Speech

Globalization by the Book, Keynote Address Given at the American Association of Publishers, by Prakash Loungani, Chief, Policy Communications, External Relations Department, International Monetary Fund

February 5, 2007

Globalization is a topic that every public speaker must approach with some trepidation given the mountain of material that has to be scaled before one can pontificate on it with any authority. The number of Google hits for the word "globalization" now exceeds 30 million. Having scaled this mountain, I can report to you that about 29 ½ million of those 'hits' are actually 'misses'. So I hope my talk helps you overcome, if not all your fears about globalization, at least your fear that it is too vast a subject to come to grips with.

Let me begin with a quiz. Here's a statement about the threat to the United States from cheap Indian and Chinese labor:

"... the time is not distant when everything that machinery and cheap labor can produce will crowd every market. The millions of China, with the millions of India, will offer the cup of cheap machine labor, filled to the brim, to our lips, and force us to drink it to the dregs, if we do not learn wisdom"

Who said this and when? Was it Pat Buchanan in the 2000 Republican primaries or Lou Dobbs on CNN last week or South Carolina textile magnate Roger Milliken in 1970?

Trick question, of course. This quote comes from The Atlantic magazine, and from an 1879 issue! The writer made a spectacularly incorrect forecast about the relative fortunes of the three countries. Despite the alleged threat from cheap labor in the 1870s -- and in every decade since that time -- average incomes in the United States have grown steadily and are now about $40,000 a year-a huge multiple of what the average Chinese or Indian makes.

In more recent times, Ross Perot warned about the "giant sucking sound" of U.S. jobs moving to Mexico and Lou Dobbs warns relentlessly of the threats from outsourcing. No wonder then that so many have a visceral fear of a phenomenon they would be at pains to define.

Globalization is actually quite easy to define. But to do so I need to lob a few more questions at you, but these are not trick questions-promise. How many of you work in a state different from the one in which you were born? How many of you have kids who are in out-of-state colleges? When you went to the grocery store last week did you only buy products manufactured within your state? These are all silly questions to ask of a U.S. audience of course. We take all these freedoms to transact across state boundaries for granted.

So here's the promised definition: Globalization is simply an extension of economic freedoms beyond national boundaries. Many years ago, I got a chance to enjoy the freedom that globalization brings when, on my 20^th birthday, I boarded a plane that brought me from Bombay to New York. And when I landed in New York it was still my 20^th birthday and I celebrated it by eating Chinese food that came in funny little white containers I'd never seen before. My son, who turned 11 today, has grown up very familiar with these little white containers and lots more besides. When he was four, he was already complaining: "No, daddy, not Thai; we always eat Thai food."

Being able to cross national boundaries-immigration-is just one of five fundamental freedoms that globalization provides. These are the other four:

• first, the freedom to sell what you produce not just in your country but in others; and to buy products from all around the globe either for your direct consumption or to help you make what you produce-this of course is international trade;
• second, the freedom to seek capital for your business ventures from foreign sources and to invest your savings abroad-this is called capital mobility or financial globalization;
• third, the spread of scientific knowledge and technology;
• fourth, the diffusion of ideas and culture-and cuisines.

We should not take these freedoms for granted. We've enjoyed them before and lost them. The world that existed before the onset of World War I was one such time. Writing about it, the great British economist John Maynard Keynes said that

"the inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole Earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep ..."

Alas a sniper's bullet on June 28, 1914, triggered a chain of events that reversed globalization. Another brilliant economist Fredrich von Hayek noted sadly: "We didn't realize how fragile our civilization was."

Over the past 60 years, we've regained many of the freedoms lost during those thirty years from 1914 to 1944. Trade has expanded steadily. Since 1990, capital mobility has greatly increased, though by some measures it is not back to pre-World War I levels. Immigration has increased but again, for the U.S. at least, it is just getting back to prewar levels. The spread of scientific knowledge has eradicated many diseases and raised agricultural efficiency worldwide. And the diffusion of culture and ideas continues apace. In the political sphere, for instance, there has been a steady diffusion of democratic norms. Electoral democracies now represent 120 of the 192 or so existing countries, constituting nearly 60% of the world's population.

Of course the course of globalization has not run smooth over these 60 years. In the mid-1990s, financial crises disrupted international capital markets, but we've learned valuable lessons from that experience on how to live with volatile capital flows. And then, on September 11, 2001, we saw an attack on globalization potentially as devastating as the sniper's bullet in 1914. Mercifully, international economic integration has thus far proven to be less fragile-in fact, the global economy has just recorded the fastest five-year pace of growth in recent decades.

The moral and material benefits from this 60-year expansion of economic freedoms are evident. Let me begin with the latter. The material benefits of globalization are longer lives, higher incomes and reduced poverty, lower inequality of incomes, reduction in social ills such as child labor, and -- eventually -- a cleaner environment.

