responding to popular demands. And we do see a lot of interesting developments in the form of, for instance, major banks establishing the Equator Principles on project finance to incorporate some safeguards for social and environmental issues. We do see the expansion of socially responsible investment funds that allow you to invest in certain companies that are judged to be pursuing positive policies, and those socially responsible investment funds now cover over a trillion dollars in the United States alone.

So it kind of leads to a new "corporations and" agenda, as some companies do undertake to monitor their policies and change them to address specific issues that are raised for specific companies. The trends are reinforced by government action, and action by international organizations. Like many people, I am doubtful of relying on companies alone.

What we have today is an expansion of what are called public-private partnerships in which specific governments or specific international organizations do partner with the private sector to address very specific issues and projects. Here I might point to, for instance, the U.N. Environment Program, which partners with many financial firms on issues of climate change, on issues of business and conflict, on a variety of other kinds of issues that people have raised regarding corporate behavior. Some governments are incorporating corporate policy change through their development programs, through their export insurance programs. There is even talk about incorporating this into bilateral investment treaties. Apparently this is an issue in Canada right now.

So far there is mixed evidence of the actual impact of all of these different initiatives taken together, but I think there is a potential for change in some of the intellectual debate about the role of corporations and the likelihood of regulation of them. I think that this does represent a search by many people for new forms of government to address the downsides of globalization while maintaining or retaining the benefits of it.

In conclusion, I would say that Tom Friedman argues that the world is flat, but I think Jeff Frieden's book makes a persuasive argument, grounded in historical analysis, that we do need to leave a few bumps in the road, a few ways to slow down or cushion the impact of globalization. Thank you.
[Applause.]

MR. PEARLSTEIN: Thank you very much, Virginia. We have some time now to take your questions and comments before we give Jeff the last word. I am told that there are some microphones at your seats. I should also mention that when we are finished, there will be a reception outside and Jeff will be happy to sign books, assuming that you buy them first.

Question and Answer Session

QUESTION: I'm Tom Palley. Thank you very much for very enjoyable three presentations. A couple of questions. The first is, I think that if globalization is going to fail, it will fail because of political developments in the north, not because of the exit of less-developed countries. I think that that is my comment to Virginia Haufler, because in that case, the whole thrust of your comments seemed a little off in that it focused very much on less-developed countries.

Tom Palley

But to all three of you I would say that I think there is a troubling presupposition in the whole conversation that globalization as we have it today and have known it really is good. It is not explicitly said, but I think I detected in Jeff's comments the suggestion that the absence of globalization results in war, fascism and so on. I do not think that is true. I think what is more likely is that globalization can produce bad times that then result in that sort of outcome.

Challenge number two: I just do not think that the economics of globalization are necessarily that compellingly good. I have just come from a discussion today on the U.S. economy where we are looking at wage profiles of average workers and so on, and across generations you really can ask the question now if you are an average worker, are you better off than your parents were, and will your children be better off than you were. This is evident when you look at wage profiles, at entry-level wages for workers today and what they will look like when they are 50; these are very difficult questions to answer.

Challenge number three to this presupposition is: just how good are the politics of globalization? I look at it in terms of money in our own system, in the sort of what I call the derooting of the corporation, going global, leaving the citizenry and many parts of society behind, what Jeff Faux talks about in his new book. I think these are real questions that put in doubt this presupposition that I heard from all three panelists that globalization is so good.

MR. PEARLSTEIN: I am not sure that it is a presupposition of what Jeff said, but why don't you all take a stab at that?

MR. FRIEDEN: Should I take this opportunity to respond to some of the other comments?

MR. PEARLSTEIN: No. Why don't you just focus on this one?

MR. FRIEDEN: I will try to control myself then.
[Laughter.]

MR. FRIEDEN: I think that you are absolutely right that there are important questions that can be asked about what in fact the broad and more focused effects of international economic integration are. I will state this case perhaps more forcefully than I might otherwise just for effect, I think that the broad effects of economic integration on overall growth are almost certainly positive, and that is especially true for developing countries, and especially true for countries that have limited resources and that need access to international markets for goods, capital and technology to be able to prosper. So I think that the argument for international economic integration is a very, very strong one. That is my view and my reading of the evidence.

That does not in any sense question the observation that the global economy and international economic integration has had some very negative effects on large numbers of people, including on unskilled workers in the U.S. There is continuing debate over the impact of the international economy on the very troubling wage and income distribution trends in the U.S., but I think a `consensual' view, that is, `mine' ...
[Laughter.]

