In Defense of Global Capitalism
Johan Norberg

Washington, D.C.
Copyright © 2003 by the Cato Institute.
All rights reserved.

Originally published in Sweden as Till VarldsKapitalismens Forsvar
(Stockholm: Timbro, 2001). Translated and revised edition
published by the Cato Institute, 2003.
Translation by Roger Tanner with Julian Sanchez.
Library of Congress Cataloging-in-Publication Data
Norberg, Johan, 1973-
[Till va¨rldskapitalismens fo¯rsvar. English 1]
In defense of global capitalism / Johan Norberg.
p. cm.
Includes bibliographical references and index.
ISBN 1-930865-46-5 (cloth : alk. paper) --
ISBN 1-930865-47-3 (paper : alk. paper)
1. Capitalism. 2. Free enterprise. 3. Free trade--Social
aspects. 4. Globalization--Economic aspects.
5. Globalization--Social aspects. 6. Poverty--Developing
countries. I. Cato Institute. II. Title.
HB501.N6713 2003
330.122--dc22 2003055487
Cover design by Elise B. Rivera.
Printed in the United States of America.
CATO INSTITUTE
1000 Massachusetts Ave., N.W.
Washington, D.C. 20001
Contents
Preface 7
I. Every day in every way . . . 19
The half truth 20
Poverty reduction 25
Hunger 31
Education 36
Democratization 38
Oppression of women 43
China 47
India 51
Global inequality 54
Reservations 60
II. . . . and it’s no coincidence 63
That’s capitalism for you! 64
Growth—a blessing 72
Freedom or equality? Why choose? 84
Property rights—for the sake of the poor 90
The East Asian ‘‘miracle’’ 99
The African morass 104
III. Free trade is fair trade 113
Mutual benefit 114
Important imports 120
Free trade brings growth 128
No end of work 136
Freedom of movement—for people as well 145
IV. The development of the developing countries 151
An unequal distribution—of capitalism 152
The white man’s shame 156
The case of Latin America 163
On the trade route 169
‘‘Let them keep their tariffs’’ 173
The debt trap 177
The right medicine 186
V. Race to the top 191
I’m all for free trade, but . . . 192
Child labor 198
But what about us? 203
Big is beautiful 210
‘‘Gold and green forests’’ 224
VI. Irrational, international capital? 239
The leaderless collective 240
Regulate more? 249
Tobin tax 253
The Asian crisis 259
Instead of crisis 264
The ‘‘dictatorship of the market’’ 268
VII. Liberalize, don’t standardize 277
The right to choose a culture 278
The onward march of freedom 286
Notes 293
Index 307
Preface
Our anarchist party won the school election!
It was the fall semester of 1988 at our school—we were about
16 at the time—in a western suburb of Stockholm. As usual in
an election year, we were staging a ‘‘school election’’ of our own.
But my best friend Markus and I didn’t believe in the system.
Majority elections, to our way of looking at things, were like two
wolves and a lamb voting on what to have for dinner. The school
wanted us to elect someone to rule us, but we wanted to rule our
own lives.
Partly, I suppose, we did it because we felt different from the
others. I was into listening to electronic music and goth, preferably
dressed in black and with my hair combed back. We wanted to
play music and read books, while others seemed mostly preoccupied
with owning the right accessories and fitting in. The right
wing, it seemed to us, was upper class establishment, dead set
against anything different. But we didn’t feel any more at home
with the left, which to us meant drab government bureaucracy
and regimentation. Even if we preferred Sisters of Mercy and the
Swedish punk singer Thåstro¨m, it was John Lennon’s ‘‘imagine
there’s no countries’’ we believed in. Nation states should be
abolished and people allowed to move freely, to cooperate of their
own free will, everywhere in the world. We wanted a world
without compulsion, without rulers. Clearly, then, we were neither
right wing nor left wing, neither Conservatives nor Social Democrats.
We were anarchists!
7
So we started ‘‘Anarchist Front’’ and put ourselves down as
candidates in the school election on a radical, humorous ticket.
We put up handwritten posters on the walls at school, asking
things like: ‘‘Who’s going to run your life—you or 349 MPs?’’
We demanded the abolition of the government . . . and of the
ban on bikes in the schoolyard. Most of the teachers took a dim
view of this, feeling that we were making a farce of the election,
while we thought that we were making our voices heard in true
democratic fashion. Being called to the headmaster’s office for a
chewing-out merely strengthened our rebellious spirit.
We did well in a tough campaign, polling 25 percent of the
votes. The Social Democrats came second with 19 percent. We
were psyched, convinced that this would be the start of something
big. . . .
That was 15 years ago. In the meantime, I have changed my
mind about a number of things. I have come to realize that
questions concerning individuals, society, and freedom are more
complicated than I then believed. There are too many complexities
and problems involved for everything to be settled in one drastic
Utopian stroke. I have come to realize that we do need some
government to protect liberty and prevent the powerful from
oppressing individuals, and I now believe that representative
democracy is preferable to all other systems for this very purpose
of protecting the rights of the individual. I realize now that the
modern industrial society of which I was so wary has in fact made
possible a fantastic standard of living and widespread freedom.
But my fundamental urge for liberty is the same today as in that
wonderful election campaign of 1988. I want people to be free,
with no one oppressing anyone else, and with governments forbidden
to fence people in or to exclude them with tariffs and borders.
8
That is why I love what is rather barrenly termed ‘‘globalization,’’
the process by which people, information, trade, investments,
democracy, and the market economy are tending more
and more to cross national borders. This internationalization has
made us less constricted by mapmakers’ boundaries.
Political power has always been a creature of geography, based
on physical control of a certain territory. Globalization is enabling
us more and more to override these territories, by traveling in
person and by trading or investing across national borders. Our
options and opportunities have multiplied as transportation costs
have fallen, as we have acquired new and more efficient means
of communication, and as trade and capital movements have
been liberalized.
We don’t have to shop with the big local company; we can
turn to a foreign competitor. We don’t have to work for the
village’s one and only employer; we can seek out alternative opportunities.
We don’t have to make do with local cultural amenities;
the world’s culture is at our disposal. We don’t have to spend
our whole lives in one place; we can travel and relocate.
Those factors lead to a liberation of our thinking. We no longer
settle for following the local routine; we want to choose actively
and freely. Companies, politicians, and associations have to exert
themselves to elicit interest or support from people who have a
whole world of options to choose from. Our ability to control
our own lives is growing, and prosperity is growing with it.
That is why I find it pathetic when people who call themselves
anarchists engage in the globalization struggle—but against it,
not for it! I visited Gothenburg, Sweden, in June 2001 during
the big European Union summit. I went there in order to explain
why the problem with the EU is that in many ways it is fighting
9
globalization and liberalization, and to present my view that borders
should be opened and controls dismantled.
I never got the chance to give my speech. The place where I
was to speak was suddenly in the middle of a battle zone, where
so-called anti-globalization anarchists were smashing shops and
throwing stones at police officers who were trying to defend a
democratic meeting. These were ‘‘anarchists’’ demanding prohibitions
and controls and throwing stones at people with different
values, ‘‘anarchists’’ who insisted that the government retake control
of people who no longer found themselves constrained by
national boundaries. They made a mockery of the idea of freedom.
To our cheerful Anarchist Front, people like that had nothing to
do with anarchism. In our simplified teenage vocabulary, they
were, if anything, fascists.
But that violence is only part of a broader movement that is
critical of increasing globalization. In the past few years, more
and more people have been complaining that the new liberty and
internationalism have gone too far, giving rise to a ‘‘hypercapitalism.’’
