Is Globalization Sustainable?

Thank you for this opportunity to visit again. Today I want to challenge your thinking about globalization - and to present a historical perspective that has both bullish and bearish elements. So buckle up your seat belts - it is October and the 70^th anniversary of the crash of 1929!

One of the questions I want to raise today is whether the new global economy is real or whether it is another bubble? Is globalization a mirage, or something enduring? And if the latter what does it mean for all of us in the years ahead? My own opinion is that globalization has the potential to define the 21st century, and perhaps even the next millennium. But, as many of you know, the road to the future frequently involves detours and unforeseen obstacles.

Let's talk briefly about the concept of globalization. For many people it seems synonymous with pop culture. Those of us here today know that there is much more to this subject than the worldwide spread of Nike, McDonalds and MTV. The term globalization relates to the process in which technology, economics, business, communications and even politics dissolve the barriers of time and space that once separated peoples. The end result of the globalization process, Pulitzer-prize winning historian Daniel Yergin points out, is a new reality -- which he calls "globality." It is the world after globalization -- a "24-hour, interconnected, hyperactive, e-mail fueled, sleep-deprived world."

Proponents of globalization often seem to associate it with perpetual prosperity and perpetual peace. Many even envisage an economic utopia in which money, capital and skilled workers move rapidly across national borders in response to private sector decisions. In such a market-driven world national regulators, such as the people from OSHA, the EPA, the SEC, the FTC, and the anti-trust division of Justice, will have declining influence. According to the "Washington consensus," which includes business and political leaders, the triumph of market-driven economics is both inevitable and irreversible - something as revolutionary to world politics as was the break down of feudalism and the rise of the nation state in the 17^th century.

Among the more amazing claims made in behalf of globalization are these two: Japanese management consultant Kenichi Ohmae has written that "nation states are dinosaurs waiting to die." Strobe Talbott, currently President Clinton's Deputy Secretary of State, once wrote in Time magazine: "I'll bet that within the next hundred years, nationhood as we know it will be obsolete; all states will recognize a single, global authority. A phrase briefly fashionable in the mid-20th century - 'citizen of the world' -- will have assumed real meaning by the end of the 21^st century."

As one trained to think in historical terms, I am always fascinated when people talk about globalization as if it is something new, and something inevitable. While the term is new, the concept has been around for a long time. This is evident, if we think of the 20^th century as having three distinct phases: (1) The first a long period of globalization that preceded the outbreak of World War I in 1914; (2) The second a long period of nationalistic reaction and disintegration (or de-globalization, if you prefer) extending from 1914 to the mid-1970s. (3) Then, finally, a quarter century of re-globalization.

A few comments about the first global economy may help us to understand present day problems. It emerged in the mid-19th century after Great Britain adopted unilateral free trade and the gold standard. It was centered in the Atlantic region and had little impact on much of the non-Western world. American colonists participated in this first global economy as suppliers of raw materials -- cotton, rice, timber and tobacco -- and importers of English manufactures. While the British system had many shortcomings, it exhibited many features of modern globalization -- trade expanded rapidly, and long-term investment capital flowed to emerging areas. Moreover, there was massive human migration -- in the 19^th and early 20^th centuries from Europe to the Western Hemisphere and Australia.

This first global economy came about because of policy changes - the shift from government controls to market de-regulation - and because of advances in critical technologies. In the late 19^th century it became possible for the first time to move large numbers of people and goods cheaply and rapidly over vast ocean distances. Before the arrival of the steamship, sailing vessels took about 25 days to cross the Atlantic. By 1907 steamships needed only 4.5 days. Now, it is a matter of a few hours. Other key developments occurred in communications. In 1866 when the transatlantic cable opened it cost $100 to send ten words. Twenty years later, it had dropped to as low as twelve cents a word. Soon the London and New York stock exchanges were only minutes apart. The telegraph was no internet - widely used by ordinary people - but it did link the world for business and governmental purposes.

To make a long story short, Britain's 19^th century decision to open its home market to foreign goods and its capital market to the world, which accompanied the revolutions in transportation and communications, created an early version of Marshall McLuhan's "global village." Before World War I the prominent economist John Maynard Keynes marveled at how "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." At the same time he observed how Londoners could invest their savings in natural resources and enterprises in any part of the world. The global village he was describing had emerged nearly a century before the internet and Fedex.

In light of the present-day belief that globalization is inevitable and irreversible, it is worth recalling that in the early years of this century business and financial leaders had a similar view. They celebrated "economic liberalism" - the deregulation of markets - as the grand panacea. Commerce, like a medical discovery, they thought, served to inoculate all nations with the prosperity and respect for civilization. Perhaps the ultimate statement of this prosperity-and-peace vision appeared in a book published in 1911. The author was Norman Angell, a British peace advocate, and the title The Great Betrayal. In it Angell asserted that "international finance has become so interdependent and so interwoven with trade and industry that . . . political and military power can in reality do nothing."