The increase in life expectancy, thanks to the international diffusion of scientific and medical knowledge, has been amazing. Consider that from about the time of the Roman Empire through to the beginning of the 19^th century, average human life expectancy was less than 30 years. And even as late as 1950, average life expectancy in developing nations, such as the one I grew up in, was just 40 years. But today average life expectancy in the developing world has risen to 65 years. That is still lower than in the developed world, where life expectancy is about 75 years, but what's noteworthy is that the gap has shrunk. The gap used to be 30 years but is only 10 years today.

As incomes have risen, poverty rates have fallen almost everywhere. The number of people living in abject poverty has fallen by nearly 500 million-there has been greater reduction in poverty over the last 50 years than in the previous 500 years.

Higher incomes provide the means to combat social ills. With higher income, more families can afford to enroll their children in school rather than put them to work. We saw this in Vietnam, for example, where school enrollment rose once the country's farmers were able to sell their rice at global prices.

Rising up the income ladder in developing nations often involves forsaking life in agriculture and moving to cities where there is more opportunity for higher-wage employment. Many of these jobs are in "sweatshops". Many of which have low pay and poor working conditions, but they also provide the poor with opportunities they've never known previously.

Nicholas Kristof and Sheryl WuDunn wrote an article in the New York Times in September 2000 describing how their opinions about labor conditions changed when they moved to Asia. "Like most Westerners," they wrote "we arrived in the region outraged at sweatshops. In time, though, we came to accept the view supported by most Asians: that the campaign against sweatshops risks harming the very people it is intended to help."

Joseph Stiglitz in Globalization and its Discontents makes a similar point about the role Wal-Mart might play in developing countries: "one has to maintain a sense of perspective: the reason that Wal-Mart is successful is that it provides goods to consumers at lower prices. The more efficient delivery of goods and services to poor individuals within developing countries is all the more important, given how close to subsistence so many live."

Many accept these benefits of globalization but worry that it raises income inequality. What are the facts? Global inequality has actually declined if one treats every individual as a citizen of Planet Earth and ignores their nationality. True, most of this is due to the spectacular advancement of incomes in China and India, but many other countries are sharing in the good fortunes that globalization brings. Within countries, the pattern of changes in inequality defies easy characterization. Income inequality has indeed increased over the last 30 years in countries like the United States, but the consensus is that the cause is technology rather than trade.

The last material benefit I mentioned was a cleaner environment. Freedom -- and free markets -- eventually translate into a cleaner environment. We now know that some of the worst environmental abuses occurred in the countries of the former Soviet Union, under central planning and absence of political freedoms. In market economies, in contrast, once average incomes have crossed a threshold of about $3000 to $4000, rising incomes and cleaner environments go hand in hand.

Why is this the case? First, it is prosperity that allows people not just to be concerned about the environment but to have the resources to devote to its clean-up. Second, environmental pressure groups can flourish better in open economies. Third, companies are concerned about their reputations and therefore have an incentive to be responsive to campaigns against them by environmental groups.

Does this mean that every developing country will have to wait until it is a middle-income country before it cleans up its environment? Not necessarily. Because the technology of environmental clean-up is getting better and cheaper, countries will undoubtedly leapfrog and start the clean-up process at lower thresholds of incomes than did today's advanced nations. Indeed, this is already happening in many countries. And environmental lobby groups are already active in many of these countries, and they are quite effective, having learnt from the experience of developed country groups what works and what doesn't.

And to interject a personal note again, another reason for my optimism about the environment comes from comparing my attitude towards it to that of my son. Last year, for his 10^th birthday, instead of presents he asked his friends' parents to contribute to save the ivory-billed woodpecker. He has watched Al Gore's movie An Inconvenient Truth. It is quite likely that, to people of my son's generation, the freedom to enjoy a clean environment will be just as important as the five freedoms I mentioned earlier are to me.

Let me turn to the moral benefits of globalization. To me the greatest moral benefit of globalization is that it brings about greater tolerance of others. This has long been recognized as one of the benefits of markets and capitalism. The 18^th century French writer Voltaire once observed that the London Stock Exchange was a place where

"you will see assembled representatives of every nation for the benefit of mankind. Here the Jew, the Mohametan and the Christian deal with one another as if they were of the same religion, and reserve the name 'infidel' for those who go bankrupt."

Harvard professor Ben Friedman has demonstrated, in a recent book called The Moral Consequences of Economic Growth, that as living standards increase, there is also an improvement in the moral dimensions of a society, with greater tolerance of differences among various racial, ethnic, and religious groups, and greater respect for democracy.

To illustrate his point, Friedman describes how U.S. attitudes toward immigration have fluctuated. For instance, why was there a wave of anti-immigrant violence in the 1850s and why did it end after the Civil War? Why were the national origin acts thrown out in legislation in the late 1950s and followed in the 1960's by the great liberalization of American immigration policy? Why, in the late '70s, did we start to have pushback on immigration?