The protest movement against this more global capitalism
may call itself radical and profess to stand for exciting new ideas,
but its arguments actually represent the same old opposition to
free markets and free trade that has always been shown by national
rulers. Many groups—authoritarian Third World regimes and
Eurocrats, agrarian movements and monopoly corporations, conservative
intellectuals and new left movements—are afraid of a
globalized humanity acquiring more power at the expense of
political institutions. All of them are united in viewing globalization
as a monster completely out of control, a monster that has
to be rounded up and restrained.
Much of the criticism of globalization is based on portraying
it as something big and menacing. Often such criticism is not
10
reasoned argument, but flat statements of fact. Critics may say,
for example, that 51 of the world’s biggest economies are corporations
or that something like $1.5 trillion are moved around in
financial markets every day, as if size itself were intrinsically dangerous
and terrifying. But that is arithmetic, not argument. It
remains to be proved that big businesses or high turnover are
problems in themselves. Frequently, the detractors forget to prove
any such thing. In this book I argue for the opposite view: as
long as we are at liberty to pick and choose, there is nothing
wrong with certain forms of voluntary cooperation growing large
through success.
Such imposing numbers and the abstract term ‘‘globalization’’—
coined in the early 1960s but in common use only since
the 1980s—conjure up the image of an anonymous, enigmatic,
elusive force. Simply because globalization is governed by people’s
individual actions across different continents, and not from a
central control booth, it seems unchecked, chaotic. Political theorist
Benjamin Barber echoed the thoughts of a host of like-minded
intellectuals when he bemoaned the apparent absence of ‘‘viable
powers capable of opposing, subduing, and civilizing the anarchic
forces of the global economy.’’1
Many feel powerless in the face of globalization, and that feeling
is understandable when we consider how much is determined by
the decentralized decisions of millions of people. If others are free
to run their own lives, we have no power over them. But in
return, we acquire a new power over our own lives. That kind
of powerlessness is a good thing. No one is in the driver’s seat,
because all of us are steering.
The Internet would wither and die if we did not send e-mails,
order books, and download music every day through this global
computer network. No company would import goods from
11
abroad if we didn’t buy them, and no one would invest money
over the border if there weren’t entrepreneurs there willing to
expand existing businesses or launch new ones in response to
customer demand. Globalization consists of our everyday actions.
We eat bananas from Ecuador, drink wine from France, watch
American movies, order books from Britain, work for export
companies selling to Germany and Russia, vacation in Thailand,
and save money for retirement in funds investing in South America
and Asia. Capital may be channeled by finance corporations, and
goods may be carried across borders by business enterprises, but
they only do these things because we want them to. Globalization
takes place from beneath, even though politicians come running
after it with all sorts of abbreviations and acronyms (EU, IMF,
UN, WTO, UNCTAD, OECD) in a bid to structure the process.
Of course, keeping up with the times doesn’t always come
easily, especially to intellectuals in the habit of having everything
under control. In a book about the 19th century Swedish poet
and historian Erik Gustaf Geijer, Anders Ehnmark writes, almost
enviously, that Geijer was able to keep himself up to date on all
important world events just by sitting in Uppsala reading the
Edinburgh Review and the Quarterly Review.2 That is how simple
and intelligible the world can be when only a tiny elite in the
capitals of Europe makes any difference to the course of world
events. But how complex and confusing everything is becoming
now that the other continents are awakening and developments
are also beginning to be affected by ordinary people’s everyday
decisionmaking. No wonder, then, that influential people, decisionmakers,
and politicians claim that ‘‘we’’ (meaning they) lose
power because of globalization. They have lost some of it to us—
to ordinary citizens.
12
Not all of us are going to be global jet-setters, but we don’t
have to be in order to be a part of the globalization process. In
particular, the poor and powerless find their well-being vastly
improved when inexpensive goods are no longer excluded by tariff
barriers and when foreign investments offer employment and
streamline production. Those still living in the place where they
were born stand to benefit enormously from information being
allowed to flow across borders, and from being free to choose
their political representatives. But that requires more in the way
of democratic reforms and economic liberalization.
Demanding more liberty to pick and choose may sound trivial,
but it isn’t. To those of us in the affluent world, the availability
of nonlocal options may seem like a luxury, or even an annoyance.
Say what you will about Starbucks or trashy American reality
shows, but they aren’t totally intolerable. Well, not the Starbucks,
anyway. The existence from which globalization delivers people
in the Third World really is intolerable. For the poor, existence
means abject poverty, filth, ignorance, and powerlessness; it means
always wondering where the next meal is coming from; it means
walking many miles to collect water that may not be fit to drink.
When globalization knocks at the door of Bhagant, an elderly
agricultural worker and ‘‘untouchable’’ in the Indian village of
Saijani, it leads to houses being built of brick instead of mud, to
people getting shoes on their feet and clean clothes—not rags—
on their backs. Outdoors, the streets now have drains, and the
fragrance of tilled earth has replaced the stench of refuse. Thirty
years ago Bhagant didn’t know he was living in India. Today he
watches world news on television.3
The new freedom of choice means that people are no longer
consigned to working for the village’s only employers, the large
and powerful farmers. When the women get work away from
13
home, they also become more powerful within the family. New
capital markets mean that Bhagant’s children are not compelled
to borrow money from usurers who collect payment in future
labor. The yoke of usury, by which the whole village was once
held in thrall, vanishes when people are able to go to different
banks and borrow money from them instead.
Everyone in Bhagant’s generation was illiterate. In his children’s
generation, just a few were able to attend school, and in his
grandchildren’s generation, everyone goes to school. Things have
improved, Bhagant finds. Liberty and prosperity have grown.
Today the children’s behavior is the big problem. When he was
young, children were obedient and helped in the home. Now
they have grown so terribly independent, making money of their
own. Such things can cause tensions, of course, but it isn’t quite
the same thing as the risk of having to watch your children die,
or having to sell them to a loan shark.
The stand that you and I and other people in the privileged
world take on the burning issue of globalization can determine
whether more people are to share in the development that has
taken place in Bhagant’s village or whether that development is
to be reversed.
***
Critics of globalization often try to paint a picture of neo-liberal*
market marauders having secretly plotted for capitalism to attain
* I use the term ‘‘liberal’’ in the European sense to refer to people in the 19thcentury
liberal tradition, who support free trade and open markets—economic as
well as civil liberties—rather than in the common American sense meaning politically
left of center. In American political parlance, ‘‘libertarian’’ is probably closer
to what I have in mind.
14
world mastery. We find political theorist John Gray, for example,
describing the spread of free-market policies as a virtual coup
d’etat staged by ‘‘radical’’ ideologues who manage to ‘‘infiltrate’’
government. ‘‘The goal of this revolution,’’ according to Gray,
‘‘was to insulate neo-liberal policy irreversibly from democratic
accountability in political life.’’4 Some pundits—among them Robert
Kuttner, editor of The American Prospect, and economist Joseph
Stiglitz—even characterize free-market advocacy as a kind of quasireligious
cult, which they call ‘‘market fundamentalism.’’