Three years later the bubble of optimism burst with the famous guns of August, signaling the beginning of World War I, and a half century of economic disintegration. World War I was a calamity -- costing 13 million lives. In modern prices the direct costs of the war were perhaps $1.5 trillion.

The second period of decoupling and government intervention extended approximately 60 years from 1914 to the mid-1970s. It is difficult to summarize in only a few words, but it included a Great Depression, two world wars, two periods of reconstruction from the wars, a period of decolonization and nationalism in emerging nations, a long Cold War struggle between the U.S. and the Soviet Union. It was a period of rising economic nationalism and active government intervention in all aspects of economic life. Because of the enormous risks associated with this political turbulence, private capital flows were restrained, and trade was often managed by governments.

In thinking about this second period, it useful to recall that in physics one learns that actions produce reactions. The same frequently occurs in politics. In the context of our globalization discussion, it is at least arguable that the long period of liberalization and economic integration before World War I triggered pressures for de-globalization.

World War I, when submarines and trade restrictions impeded the flow of food and fuel, residents of Britain and Germany both came perilously close to mass starvation, and their military machinery stalled for lack of gasoline. The lesson of World War I for many Europeans was that interdependence was a fair-weather system. In times of war and economic dislocation the system proved volatile and nations vulnerable. As a consequence, the pendulum swung away from laissez-faire and de-regulation toward greater government intervention. During the 1920's governments intervened in markets and actively regulated every thing from flows of trade, to money and immigrants. That trend accelerated during the Great Depression. Even economists trained in the neo-classical liberal English tradition began to question the benefits of globalism. In 1933 Keynes noted that "the age of economic internationalism was not particularly successful in avoiding war. . . ." He thought that free trade, combined with capital mobility, was more likely to provoke war than to keep peace. He said: "I sympathize . . . with those who would minimize, rather than with those who would maximize, economic entanglement between nations. Ideas, knowledge, art hospitality, travel - these are the things which should of their nature be international. But let goods be homespun whenever it is reasonable and conveniently possible; and above all, let finance be primarily national." Keynes was also critical in 1933 of something we hear much about today - short-term capital mobility. He criticized speculators "who buy their interest today and sell it tomorrow and lack altogether both knowledge and responsibility towards what they momentarily own." In short, the Keynes of 1933 was saying many of the same things we hear today from President Nelson Mandela, Prime Minister Mahathir, and other leaders of the developing world.

The first experiment with globalization produced many other reactions as well. Not only did its collapse in 1914 produce a swing toward more active government intervention, it stirred nationalism in colonial areas and resentment of British dominance among those who thought themselves disadvantaged by globalization. The rise of Leninism in the Soviet Union, and the emergence of Nazism and Fascism in Europe fit the latter pattern.

What about the much ballyhooed notion that trade promotes freedom and democracy, and that business moderates political extremism, you ask? One must be cautious with historical generalizations, but experiences in the 1930's raise questions about the popular notion that expanding commerce and investments can alter totalitarian regimes. During the 1930s, many multinationals, eager to establish their market positions in Germany, invested heavily in Germany. They did not anticipate World War II, and so their rational business decisions aided and abetted Hitler's rearmament with investments and technology transfers. Ford built a truck plant in Berlin, which later served the German military well in World War II. Standard Oil of New Jersey entered cartel arrangements with I. G. Farben that handicapped the development of synthetic rubber in the U.S. IBM worked closely with the Nazis. Thomas Watson, the head of IBM, promoted the slogan "You can do business with Hitler." Hitler later decorated him with the Order of the German Eagle.

I know that many intelligent people believe that conditions have changed, and think that many of the present generation of educated business leaders are more clairvoyant, socially conscious, and principled than their predecessors. Possibly, they will be more successful in restraining aggressive political behavior and improving human conditions. Perhaps too expanded commercial and financial contacts will bind emerging powers, like the People's Republic of China, to the Western market system and promote a more democratic political system, as many think. But if the experience of the 1930's has any relevance, the skeptics could enjoy the last laugh.

The second phase of 20^th century history - the period of economic disintegration and regulatory nationalism - lingered until the 1970s. As you know, it ended with a whimper, not a bang, collapsing slowly over a 20-year period, as the Cold War competition between East and West subsided. The architects of the new world economic order - the world of the World Trade Organization, mandatory dispute settlement, and global deregulation - are, I believe, the real revolutionaries of the 20^th century -- seemingly far more successful than the Lenin's, Hitler's, and Castro's who could destroy but not create. The new revolutionaries are pin-striped international lawyers who pressed their plans for giving the system order and structure.