... would be that although technological change has also had a very negative effect on the real wages and relative wages of unskilled American workers, but that international economic competition has also had a very negative effect, and that cannot be denied and should not be ignored.

To say that international economic integration has an overall positive effect on economic growth, on prosperity, on productivity, on things like that, is not to say that it is good for everyone, or even to say that it is good for a majority. It is completely plausible that an economy can grow while its people do not. Brazil proved that in the 1960s and the 1970s.

So I would insist on my view that, especially considering all of the alternatives, in Churchillian fashion, an integrated international economy is a good thing. But I would agree with you that we cannot ignore and should not ignore, both from a social, economic and political perspective, the very severe effects that international economic integration can have on groups, countries, and in various societies.

MR. PEARLSTEIN: Harold?

MR. JAMES: I would identify myself very much with the view that you did not like, that globalization is good for you, and that the alternative is actually very, very unpleasant. And it is not just mildly unpleasant, because once you start seeing your interests fundamentally opposed to those of other states, then you start thinking of ways in which you can put down those other states. I try to tell the story of globalization going back not just to the 19th century episode of globalization, but to the 18th century, to the 16th century, to China and the 12th and 13th century, to the Roman Empire. All these efforts at globalization produced big gains in welfare and people got better off. If you think of the 20th century, this is a remarkable period of improved living standards for very, very many people. They produced welfare gains, and when they collapsed, they collapsed in war, hunger, famine, misery, and epidemic disease.

So I think this idea that is sometimes out there in the discussion that it might be nice if we did not have such an integrated world, that we could really live with it, that just does not respond to the historical story.

MR. PEARLSTEIN: Virginia?

MS. HAUFLER: To address your question about whether it is politics in the north that will stop globalization and whether the developing countries matter, I would say they do, and they do in a number of different ways.

It is developing countries that are often blocking some of the interests of further globalization in the north, for instance in the Doha Round. I think that it is both north and south have been diametrically opposed in what they are looking for, and so the developing countries do matter.

I also think that you are missing the point that politics today is very global, and a lot of the antiglobalization activism today is intimately linked to concerns not just about workers in the north, but workers, the environment, and human rights in the south. So the politics itself is I think on a more globalized plane than in the past.

QUESTION: I'm Michael Bordo. I have a question about the historical narrative that Jeff told us about, and it is also related to Harold's book. It is about the inevitability of collapse in the inter-war period, that in a sense the backlash was going to lead to the collapse that occurred. I would have thought that it had a lot to do with the Great Depression, which many think was triggered by a series of big policy shocks in the U.S. and possibly in France, and there are stories about why that happened. In a sense, if that had not happened, if the big policy mistakes had not been made, I posit that maybe things would not have wound down the way they did, and, in fact, global history would have been much different.

MR. PEARLSTEIN: Harold, could we start with you on that?

MR. JAMES: The big policy mistakes you are referring to are really U.S. policy mistakes, maybe in France, and just perhaps in Britain. But it does seem to me that there is a story of the world depression that actually does not depend on the U.S. policy mistakes, and it has to do with financial instability in the emerging market economies at the time in Central Europe, in Eastern Europe, and in South America, that these had big capital inflows. In a sense, it is sort of like the 1997 East Asian story, with which people I think are familiar here. Just transplant that back to the 1930s, and that is what you've got. What happened that made it the Great Depression was that something bad went on in the industrial countries and the core countries after that, but the meltdown in South America and in Central Europe and in Germany was, I think, pretty hard to avoid.

MR. PEARLSTEIN: Do you have anything to add to that, Jeff?

MR. FRIEDEN: I'll stick with that and we can come back to it.

QUESTION: I get a bit itchy when this glorification of the 19th century free-trade world gets going. That 19th century order was based previously on slavery--absolute looting, especially from India and from Indonesia, South America, Congo--and that loot went to Amsterdam and London and on into America. I would like to ask Professor James whether Professor Frieden's book follows on his Harvard buddy Niall Ferguson's. Also, I would like to hear your comments on the reaction against free trade. We now have trade policy being decided by two rather distinguished Senators ...

MR. PEARLSTEIN: If I could, let me exercise my prerogative. Let us stick to the British and India question and leave the Senators out of it, because they are out of it anyway.
[Laughter.]