Deregulation, privatization, and trade liberalization, however,
were not invented by ultra-liberal ideologues. True, there were
political leaders—Reagan and Thatcher, for instance—who had
been inspired by economic liberalism. But the biggest reformers
were communists in China and the Soviet Union, protectionists
in Latin America, and nationalists in Asia. In many other European
countries, the progress has been spurred by Social Democrats. In
short, the notion of conspiratorial ultra-liberalsmaking a revolution
by shock therapy is completely off the mark. Instead, it is pragmatic,
often anti-liberal politicians, realizing that their governments have
gone too far in the direction of control-freakery, who have for this
very reason begun liberalizing their economies. The allegation of
liberal-capitalist world dominion has to be further tempered by
the observation that today we probably have the biggest public
sectors and the highest taxes the world has ever known. The liberalization
measures that have been introduced may have abolished
some of the past’s centralist excesses, but they have hardly ushered
in a system of laissez faire. And because the rulers have retreated
on their own terms and at their own speed, there is reason to ask
whether things really have gone too far, or whether they have not
gone far enough.
15
When I say that I mean to defend capitalism, what I have in
mind is the capitalistic freedom to proceed by trial and error,
without having to ask rulers and border officials for permission
first. That is the liberty that I once thought anarchy would bring,
but under the control of laws ensuring that one person’s freedom
will not encroach on other people’s. I want everyone to have that
liberty in abundance. If the critics of capitalism feel that we already
have a superabundance of that liberty today, I would like to have
more still—a superduper abundance if possible—especially for the
poor of the world’s population, who as things now stand have little
say regarding their work and consumption. That is why I do not
hesitate to call this book In Defense of Global Capitalism, even
though the ‘‘capitalism’’ I celebrate is really more a possible future
than a currently existing system.
By capitalism I do not specifically mean an economic system of
capital ownership and investment opportunities. Those things can
also exist in a command economy. What I mean is the liberal
market economy, with free competition based on the right to use
one’s property and the freedom to negotiate, to conclude agreements,
and to start up business activities. What I am defending,
then, is individual liberty in the economy. Capitalists are dangerous
when, instead of seeking profit through competition, they join
forces with the government. If the state is a dictatorship, corporations
can easily be parties to human rights violations, as a number
of Western oil companies have been in African states.5 By the same
token, capitalists who stalk the corridors of political power in search
of benefits and privileges are not true capitalists. On the contrary,
they are a threat to the free market and as such must be criticized
and counteracted. Often, businessmen want to play politics, and
politicians want to play at being businessmen. That is not a market
16
economy; it is a mixed economy in which entrepreneurs and politicians
have confused their roles. Free capitalism exists when politicians
pursue liberal policies and entrepreneurs do business.
What I really believe in, first and foremost, isn’t capitalism or
globalization. It isn’t the systems or regulatory codes that achieve
all we see around us in the way of prosperity, innovation, community,
and culture. Those things are created by people. What I
believe in is man’s capacity for achieving great things, and the
combined force that results from our interactions and exchanges.
I plead for greater liberty and a more open world, not because I
believe one system happens to be more efficient than another, but
because those things provide a setting that unleashes individual
creativity as no other system can. They spur the dynamism that
has led to human, economic, scientific, and technical advances.
Believing in capitalism does not mean believing in growth, the
economy, or efficiency. Desirable as they may be, those are only
the results. At its core, belief in capitalism is belief in mankind.
Like most other liberals, I can endorse the opinion of French
socialist prime minister Lionel Jospin that we must have a ‘‘market
economy, not a market society.’’ My aim is not for economic
transactions to supplant all other human relations. My aim is
freedom and voluntary relations in all fields. In the cultural arena,
that means freedom of expression and of the press. In politics, it
means democracy and the rule of law. In social life, it means the
right to live according to one’s own values and to choose one’s
own company. And in the economy, it means capitalism and
free markets.
It is not my intention that we should put price tags on everything.
The important things in life—love, family, friendship, one’s own
way of life—cannot be assigned a dollar value. Those who believe
17
that, to the liberal mind, people always act with the aimof maximizing
their income know nothing about liberals, and any liberal who
does think that way knows nothing of human nature. It is not a
desire for better payment that moves me to write a book about
the value of globalization instead of becoming an accountant or a
fisherman. I am writing about something I believe in, something
that matters. And I wish to live in a liberal society because such
a society gives people the right to choose what matters to them.
Last of all, I offer my heartfelt thanks to the friends who helped
me to marshal my thoughts on these matters, for the simple reason
that this subject also matters to them, especially in the case of
Fredrik Erixon, Sofia Nerbrand, and Mauricio Rojas. A big thank
you also to Barbro Bengtson, Charlotte Ha¨ggblad, and Kristina
von Unge for their efficiency in making mymanuscript presentable.
Johan Norberg
Stockholm, January 2003
18
I
Every day in every way . . .
The half truth
At least since 1014, when Archbishop Wulfstan, preaching in
York, declared that ‘‘The world is in a rush and is getting close
to its end,’’ people have believed that everything is growing worse,
that things were better in the old days. Much of the discussion
surrounding globalization presupposes that the world is rapidly
going to hell in a handbasket. A few years ago, Pope John Paul
II echoed his colleague of a thousand years ago by summing up
world development in the following terms:
Various places are witnessing the resurgence of a certain capitalist
neoliberalism which subordinates the human person to blind market
forces and conditions the development of peoples on those
forces. . . . In the international community, we thus see a small
number of countries growing exceedingly rich at the cost of the
increasing impoverishment of a great number of other countries;
as a result the wealthy grow ever wealthier, while the poor grow
ever poorer.1
The world is said to have become increasingly unfair. The chorus
of the debate on the market economy runs: ‘‘The rich are getting
richer, and the poor are getting poorer.’’ This statement is offered
as a dictate of natural law, not as a thesis to be argued. But if
we look beyond the catchy slogans and study what has actually
happened in the world, we find this thesis to be a half-truth. The
first half is true: the rich have indeed grown richer—not all of
20
them everywhere, but generally speaking. Those of us who are
privileged to live in affluent countries have grown appreciably
richer in the past few decades. So too have the Third World rich.
But the second half is, quite simply, wrong. The poor have not,
generally speaking, come to be worse off in recent decades. On
the contrary, absolute poverty has diminished, and where it was
quantitatively greatest—in Asia—many hundreds of millions of
people who barely twenty years ago were struggling to make ends
meet have begun to achieve a secure existence and even a modest
degree of affluence. Global misery has diminished and the great
injustices have started to unravel. This opening chapter will contain
a long succession of figures and trend descriptions that are
necessary to correct the very widespread misunderstanding that
exists concerning the state of the world.2
One of the most interesting books published in recent years is
On Asian Time: India, China, Japan 1966–1999, a travelogue in
which Swedish author Lasse Berg and photographer Stig Karlsson
describe new visits to Asian countries where they traveled during
the 1960s.3 Then, they saw poverty, abject misery, and imminent
disaster. Like many other travelers to those countries, they could
not bring themselves to hold out much hope for the future, and
they thought that socialist revolution might be the only way out.
Returning to India and China in the 1990s, they could not
help seeing how wrong they were. More and more people have
extricated themselves from poverty; the problem of hunger is
steadily diminishing; the streets are cleaner. Mud huts have given
way to brick buildings, wired up for electricity and sporting
television aerials on their roofs.
When Berg and Karlsson first visited Calcutta, a tenth of its
inhabitants were homeless, and every morning trucks sent by
the public authorities or missionary societies would go around
21
collecting the bodies of those who had died in the night. Thirty
years later, setting out to photograph people living on the streets,
they had difficulty in finding any such people. The rickshaw, a
passenger cart pulled by a barefoot man, is disappearing from the
urban scene, and people are traveling by car, motorcycle, and
subway instead.