Friedman acknowledges that "it would be foolish to pretend . . . that every twist and turn of immigration policy over this span of 150 years in the United States, was narrowly anchored in the underlying economics of growth versus stagnation." But, he adds, "it would be even more foolish to pretend that the underlying economics had nothing to do with it."

Just as globalization has improved the moral dimension of various societies, it has also opened up heretofore unknown vistas of opportunity for people throughout the world. This truth is self-evident, even to Joseph Stiglitz, who writes that globalization

"has reduced the sense of isolation felt in much of the developing world and has given many people in the developing world access to knowledge well beyond the reach of even the wealthiest in any country a century ago."

This access to knowledge, and education, creates economic opportunity, but it also can help to temper the excesses of political leaders -- a point made forcefully by Martin Wolf in Why Globalization Works. He says that globalization "puts a degree of competitive pressure on government. If one believes governments are always benevolent, wise and caring, one may well object to that pressure." But, where governments are incompetent or corrupt, or bent on making harmful economic decisions for dubious political ends, one important way of getting them to mend their ways "is to open up economies to global competitive forces."

A dramatic example of such pressure is described in Tom Friedman's The World is Flat. He tells of a story of being in India during a nuclear alert:

"It was fascinating to watch the IT industry in Bangalore basically say to the government in New Delhi: 'Excuse me, but this just isn't on. Maybe you don't realize it, but we're managing the back rooms of the biggest global companies in the world today. We can't take a week off for war in Kashmir.'"

Given all of the benefits from globalization, it's fair to ask why it is the target of so much criticism, both in the United States and elsewhere. The concerns that the so-called anti-globalizers express are real and should be taken seriously. In fact, in fairness to anti-globalizers, many are not really against globalization; rather they want changes in it to make its benefits more broadly shared. Let me mention three concerns.

First, it reflects the unease about job turnover that often accompanies life in dynamic, free-market economies. Does globalization add significantly to the job churn? It does, but it's not the only factor and it's far from being the most important driver of it. Technological progress is a much bigger factor. But globalization's opponents have made the wise decision not to oppose such progress.

A second explanation for why globalization gets blamed for social ills is that while it creates huge numbers of winners, there are also many who lose or do not get to share in the benefits. The hardships that accompany these losses are real. People who have been dislocated, not just by globalization but by other forces as well, need help in the form of unemployment benefits to support their families and obtain the training to equip them for new jobs. As Gordon Brown, the British Chancellor, put it, "The aim ... should not be to protect lifetime employment but to ensure lifetime employability." I once heard a former colleague at the IMF put it even more succinctly when he said: "Protect people, not jobs".

A third explanation is that the global institutions or rules needed to make globalization work better are not in place or often not effective. So going back to my example of the freedom of inter-state transactions within the U.S., that freedom is underpinned by national institutions, rules and regulations that enjoy broad support.

Given the passions surrounding globalization, it seems fitting to draw to a close by asking what the future holds for globalization in the United States and elsewhere. For all the momentum surrounding globalization, it is not on autopilot, and it is continually being put to the test through individual decisions -- consumers face decisions about whether to buy imports or goods produced at home; business executives face decisions about whether to open factories at home or abroad. And, most significantly in my view, voters face decisions about whether to support political candidates who are for globalization or opposed to it.

Just looking back at the presidential elections and the primaries in the United States bears out my point that globalization is constantly being put to the vote. Thus far the results of these referendums are very good news for supporters of globalization. The only "giant sucking sound" that Ross Perot heard in two presidential elections was that of voters moving away from him. U.S. senator Richard Gephardt warned of the dangers of trade and was trounced in the primaries on his home turf in the Midwest. Pat Buchanan complained about immigration but got so few votes in the Republican primaries that he had to set up an independent party where he could be more popular, albeit among a much smaller circle. And, in 2004, John Kerry talked briefly of "Benedict Arnold CEOs" who moved operations overseas, but quickly dropped this rhetoric in the face of considerable criticism.

I mentioned earlier that 60 percent of the world population is now governed by electoral democracies. This means that globalization is being put to the test in elections all over the globe. This is as it should be. Globalization delivers five fundamental economic freedoms. But people should be free to choose it, and to choose the pace at which they wish to globalize.

Let me conclude. Did I really troll through 30 million websites to put together this talk? Of course not: I didn't, my research assistant did! Well, ok, he didn't either. What I've relied on quite heavily, as you know from my extensive quotes from them, are several wonderful books that make up my 'single bookshelf' on globalization. And though I do not quote him, Jagdish Bhagwati's brilliant In Defense of Globalization, has formed my thinking more than any other.

But in the end it is not just the material on the websites or in the books that makes me a defender of globalization. It's my own experience of its benefits, and the stories of millions like me. So on behalf of all who have also benefited from globalization, as I have, I am grateful for this opportunity to share its story. Thank you.