While it is too early to issue a final judgment on the ambitious dispute resolution process, WTO panels have rendered some far-reaching panel decisions -- touching on environmental, cultural, and other issues of national sovereignty. Did the founders of the WTO bite off too much? Were these incremental internationalists too ambitious and too idealistic? Stay tuned -- the final chapter has not been written. The WTO dispute resolution system will either open markets and expand the opportunities for economic globalization, or the system will founder, having aroused a grassroots backlash that may in turn rejuvenate national regulatory efforts. The WTO critics are using the internet effectively to press their criticisms that the trading system encroaches on national sovereignty and endangers food safety, cultural diversity, and environmental and labor standards.

Let me also speak briefly about events in international finance. Here the architects of globalization have been far less successful. The principal international financial institutions -- the IMF, the World Bank, and the Bank for International Settlements -- were conceived in the Great Depression or World War II, and designed for a simpler world when currency rates among major currencies were fixed and when capital flows were regulated. The so-called Bretton Woods financial system designed for the post-World War II order envisaged only convertibility for current account transactions - trade and income on long-term investments - it did not authorize capital account convertibility. The experience between the two world wars with volatile currencies convinced experts of that generation that open capital markets were incompatible with international monetary stability. There was a consensus in Britain and America that governments needed to regulate short-term capital flows and that bankers could not be trusted to act responsibly. President Roosevelt's Treasury Secretary put the idea quite vividly. He said the task of public officials was to drive the "usurious money lenders from the temple of international finance."

During the 1980s as the trend toward deregulation in financial markets gained momentum, IMF began pushing developing countries to open their own capital markets. In pressing this objective the Fund may have over-reached. In pursuit of a good idea - open markets and efficiency - they gave too little attention to the necessary underlying conditions: high levels of transparency in information and symmetrical standards and regulatory procedures. In the aftermath of the Asian financial crisis the Fund has admitted that it overreached. Opening economies prematurely to free flows of capital, the IMF said in its latest annual report, "constituted an accident waiting to happen."

As you know, some economists who enthusiastically embrace free trade and open markets have been the most severe critics of those who pressed for open capital markets. Jagdish Bhagwati of Columbia University, has asserted that a "Treasury-Wall Street complex" had hi-jacked the free-trade movement in support of open capital markets. He has argued there was no proof for the "flag-waving" assertions that open capital markets stimulate growth, citing the examples of Japan and Mainland China, which he says grew rapidly without foreign capital.

I think Bhagwati has a point. It is at least arguable that the Washington consensus pushed their own grandiose ideas too fast and too far in international finance, as the proponents of mandatory dispute-resolution may have done in the WTO negotiations.

This conclusion suggests the key paradox - that the doctrinaire and zealous proponents of globalization and de-regulation may be the real enemies of sustainable globalization. In aggressively pressing their vision of an open system and unregulated system, they may have succeeded in creating a system that is crisis-prone and in igniting nationalistic reactions. In effect, the doctrinaire de-regulators have met the enemy and discovered, as the cartoon character Pogo did, that "they is us."

So, where is globalization going? I am both bullish and bearish. Obviously, the technological advances will continue. What could significantly change our lives would be the availability of large capacity supersonic airliners that can transport large numbers of people cheaply from continent to continent in half the time now allotted. We are apparently some time away from this development. This together with wider public use of internet communications has the potential for expanding global awareness and developing a global outlook similar to the Euro-centric outlook which is emerging in Western Europe.

Nonetheless, if the history of the last century is any guide, the path forward is likely to have major obstacles. Rather than a linear future - suggested in the notion of a 25-year boom - I envisage a zig-zag future - 2 steps forward, 1 or 2 back - with actions producing reactions.

Among the recipes for disaster: Financial contagion could produce a global meltdown. I do not think it imminent. The rise of totalitarian leaders in major countries could ignite another World War, although this too is not imminent. Or, ordinary citizens may simply conclude that they prefer autonomy and independence to efficiency and harmonization in a global economy. We are seeing signs everywhere that this may be the real challenge of the future. Traditional appeals of localism, regionalism and nationalism.

I think that we should be cautious about celebrating the death of these alternative "isms." Yes, Norman Angell is dead, but his celebration of globalism on the eve of World War I endures as an example of a bullish forecast gone bust. The Washington consensus about the advantages of globalism has not yet converted large numbers of opinion-leaders, activists, and ordinary citizens around the world -- particularly in developing countries. Many of them still question whether communities, cultures, and nations should be subordinated to the logic of an unregulated, market-driven system, or to a system regulated by international authorities. Many of these activists can be expected to demonstrate in Seattle next month when the World Trade Organization holds a ministerial in late November. Over the last year, we have heard much in the last year about the potential disruption of the millennium bug. I would not be surprised if the G2K Bug -- globa-phobia -- proved more disruptive in the new millennium than Y2K.