When Berg and Karlsson showed young Indians photographs
of what things looked like on that last visit, they refused to believe
that it was even the same place. Could things really have been
so dreadful? One striking illustration of the change is provided
by a pair of photographs on page 42 of their book. In the old
one, taken in 1976, a 12-year-old Indian girl named Satto holds
up her hands. They are already furrowed and worn, prematurely
aged by many years’ hard work. The recent picture shows Satto’s
13-year-old daughter Seema, also holding up her hands. They are
young and soft, the hands of a child whose childhood has not
been taken away from her.
The biggest change of all is in people’s thoughts and dreams.
Television and newspapers bring ideas and images from the other
side of the globe, widening people’s notions of what is possible.
Why should one have to spend all one’s life in one place? Why
must a woman be forced to have children early and sacrifice her
career? Why must marriages be arranged—and the untouchables
excluded from them—when family relations in other countries
are so much freer? Why make do with this kind of government
when there are alternative political systems available?
Lasse Berg writes, self-critically:
Reading what we observers, foreigners as well as Indians, wrote
in the 60s and 70s, nowhere in these analyses do I see anything
of present-day India. Often nightmare scenarios—overpopulation,
22
tumult, upheaval or stagnation—but not this calm and steady
forward-jogging, and least of all this modernization of thoughts
and dreams. Who foresaw that consumerism would penetrate so
deeply in and among the villages? Who foresaw that both the
economy and general standard of living would do so well? Looking
back, what the descriptions have in common is an overstatement
of the extraordinary, frightening, uncertain (most writers had their
personal hobby-horses and favorites) and an understatement of the
force of normality.4
The development described by Lasse Berg has resulted, not from
socialist revolution, but rather from a move in the past few decades
toward greater individual liberty. Freedom of choice and international
exchange have grown, and investments and development
assistance have transmitted ideas and resources, allowing the developing
world to benefit from the knowledge, wealth, and inventions
of other countries. Imports of medicines and new health
care systems have improved living conditions. Modern technology
and new methods of production have stepped up output and
improved the food supply. Individual citizens have become more
and more free to choose their own occupations and to sell their
products. We can tell from the statistics how this enhances
national prosperity and reduces poverty among the population.
But the most important thing of all is liberty itself, the independence
and dignity that autonomy confers on people who have
been living under oppression.
With the spread of humanist ideas, slavery, which a few centuries
ago was a worldwide phenomenon, has been beaten down in
one continent after another. It lives on today illegally but, since
the liberation of the last slaves in the Arabian Peninsula in 1970,
has been forbidden practically everywhere on earth. The forced
23
labor of precapitalist economies is being rapidly superseded by
freedom of contract and freedom of movement where the market
breaks through.
24
Poverty reduction
Between 1965 and 1998, the average world citizen’s income practically
doubled, from $2,497 to $4,839, adjusted for purchasing
power and inflation. That increase has not come about through
the industrialized nations multiplying their incomes. During this
period the richest fifth of the world’s population increased their
average income from $8,315 to $14,623, or by roughly 75 percent.
For the poorest fifth of the world’s population, the increase has
been faster still, with average income more than doubling during
the same period from $551 to $1,137.5 World consumption today
is more than twice what it was in 1960.
Thanks to material developments in the past half century, the
world has over three billion more people living above the poverty
line. This is historically unique. The United Nations Development
Program (UNDP) has observed that, all in all, world poverty has
fallen more during the past 50 years than during the preceding
500. In its Human Development Report 1997, the UNDP writes
that humanity is in the midst of ‘‘the second great ascent.’’ The
first began in the 19th century, with the industrialization of the
United States and Europe and the rapid spread of prosperity. The
second began during the post-war era and is now in full swing,
with first Asia and then the other developing countries scoring
ever-greater victories in the war against poverty, hunger, disease,
and illiteracy.
25
The great success in reducing poverty in the 20th century shows
that eradicating severe poverty in the first decades of the 21st
century is feasible.6
Poverty is still rapidly diminishing. ‘‘Absolute poverty’’ is usually
defined as the condition of having an income less than one dollar
a day. In 1820 something like 85 percent of the world’s population
were living on the equivalent of less than a dollar a day. By 1950
that figure had fallen to about 50 percent and by 1980 to 31
percent. According to World Bank figures, absolute poverty has
fallen since 1980 from 31 to 20 percent (a figure of 24 percent
is often mentioned, meaning 24 percent of the population of the
developing countries). The radical reduction of the past 20 years
is unique in that not only the proportion but also the total number
of people living in absolute poverty has declined—for the first
time in world history. During these two decades the world’s
population has grown by a billion and a half, and yet the number
of absolute poor has fallen by about 200 million. That decrease
is connected with economic growth. In places where prosperity
has grown fastest, poverty has been most effectively combated.
In East Asia (China excluded), absolute poverty has fallen from
15 to just over 9 percent, in China from 32 to 17 percent. Six
Asians in 10 were absolutely poor in 1975. Today’s figure, according
to the World Bank, is fewer than 2 out of 10.
Even those encouraging findings, however, almost certainly
overestimate world poverty significantly because the World Bank
uses notoriously unreliable survey data as the basis for its own
assessments. Former World Bank economist Surjit S. Bhalla
recently published his own calculations, supplementing survey
results with national accounts data. This method, he argues convincingly,
is far more likely to provide an accurate measurement.
26
Bhalla found that poverty had fallen precipitously, from a level
of 44 percent in 1980 to 13 percent at the end of 2002. If
those figures are correct, then the last 20 years have seen an
extraordinary, unprecedented reduction of poverty—twice that
achieved in any other 20-year period on record. The UN’s goal
of lowering world poverty to below 15 percent by 2015 has already
been achieved and surpassed.7
‘‘But,’’ the skeptic asks, ‘‘what do people in the developing
countries want consumption and growth for? Why must we force
our way of life upon them?’’ The answer is that we must not
force a particular way of life on anyone. Whatever their values,
the great majority of people the world over desire better material
conditions, for the simple reason that they will then have more
options, regardless of how they then decide to use that increased
wealth. As Indian economist and Nobel laureate Amartya Sen
has emphasized, poverty is not just a material problem. Poverty
is something wider: it is about powerlessness, about being deprived
of basic opportunities and freedom of choice. Small incomes are
often symptomatic of the absence of these things, of people’s
marginalization or subjection to coercion. Human development
means enjoying a reasonably healthy and secure existence, with
a good standard of living and freedom to shape one’s own life.
It is important to investigate material development because it
suggests how wealth can be produced and because it contributes
to development in this broader sense. Material resources, individual
and societal, enable people to feed and educate themselves,
to obtain health care, and to be spared the pain of watching their
children die. Those are pretty universal human desires, one finds,
when people are allowed to choose for themselves.
27
Average life expectancy is increasing
0
10
20
30
40
50
60
70
80
1900 1950 1960 1970 1998
(estimate)
Average life expectancy in developing countries, years
30
41
46
55
65
Source: UNDP, Human Development Report 1997 (New York: Oxford University Press for the
United Nations Development Program, 1997).
The worldwide improvement in the human condition is reflected
in a very rapid growth of average life expectancy. At the beginning
of the 20th century, average life expectancy in the developing
countries was under 30 years; by 1960 it had risen to 46, and in
1998 it was 65. Longevity in the developing countries today is
nearly 15 years higher than it was a century ago in the world’s
leading economy at the time, Britain. Development has been
slowest in sub-Saharan Africa, but even there life expectancy has
risen, from 41 to 51 years since the 1960s. Average life expectancy
remains highest in the most affluent countries—in the Organization
for Economic Cooperation and Development (OECD) countries
it is 78—but the fastest improvement has been in the poor
28
countries. In 1960, their average life expectancy was 60 percent
of that of the affluent countries. Today it is more than 80 percent.