MR. JAMES: I think, if I may, I do not want to speak for Niall Ferguson. I do not particularly agree with his most recent book, but I think the discussion of the empires in the 19th century exactly hits the central note in this discussion, that they brought big benefits for many people, but they were perceived of as very unfair, discriminatory, they rested, as you say, on violence, and at a point they became illegitimate, so it does seem to me that they actually anticipate much of the modern discussion of this issue.

MR. HENNING: I am Randy Henning at American University. I have already bought the book, look forward to reading it, and putting on my course syllabus.

I wanted to raise two points. The first was that one of the interesting things in Jeff's earlier work that I have appreciated is the notion that globalization changes the opportunity cost of policy reform for domestic interest groups even in a closed economy just by virtue of the fact that globalization is changing relative prices globally.

I wanted to know, Jeff, to what extent you developed this at all in the book, and whether or not it is kind of a source of encouragement for pro-globalization forces? Doesn't it provide some insurance given the level of liberalization that we have achieved, some insurance against the backlash against globalization?

The second point is related to the central importance that you attach now to the social compact in moving forward, that is, a compact that would help to redistribute some of the gains from globalization to the losers as to underpin political support for further openness as we go forward. Given the importance that you attach to such a compact, I wanted to encourage you to be more emphatic about advocating policies for global adjustment, as we use the term in the trade debate in the United States. You are going to be doing a lot of book forums like this, and it would be useful to have your support for that.

MR. PEARLSTEIN: Let me start by saying as somebody who writes about this all the time, it is a lot easier to say that you should redistribute some of the gains to the losers than to come up with a policy that doesn't have so many side effects that you can defend it, but it is not impossible. But it easier to analyze the problem than to suggest the solutions. Jeff, what would you say to that?

MR. FRIEDEN: I will heartily agree with the latter statement, that it is easier to analyze than to suggest solutions, and that there are no silver bullets. I am very happy to accept any policy proposals that you would like me to flog in future book forums, on the second point.

I think, seriously, there are proposals out there and they should be paid attention to. I am not emphatic about them because I am not as knowledgeable about them as perhaps I should be, but let me focus on the first point which is related. That is, is there something about international economic integration concerning the fact that countries have been drawn into the world economy far more than they had been 40 or 50 years ago that makes it self-sustaining or self-reinforcing? I would go back to, in a sense, where we started, that, yes, it does reinforce the position of those who favor further economic integration, but it also can reinforce the opposition from those who oppose it.

This gets to Harold's point, to identify forces is not necessarily to argue for the inevitability of the predominance of one over another, and I would not argue for the predominance of pro-globalization forces just because the world is so economically integrated today. So I would say, no, it does not provide any insurance. What it does is provide the social and political underpinnings of conflict or, perhaps, compromise and resolution. That is, the interests that have been created by the last 30 years of international economic integration and development are powerful potential players in the resolution of the problems that we face, but they do not necessarily and inevitably point in one particular direction.

That is where I would in some sense disagree with Harold's notion of the inevitability of the collapse in the inter-war period. I think that it is one thing to point to the forces that the war and its consequences created -- and I agree with the fact that those forces and those consequences made some kind of crisis close to inevitable -- but the resolution of the crisis that emerged was not inevitable. Some kind of conflict over global economic integration is undoubtedly inevitable in many countries, perhaps in all countries, but its resolution is not.

MR. PEARLSTEIN: Let's have one more.

QUESTION: One problem I am not quite clear on is the unique role of the United States, that the United States is now the greatest deficit nation, and it is not an accident that since 2000, the references to imperialism have arisen because, by an interesting coincidence that we had a presidential election in that year. My question: to what extent will the contempt for political globalization be matched in the United States by a contempt for economic globalization?

MR. PEARLSTEIN: Anyone? Go ahead, Harold. You have a book about it, Harold, "The Roman Predicament: How the Rules of International Order Create the Politics of Empire." And I can also say that his second book that came out in the last 2 weeks is about family firms.

MR. JAMES: Thank you for the book advertisement.
[Laughter.]

MR. JAMES: It is absolutely right that these are not just about international conflicts, but these are domestic conflicts that are played out inside societies, because the periods of globalization are also the periods of rapid growth, and they usually are also the periods of rapid growth of inequality within territorial states, so that Britain before the First World War was becoming really quite unequal and there were big debates then about whether some people were not benefiting from a policy preference from imperialism, to go back to the question, at the expense of the rest of the population, that it is just a few bankers or Cecil Rhodes or characters like this that are the beneficiaries. So there was a big push then as a result of the kind of forces that Jeff was describing with pressure to democratize, to open the political pressure, that there is a pressure inside the society to redistribute within the national economy.

