Globalization: dissonance of theory and reality

The author is research associate, Action for Economic Reforms; lecturer, Department of Economics, Ateneo de Manila University.

The Fundamental Theorems of Welfare Economics state that a private
property, perfectly competitive free market will maximize private and
social welfare, and will result in an efficient allocation of resources
through competition. Furthermore, if government decides to intervene in
the market where no imperfections exist, deadweight losses will arise
and will make government vulnerable to capture and corruption. These
serve as the theoretical underpinnings of what has come to be known as
the Washington Consensus – privatize, liberalize, deregulate.

Empirical evidence seems to support the propositions of the Washington
Consensus. Studies show that, once other relevant characteristics are
controlled for, countries with lower policy-induced barriers to
international trade grow faster. It is generally accepted that the
economic tigers of East Asia (EA) grew at unparalleled rates via
globalization. Poverty reduction in these countries was likewise
phenomenal. Such growth and development was based on taking advantage
of global markets for exports, thereby closing technological and
resource (e.g. capital) gaps.

Cognitive Dissonance

And yet, there are other examples that just seem to disagree with
theory. How is it that countries in Latin America and Africa are
growing at much slower rates now that they have liberalized their
economies compared to when they were import-substituting? Or perhaps,
bringing the issue closer to home, what do we make of the East Asian
crisis? The fact is that there is also a plethora of evidence that show
that openness has very little to do with growth. Rodrik argues that
methodologies employed in most of the literature leave the results open
to diverse interpretations and, in his own study, finds little evidence
that open trade policies are significantly associated with economic
growth.

The question that has arisen therefore is whether globalization is
indeed all that the theory claims it to be. Is there truly a dissonance
between theory and reality?

A Question of Ideology?

Unfortunately, answering those questions has heretofore been reduced to
a matter of pledging of allegiance to a particular ideology. Side with
free trade and you will be called a neo-liberal. Ask for the temporary
relief for a particular industry, and you will be called protectionist.
Point out the possible perils of the free market, and you will be
branded a Marxist.

But if there is anything that we must learn from recent history, it is
that ideologies, orthodoxies, and creeds (which are exactly what the
Washington Consensus is!) can never supplant critical thinking.

Restoring Coherence

Even the theory admits that if certain crucial assumptions are
unfulfilled, a market failure ensues, and letting the market be is
simply not optimal. Furthermore, while the ENTIRE country may be better
off after free trade theoretically, a distributional problem arises,
with benefits accruing only to a few, and costs being borne by many.
But perhaps the most crucial assumption of the theory of the free
market is the one pointed out by Karl Polanyi (1957): Markets are
sustainable only to the extent that they are embedded in social and
political institutions that serve to stabilize, legitimize, and
regulate market outcomes. Without such institutions, a market cannot
work.

Even with the extensions, however, the theory is still inadequate in
explaining reality. While the use of simple graphs can illustrate how
trade liberalization increases societal welfare, one must ask the
obvious but oft-ignored question: WHERE ARE THE PEOPLE? Moreover,
graphs and general equilibrium equations work almost instantaneously,
but reality requires time to unfold. People and the institutions that
they build need time to adapt. Of these, the theory does not have a
grasp.

Revisiting the Model

A second look at the East Asian miracle will show that while the tigers
truly were outward-oriented, the distinctive characteristic, however,
was that they also managed the process of globalization on their own.
These countries espoused trade and investment liberalization, but did
so in an unorthodox manner – sequentially, and only after an initial
period of high growth, and as part of a broader package with many
unconventional features. But capital account liberalization, another
form of globalization forced upon the economies by the International
Monetary Fund and its Washington Consensus dogma, altered key
ingredients of the model and led to the model’s spectacular nose-dive
in 1997. Indeed, it is here in East Asia that the rewards and risks of
globalization have been most dramatically manifested.

If one asks, however, whether the miracle can be repeated and the
crisis avoided, the answer will be a dismal “Not likely.” The present
institutional arrangement of the world economy precludes a repeat of
the East Asian miracle, and almost guarantees a repeat of the crisis.
Unconventional strategies that greatly helped these economies in the
past, such as domestic content requirement and investments policies,
are now frowned upon by multilateral agencies, foreign governments, and
even academics. Capital controls that could very well reduce the
probability of financial crisis, or perhaps just buy the country some
time to react to a sudden reversal of capital flows, are also not
welcomed by these groups. Unfortunately, these are the same people that
wield power in the World Trade Organization (WTO), World Bank (WB),
International Monetary Fund (IMF), and even Asian Development Bank
(ADB).
The problem with such institutions is not so much what they advocate,
for indeed it is understandable how one can be so enthralled and
mesmerized by the theory’s elegance. A bigger problem is their attitude
when they prescribe reforms – highly ideological, very dogmatic, and
extremely myopic.

Reforms and Advocacies

There is undeniably much use for global institutions. But these
institutions need to be sensitized to cultural and national diversity
of nations. The WTO, IMF, WB, and the ADB must be made to realize that
globalization is but a means towards a higher end – development!
Clearly, the priorities of such institutions need to be reassessed and
rearranged, and they must be made to acknowledge and accept the
undeniable truth that globalization also has its costs. As such, the
most important item in today’s agenda is to ensure that there be a
broad-spectrum clamor for allowing sovereign countries to manage such
costs and risks in their own terms. As Rodrik said, “Too much faith in
foreign models makes you unmindful of the unique characteristics of
your own context.” After all is said and done, one size never really
does fit all.

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