Nine out of every 10 people in the world today can expect to
live beyond 60, which is more than twice the average only a
hundred years ago.
In On Asian Time, Berg describes returning to Malaysia 30
years after his first visit and suddenly realizing that in the meantime
the average life expectancy of the population has risen by 15 years.
That means that the people he meets there have been able to
celebrate every birthday since his last visit having come only half
a year closer to death.8
The improvement in health has been partly because of better
eating habits and living conditions, but also because of improved
health care. Twenty years ago there was one doctor for every
thousand people; today there are 1.5. In the very poorest countries,
there was 0.6 of a doctor per thousand inhabitants in 1980; this
statistic has almost doubled to 1.0. Perhaps the most dependable
indicator of the living conditions of the poor is infant mortality,
which in the developing countries has fallen drastically. Whereas
18 percent of newborns—almost one in five!—died in 1950, by
1976 this figure had fallen to 11 percent and in 1995 was only
6 percent. In the past 30 years alone, mortality has been almost
halved, from 107 deaths per thousand births in 1970 to 59 per
thousand in 1998. More and more people, then, have been able
to survive despite poverty. And even as more people in poor
countries survive, a progressively smaller proportion of the world’s
population is poor, which in turn suggests that the reduction of
poverty has been still greater than is apparent from a superficial
study of the statistics.
29
Infant mortality is declining
0
5
10
15
20
1950 1970 1995
18
11
Years
6
Newborns in the developing countries
not surviving the first year, percentages
Source: UNDP, Human Development Report 1997 (New York: Oxford University Press for the
United Nations Development Program, 1997).
30
Hunger
Longer lives and better health are connected with the reduction
of one of the cruelest manifestations of underdevelopment—
hunger. Calorie intake in the Third World has risen by 30 percent
per capita since the 1960s. According to theUNFood and Agriculture
Organization, 960 million people in the developing countries
were undernourished in 1970. In 1991 the figure was 830 million,
falling by 1996 to 790 million. In proportion to population, this
is an immensely rapid improvement. Thirty years ago nearly 37
percent of the population of the developing countries were
afflicted with hunger. Today’s figure is less than 18 percent.
Many? Yes. Too many? Of course. But the number is rapidly
declining. It took the first two decades of the 20th century for
Sweden to be declared free from chronic malnutrition. In only
30 years the proportion of hungry in the world has been reduced
by half, and it is expected to decline further, to 12 percent by
2010. There have never been so many of us on earth, and we
have never had such a good supply of food. During the 1990s,
the ranks of the hungry diminished by an average of 6 million
every year, at the same time as the world’s population grew by
about 800 million.
Things have moved fastest in East and Southeast Asia, where
the proportion of hungry has fallen from 43 to 13 percent since
1970. In Latin America, it has fallen from 19 to 11 percent, in
North Africa and the Middle East from 25 to 9 percent, in South
Asia from 38 to 23 percent. The worst development has occurred
31
in Africa south of the Sahara, where the number of hungry has
actually increased, from 89 to 180 million people. But even there
the proportion of the population living in hunger has declined,
albeit marginally, from 34 to 33 percent.
World hunger is declining
0
5
10
15
20
25
30
35
40
2010
(forecast)
1970 1980 1991 1996
37
29
20
18
12
Undernourished persons in the developing
countries, percentages
Years
Source: Food and Agriculture Organization of the United Nations, ‘‘The State of Food and
Agriculture,’’ Document C99/2 to FAO conference, 30th Session, Rome, Nov. 12-13, 1998.
Global food production has doubled during the past half century,
and in the developing countries it has tripled. Global food supply
increased by 24 percent, from 2,257 to 2,808 calories per person
daily, between 1961 and 1999. The fastest increase occurred in
the developing countries, where consumption rose by 39 percent,
from 1,932 to 2,684 calories daily.9 Very little of this development
32
is due to new land having been converted to agricultural use.
Instead, the old land is being farmed more efficiently. The yield
per acre of arable land has virtually doubled. Wheat, maize, and
rice prices have fallen by more than 60 percent. Since the beginning
of the 1980s alone, food prices have halved and production
from a given area of land has risen by 25 percent—a process that
has been swifter in poor countries than in affluent ones.
Such is the triumph of the ‘‘green revolution.’’ Higher-yield,
more-resistant crops have been developed, at the same time as
sowing, irrigation, manuring, and harvesting methods have
improved dramatically. New, efficient strains of wheat account
for more than 75 percent of wheat production in the developing
countries, and farmers there are estimated to have earned nearly
$5 billion as a result of the change. In southern India, the green
revolution is estimated to have boosted farmers’ real earnings by
90 percent and those of landless peasants by 125 percent over 20
years. Its impact has been least in Africa, but even there the green
revolution has raised maize production per acre by between 10
and 40 percent. Without this revolution, it is estimated that world
prices of wheat and rice would be nearly 40 percent higher than
they are today and that roughly another 2 percent of the world’s
children—children who are now getting enough to eat—would
have suffered from chronic malnourishment. Today’s food problem
has nothing to do with overpopulation. Hunger today is a
problem of access to the available knowledge and technology, to
wealth, and to the secure background conditions that make food
production possible. Many researchers believe that if modern
farming techniques were applied in all the world’s agriculture, we
would already be able, here and now, to feed another billion or
so people.10
The incidence of major famine disasters has also declined dramatically,
largely as a result of the spread of democracy. Starvation
33
has occurred in states of practically every kind—communist
regimes, colonial empires, technocratic dictatorships, and ancient
tribal societies. In all cases they have been centralized, authoritarian
states that suppressed free debate and the workings of the
market. As Amartya Sen observes, there has never been a famine
disaster in a democracy. Even poor democracies like India and
Botswana have avoided starvation, despite having a poorer food
supply than many countries where famine has struck. By contrast,
communist states like China, the Soviet Union, Cambodia, Ethiopia,
and North Korea, as well as colonies like India under the
British Raj, have experienced starvation. This shows that famine
is caused by dictatorship, not by food shortage. Famine is induced
by leaders destroying production and trade, making war, and
ignoring the plight of the starving population.
Sen maintains that democracies are spared starvation for the
simple reason that it is easily prevented if the rulers of a society wish
to prevent it. Rulers can refrain from impeding the distribution of
food, and they can create jobs for people who would not be able
to afford food purchases in times of crisis. But dictators are under
no pressure: they can eat their fill however badly off their people
are, whereas democratic leaders will be unseated if they fail to
address food distribution problems. Additionally, a free press
makes the general public aware of the problems, so that they can
be tackled in time. In a dictatorship, even the leaders may be
deceived by censorship. Much evidence suggests that China’s
leaders were reassured by their own propaganda and their subordinates’
laundered statistics while 30 million people died of starvation
during ‘‘the Great Leap Forward’’ between 1958 and 1961.11
At the same time as more people are getting the food they
need, the supply of potable drinking water has doubled, which
is hugely important for the reduction of disease and infection in
34
developing countries. Worldwide, 8 people in 10 now have access
to pure water. A generation ago, 90 percent of the world’s rural
population were without pure water. Today that applies to only
25 percent. At the beginning of the 1980s, little more than half
of India’s population had access to pure water, while 10 years
later the figure was more than 80 percent. In Indonesia that
percentage rose from 39 to 62. Countries like Kuwait and Saudi
Arabia today derive large parts of their water supply from desalination
of seawater, which is available in practically unlimited quantities.