Where it gets extremely unpleasant, I think, is where these national resentments are mixed with international resentments. Again, if you want a recent example, you can go, I think, to the 1997 crisis in Asia, because in many of the crisis economies, the sense that there was a caste that was benefiting illegitimately and that there was an international crisis got directed against ethnic Chinese people, and in a very similar way, and it is also described in Jeff's book and in my book, in the 1930s that this happened. This is when the scope for real destruction and the tearing apart of the moral fabric of a society becomes very great.

MR. PEARLSTEIN: Jeff, why don't you pick up on that and also take this opportunity to get in your last word about anything that anyone has said?

Closing remarks by Jeffry Frieden

MR. FRIEDEN: I was going to briefly say that without dissipating into an extraordinary level of abstraction, there is a specific point that your question raises which I think is very interesting, which is the relationship between, if you will, geopolitics or national security and international economic issues in the United States. One of the things that I think is interesting, I think, ironic and central about the role of the U.S. in the world in the aftermath of World War II, in the 1940s and 1950s, is that it was possible for American political and economic leaders to make the argument that there was a close relationship between our international economic commitments and our international political commitments. You could tell, as Dean Acheson, Marshall and Truman did, the American people that the alliance of the Western democracies against the Soviet Union went hand in hand with integrating those Western democracies and even some nondemocracies into the American led international economic order. It was not difficult to make the case that trading more, investing more, dealing more economically with Japan and Western Europe, was part of building an anti-Soviet alliance.

Fast-forward to today where it is turning out to be very difficult to make those kinds of arguments. People say: you are telling me that our principal concern from a national security standpoint is the rise of Islamic extremism, and then you are telling me that the best way to fight it is to trade more with Saudi Arabia -- that does not fly. So I think the Dubai Ports World controversy in the U.S. is indicative of the fact that there is a real disconnect in American politics today between the debate over national security issues and the debate over international economic issues which is very different from the 1940s, 1950s, and 1960s. In the late 1940s and early 1950s the Republicans who had been the strongest opponents of trade liberalization, were brought over to the side of trade liberalization not because they liked it, but because they felt that it was a price worth paying to build the alliance with other countries against the Soviet Union. I do not see something like that, so I see a lot of these tensions arising in similar ways to what Harold describes.

Let me say a couple of things. I think Harold pointed to, and Ginny also in her remarks, a central question that faces all of us and faces me, which is, in a sense, what can be done and what should be done. I certainly have, as I say, no silver bullet to offer, no panacea to offer, to solve the problems of the world economy. Believe me, if I had one, I would make it freely available. But I think I would disagree, in a sense, with Harold's characterization of where we have been because I think it is inconsistent with what I believe his view about where we might go.

I think that the sorry events of the inter-war period were not inevitable. What was inevitable was the problems that arose, what was inevitable and inherent were the social and economic tensions that arose in that period. The outcome was not inevitable, and Harold's own spectacularly important work on the inter-war crises I think shows that at every step of the way, choices are being made. People have interests, firms had interests, the German business community had interests, and they pursued those interests, but it was not the same thing to say they had an interest in doing something about the labor movement and to say they preferred having Hitler in power. The latter was not inevitable. The former was, the latter was not.

Jeffry Frieden making closing remarks

So I think that historical reference takes us to where we are today. We can point to tensions, we can point to the interests at stake, we can point to choices available, we can understand what the issues that confront us are, without implying anything inevitable about what choice will be undertaken, what choice will be made. I think understanding the choices is central, that even powerful vested interests can understand that there are different ways of pursuing their interests. There's a way that involves bringing Hitler to power, and there are other ways, perhaps, and in today's world I think it is completely consistent to say there are powerful interests and others that could lead to intense conflict and even disastrous conflict, but those interests and those same political institutions could also be used and could also compromise or work towards compromises that make different kinds of choices. So I would say that the challenge that we face is not one of overcoming inevitability, but of dealing with the economic realities and political realities we face and trying to work with them creatively towards less disastrous conclusions than the ones we saw in the inter-war period.

MR. PEARLSTEIN: Thank you very much. There will be a reception with some food, I'm told, right outside. Thank you very much.
[Applause.]