Desalination is a costly process, but it shows that growing
prosperity can solve problems of scarce resources.
35
Education
Education is one of the most reliable methods of increasing people’s
development and earning prospects, yet many people are
denied access to it. Access to education is very much a gender
issue: roughly 65 percent of those who are not allowed to attend
school, and who therefore remain illiterate, are girls. It is also a
poverty problem. In many countries the poorest people have no
education at all. Poor families cannot send their children to school,
either because school is too expensive to afford at all or because
the return on education is insufficient. In India, children from
the wealthiest 15 percent of families receive 10 years more schooling
than those from the poorest 15 percent. And so it is no
surprise that education is quickly extended when the economy
gathers speed. Rising levels of education in turn act as a spur to
economic growth.
Participation in elementary education has come close to 100
percent the world over. The big exception, once again, is Africa
south of the Sahara, and even there it has reached three-quarters
of the population. Participation in high school education rose
from 27 percent in 1960 to 67 percent in 1995. During that
time, the proportion of children allowed to attend school rose by
80 percent. Today there are nearly 900 million illiterate adults.
That sounds like a lot, and indeed it is, but it reflects a significant
decrease, from 70 percent of the population of the developing
world in the 1950s to 25–30 percent today. The very rapid
spread of literacy in the world today is readily apparent from
36
an examination of literacy rates across generations. Where the
youngest people are concerned, illiteracy is rapidly disappearing.
Illiteracy is diminishing
0
10
20
30
40
50
60
70
80
1925 1948 1970
75
52
20
Percentage of illiterates
Developing countries, birth years
Source: United Nations Educational, Scientific and Cultural Organization, The World
Education Report 2000 (Paris: UNESCO Publishing, 2000).
37
Democratization
The accelerating spread of information and ideas throughout
the world, coupled with rising education standards and growing
prosperity, is prompting demands for genuine political rights.
Critics of globalization maintain that a dynamic market and international
capital are a threat to democracy, but what they really
see threatened is the use that they would like to make of democracy.
Never before in human history have democracy, universal suffrage,
and the free formation of opinion been as widespread as they
are today.
A hundred years ago, no country on earth had universal and
equal suffrage. The world was ruled by empires and monarchies.
Even in the West, women were excluded from the democratic
process. During the 20th century, large parts of the world were
subjugated by communism, fascism, or National Socialism, ideologies
that led to major wars and the political murder of more
than a hundred million people. With just a few exceptions, those
systems have fallen. The totalitarian states have collapsed, the
dictatorships have been democratized, and the absolute monarchies
have been deposed. A hundred years ago, one-third of the
world’s population was governed by remote colonial powers.
Today the colonial empires have been dismantled. In the past
few decades alone, dictatorships have fallen like bowling pins,
especially following the tearing down of the communist Iron
Curtain. The end of the Cold War also put an end to the unpleasant
American strategy of supporting Third World dictatorships
as long as they opposed the Soviet bloc.
38
According to the think tank Freedom House, there were 121
democracies with multiparty systems and with universal, equal
suffrage in 2002. Living in those democracies are some 3.5 billion
people, or roughly 60 percent of the world’s population. Freedom
House regards 85 countries, with a total of 2.5 billion inhabitants,
as ‘‘free’’ (i.e., democratic countries with civil rights). That is
more than 40 percent of the world’s inhabitants, the biggest
proportion ever. That many, in other words, are living in states
that guarantee the rule of law and permit free debate and an
active opposition.
The world is being democratized
0
10
20
30
40
50
60
70
80
1900 1950 2000
(0 percent)
Percentage of countries which are democracies
Percentage living in democracies
14.3
31.0
62.5
58.2
Years
Percentages
Source: Freedom House, ‘‘Democracy’s Century: A Survey of Global Political Change in the
20th Century’’ (New York: Freedom House, 2000), http://www.freedomhouse.org/reports/
century/pdf.
39
In 2002, there were 47 states that violated basic human rights.
Worst among them were Burma, Cuba, Iraq, Libya, North Korea,
Saudi Arabia, Sudan, Syria, and Turkmenistan—that is, the countries
least affected by globalization and least oriented in favor of
the market economy and liberalism. While deploring and combating
their oppression, suppression of opinion, government-controlled
media, and wiretapping, we should still remember that
such was the normal state of affairs for most of the world’s
population only a few decades ago. In 1973, only 20 countries
with populations of more than a million were democratically governed.
12
During the 1990s the number of ‘‘free’’ states in the world
increased by 21, at the same time as the number of unfree ones
declined by 3. This expansion of freedom has proceeded parallel
to the formation of many new states, following the disintegration
of old ones like the Soviet Union. The democratic trend continues.
And there is no reason to expect it to end now. Now and then
it is alleged that democracy is hard to reconcile with Islam, and
so it may seem in the world today. But we should remember that
many researchers were saying the same about Catholicism as
recently as the 1970s, when Catholic countries included, for
example, the military regimes of Latin America, the communist
states of eastern Europe, and dictatorships like the Philippines
under Ferdinand Marcos.
The number of wars has diminished by half during the past
decade, and today less than 1 percent of the world’s population
are directly affected by military conflicts. One reason is that
democracies simply do not make war on each other; another is
that international exchange makes conflict less interesting. With
freedom of movement and free trade, citizens are not all that
interested in the size of their country. People create prosperity,
40
not by annexing land from another country, but by carrying on
trade with that land and its resources. If, on the other hand, the
world consists of self-contained nation states, the land of other
countries has no value until one is able to seize it.
‘‘The ox made peace’’ is a 16th-century saying from the border
country between Denmark and Sweden. Farmers near the border
made peace with each other against the wishes of their rulers
because they wanted to trade meat and butter for herring and
spices. In the trenchant words of the 19th-century French liberal
Fre´de´ric Bastiat, ‘‘If goods do not cross borders, soldiers will.’’
Mutual dependence means fewer potential causes of conflict
between states. Cross-ownership, multinational corporations,
investment, and privately owned natural resources make it hard
to tell where one country really ends and another begins. Several
centuries ago, when the Swedes pillaged Europe, it was other
people’s resources they wrecked and stole. If they were to do
the same thing today, the victims would include many Swedish
companies, not to mention Swedish capital and Swedish export
markets.
It has been asserted that the globalist challenge to nation-states
leads to separatism and to local and ethnic conflicts. There is
indeed a risk of separatist activity when national power is called
into question, and the tragedy of the former Yugoslavia is evidence
of the bloody conflicts that can follow. But the number of major
internecine conflicts—those costing more than a thousand lives—
fell from 20 to 13 between 1991 and 1998. Nine of those conflicts
occurred in Africa, the world’s least democratized, least globalized,
and least capitalist continent. The conflicts that follow the collapse
of totalitarian states are primarily power struggles in temporary
power vacuums. In several countries, centralization has prevented
the evolution of stable, democratic institutions and civil societies,
41
and when centralization disappears, chaos ensues pending the
establishment of new institutions. There is no reason for believing
this to be a new trend in a more internationalized and democratic
world.
42
Oppression of women
One of the world’s cruelest injustices is the oppression of women.
There are parts of the world where women are regarded as the
property of men. A father is entitled to marry off his daughters,
and it is the husband who decides what work his wife is to do.
In many countries, a husband owns his wife’s passport or ID
card, with the result that she cannot even travel freely in her own
country. Laws disqualify women from divorce, from ownership
of property, and from work outside the home. Daughters are
denied the rights of inheritance enjoyed by sons. Girls receive
nothing like the same education as boys, and very often no education
at all. Women are abused and subjected to genital mutilation
and rape without any intervention by the authorities.
It is true, as many complain, that globalization upsets old
traditions and habits. How, for example, do you maintain patriarchal
family traditions when children are suddenly earning more
than the head of the family? One of the traditions challenged by
globalization is the long-standing subjugation of women. Through
cultural contacts and the interchange of ideas, new hopes and
ideals are disseminated. Indian women who can see on television
that women are not necessarily housewives begin to contemplate
careers in law or medicine. Some Chinese women who had previously
been isolated have been inspired to press demands for
greater autonomy and to make decisions of their own by the
website gaogenxie.com. The site’s name, which means ‘‘highheeled
shoes,’’ is a symbol of freedom contrasting with the tradition
of bound feet. When women begin making their own decisions
about their consumer behavior or their employment, they
43
become more insistent in demanding equal liberty and power in
other fields.
‘‘My parents brought me up to be pretty and well-behaved. I was to be
obedient and polite, submissive to them and my teachers. . . . When I
eventually have children, I want to go in for equality within the family,
between man and woman, between children and parents. It wasn’t like
that for us. To my parents’ generation it went without saying that the
married woman’s life took place within the four walls of the home, where
she did everything, even if she was working. I think that age will soon be
gone forever.’’
Shang Ying, a 21-year-old Chinese girl employed as a bank clerk in
Shanghai.13
Growing prosperity gives women more opportunity to become
independent and provide for themselves. Experience from Africa
and elsewhere shows that women are often leading entrepreneurs
for various kinds of small-scale production and exchange in the
informal sector, which suggests that, absent discrimination and
regulation by the government, the market is their oyster. And
indeed, the worldwide spread of freer conditions of service and
freer markets has made it increasingly difficult for women to be
kept out. Women today constitute 42 percent of the world’s work
force, compared with 36 percent 20 years ago. Capitalism doesn’t
care whether the best producer is a man or a woman. On the
contrary, discrimination is expensive because it involves the rejection
of certain people’s goods and labor. All studies have shown
that respect for women’s rights and their ability to exert influence
in the home are closely bound up with their ability to find
employment outside the home and earn an independent income.
44
Technological progress can expedite social progress. Women
in Saudi Arabia are prevented from showing themselves in public
unless they cover their whole bodies except the hands, eyes, and
feet. They are also disqualified from driving cars and from doing
other things. The practical effect of this has been to exclude them
from all economic activity. But now the Internet and the telephone
have suddenly made it possible for women to carry on business
from home, at the computer. Within a short span of time, a
profusion of women-owned enterprises has come into being, dealing,
for example, in fashion, travel bookings, or conference and
party arrangements. That is one reason why something like twothirds
of Internet users in Saudi Arabia are women. When several
thousand women suddenly show that they are every bit as competitive
as men, discrimination notwithstanding, the prohibitions
applying to them are made to look increasingly absurd. Awareness
and criticism of gender discrimination is growing.14
Democratization gives women a voice in politics, and in more
and more countries the laws have been reformed to establish
greater equality between the sexes. Divorce laws and rights of
inheritance are becoming less and less biased. Equality before the
law spreads with democracy and capitalism. The idea of equal
human dignity spreads, knocking out discrimination.
Gender equity also grows with prosperity. A World Bank study
of education in India found that, although boys are more likely
than girls to receive schooling at all income levels, the extent
of the disparity is highly wealth-dependent. In the wealthiest
households, the study found only a 2.5 percentage point difference
in the enrollment of male and female children. The difference
was a whopping 34 percentage points for children from the poorest
households.15 In the most unequal parts of the world—South
Asia, Africa, and the Middle East—the proportion of girls attending
school has doubled in the past 25 years. The global difference
45
between the proportion of women and men respectively enabled
to attend school has diminished by more than half in two decades.
On average in basic education worldwide, 46 percent of the pupils
are girls.
That statistic is important, not only for women but also for
their children. Better education and extra earnings for a mother
quickly result in better nourishment and education for her children,
whereas the connection between paternal income and child
welfare is less strong. In South Asia, where an inhuman attitude
concerning the value of women resulted—and still does—in high
mortality rates among girls during the first years of life, girls now
have a greater life expectancy at birth than boys. The average life
expectancy of women in the developing countries has increased
by 20 years during the past half century. Development is also
giving women more power over their own bodies. Increased power
for women in poor countries, and improved availability of contraception,
go hand in hand with reduced birthrates.
Helen Rahman of Shoishab, an Oxfam-funded organization working in Dhaka,
Bangladesh, with disadvantaged and homeless children and with working
women, maintains that the emergence of the country’s textile industry
during the past 20 years has given women better status: ‘‘The garment
industry has stimulated a silent revolution of social change. It used not to
be acceptable for a woman to work outside her neighborhood. Before, anyone
who left the countryside to go to the city was in disgrace; they were assumed
to be involved in prostitution. Now it is acceptable for five girls to rent a
house together.’’ Helen has noticed changes in social behavior too: ‘‘The
income the women earn gives them social status and bargaining power.
One very positive thing is that the average marriage age has increased.’’16
46
China
About half of the world’s poor live in the two most populous
countries, India and China, hence the great importance of what
happens in those countries. Both their economies have been extensively
liberalized in the past 20 years. China’s communist dictatorship
realized at the end of the 1970s that collectivization was
impeding development. Stifling centralized control—such as the
requirement that farmers deliver their own produce—impeded
land renewal and lowered crop yields. Deng Xiaoping, China’s
ruler, wanted to keep faith with the distributive ideas of socialism.
Yet he realized that he would have to distribute either poverty or
prosperity, and that the latter could only be achieved by giving
people more freedom. And so in December 1978, two years after
the death of Chairman Mao, Deng embarked on a program of
liberalization. Rural families that had previously been forced into
collective farming were now entitled to set aside part of their
produce for sale at market prices, a system that became increasingly
liberal as time went on. The Chinese were thereby impelled to
invest in agriculture and improve its efficiency. The option to
drop out of the collective and formally lease land from the government
was taken advantage of to such a huge extent that nearly
all farmland passed into private hands in what may have been
the biggest privatization in history. It paid off, with crop yields
rising between 1978 and 1984 by an incredible 7.7 percent annually.
The same country that 20 years earlier had been hit by the
worst famine in human history now had a food surplus.
47
Before long, similar market incentives began to be introduced
in the rest of the economy. First, economic free zones were set
up. Exempted from socialist controls, these zones allowed Chinese
entrepreneurs to engage in foreign trade, and the great success of
this arrangement inspired liberalization measures across the board.
Trade was permitted in the countryside, and also between town
and country. The formerly self-sufficient villages were integrated
with regional and even national markets. Increased productivity
and purchasing power induced many farmers to invest their capital
in starting up private and cooperative industrial production. Since
then, more and more previously inconceivable phenomena—freer
labor markets, foreign trade, direct foreign investments—have
become commonplace.
Information about those developments is partly contradictory,
owing to the difficulty of obtaining hard facts in an immense
dictatorship. But all observers agree that the economic growth
and the rise in incomes observed in China are unique. There has
been talk of almost 10 percent growth annually in the 20 years
following the early reforms, and China’s gross domestic product
(GDP) has more than quadrupled. In 20 years, China’s economy
has moved from equaling Germany’s to exceeding the German,
French, Italian, and Nordic economies combined. The 1978 liberalization
enabled 800 million Chinese farmers to double their
incomes in only six years. Economist Shujie Yao contends that
absolute poverty was long concealed by China’s official statistics,
but in terms of actual development half a billion Chinese have
left absolute poverty behind them. The World Bank has characterized
this phenomenon as ‘‘the biggest and fastest poverty reduction
in history.’’17
Dramatic economic reversals may still take place in China.
Under the protection of capital regulations, colossal loans have
48
been channeled into the inefficient national government sector
and companies favored by state officials, while small and medium
enterprises (SMEs) are undercapitalized. The authorities have protected
banks and corporations from outside scrutiny, which could
precipitate a crisis of huge proportions. But the economy has
undergone too much of a fundamental transformation for a reversion
to the pre-1978 situation, in terms of either policy or prosperity,
to be possible.
The Tiananmen Square massacre, the ban in many regions on
having more than one child, oppression in Tibet and Sinkiang,
the persecution of the Falun Gong movement, labor camps for
political prisoners—these things show that, sadly, not everything
has changed in China. Communist party oppression lives on, but
fewer and fewer people expect it to survive economic liberalization
in the long term. Simply through economic liberalization, citizens
have come to enjoy important liberties. Whereas formerly they
had to work wherever they were ordered to, today the Chinese
can choose their own employment. Travel and relocation used
to be almost impossible, and moving from countryside to town
or city was out of the question. Now the Chinese can travel
almost freely, wear whatever clothing they like, and spend their
money almost as they please.
The ability of villages to choose their local representatives has
grown. The elections are typically still controlled by the Communist
Party, but where they are not, the people have shown that
a change is what they want. In nearly one-third of the villages,
party control has broken down, and in some, villagers are even
insisting on the right to elect national party officials. Combining
increased local democracy with central dictatorship will be difficult
in the long term. Although people can still be arrested for dissent,
a wide range of opinions can now be heard—in large part because
49
of international influence and the Internet. Independent organizations
are emerging and information is no longer controllable. Even
the newspapers are showing greater independence, and corrupt
officials can be criticized.
50
India
Unlike China, India has been a democracy ever since Independence
in 1947, but at the same time it has opted for a strictly
regulated economy. The government invested in large-scale industries
that had been protected by fierce import and export barriers
in an effort to make them self-sufficient. That investment turned
out to be a very expensive fiasco. All economic activity was
ensnared in regulations and impeded by required permits, which
were all but unobtainable without pulling strings and paying
bribes. The British Raj was succeeded by a ‘‘permit raj.’’ Power
passed to the bureaucracy. Indians wishing to engage in business
had to devote a great deal of their time to buttering up officials,
and if successful they were rewarded with protection against competition
from others. Economic growth barely kept pace with
population growth, and the proportion falling below the Indian
poverty line grew from 50 percent at Independence to 62 percent
in 1966.
In the mid-1970s India began a slow reordering of its economy.
Exclusion and self-sufficiency were replaced with reliance on the
country’s advantage in labor-intensive industry. Growth started
to accelerate in the 1980s, and poverty began to decline. But
this expansion was fueled with borrowed money, resulting in a
profound crisis at the beginning of the 1990s. In 1991, the
government embarked on a series of reforms aimed at putting its
finances in order, welcoming trade and foreign investments, and
encouraging competition and enterprise. Tariff levels, which had
51
averaged a crippling 87 percent, were lowered to 27 percent.
The economy was freed from numerous restrictions by three
consecutive governments, even though the governments represented
different party constellations.
Although a massive process of reform still remains to be accomplished
before India becomes a genuine market economy, great
results have already been achieved through more productive use
of the country’s resources. Since the reforms began, India has
received a steady stream of investment from abroad, and growth
has been running at 5 to 7 percent annually. The proportion of
inhabitants below the Indian poverty line has now fallen to about
32 percent. Things have moved fastest following the change of
system. During the reform years of 1993–99 alone, poverty fell
by 10 percentage points. Without this reduction, something like
300 million more Indians would have been poor today. Population
growth has fallen by 30 percent since the end of the 1960s and
average life expectancy has doubled from about 30 years after
Independence to about 60 today.18 Half the poor households of
India today own a clock, one-third have a radio, and 40 percent
have access to television.
Developments have varied, however, depending on the extent of
reform in the various states of India. Large parts of the countryside,
which is where the poor live, have not had the benefit of any
major liberalization measures, and poverty rates there have
remained stable. At the same time, the southern states in particular—
Andhra Pradesh, Karnataka, and Tamil Nadu—have made
very swift progress with liberalization. Growth in these states
has been above the national average, sometimes approaching an
incredible 15 percent annually, and it is these states that have
attracted most investments, both from abroad and from the rest
of India. The economy has experienced an information technology
52
miracle, with the software sector growing by 50 percent annually.
In Andhra Pradesh, Microsoft opened its first full-fledged development
center away from its headquarters in Redmond. Economic
growth has also left its mark on social development. On average,
the reforming states have succeeded best with medical care and
education, and have achieved the fastest reductions of infant
mortality and illiteracy. Girls, who hardly ever received any education
at all, are now catching up with boys in terms of school
attendance. In several of the states (Andhra Pradesh, Maharashtra)
poverty has declined by about 40 percent since the end of the
1970s, while in nonliberalized states like Bihar and Uttar Pradesh
it has hardly diminished at all.19
The Indian caste system—a form of apartheid that divides,
assesses, and treats people according to the family they come
from—has been officially abolished but has proved very persistent.
At the local level, people of lower caste are still treated as inferior
human beings with fewer rights than others. But now the system
is slowly breaking up, with an unprejudiced market hiring the
best workers instead of people from the right families. In more
and more places, ‘‘untouchables’’ are, for the first time, taking
part in village council meetings. Instead of strengthening the
caste system, the government is launching anti-discrimination
campaigns. One sure sign of progress came when an untouchable,
K. R. Narayanan, served as president from 1997 to 2002.
53
Global inequality
This progress is all very well, many critics of globalization will
argue, but even if the majority are better off, gaps have widened
and wealthy people and countries have improved their lot more
rapidly than others. So inequality has grown. The critics point
to the fact that the combined per capita GDP of the 20 richest
countries was 15 times greater than that of the 20 poorest countries
40 years ago and is now about 30 times greater.
There are two reasons why this objection to globalization does
not hold up. First, even if this were true it would not matter very
much. If everyone is coming to be better off, what does it matter
that the improvement comes faster for some than for others?
Surely the important thing is for everyone to be as well off as
possible, not whether one group is better off than another. Only
those who consider wealth a greater problem than poverty can
find a problem in some becoming millionaires while others grow
wealthier from their own starting points. It is better to be poor
in the inegalitarian United States, where the poverty line for
individuals in 2001 was about $9,039 per year, than to be equal
in countries like Rwanda, where in 2001 GDP per capita (adjusted
for purchasing power) was $1,000, or Bangladesh ($1,750), or
Uzbekistan ($2,500).20 Often the reason why gaps have widened
in certain reforming countries, such as China, is that the towns
and cities have grown faster than the countryside. But given the
unprecedented poverty reduction this has entailed in both town
54
and country, can anyone wish that this development had never
happened?
The poor do not always experience poverty. Many concepts of poverty are
relative, which is to say that, instead of measuring how poor someone is,
they say how poor that person is in relation to others. One poverty concept
frequently used, for example, by the UNDP, rates people as poor if they
have less than half the median wage in the country where they live. That
means that a person regarded as ‘‘loaded’’ when living in a poor country
like Nepal is considered as poor as a church mouse when living in the
affluent United States. These relative figures, consequently, cannot be
compared internationally. Those who are rated poor in the United States
are not always living in circumstances that we would term poverty. Thus,
72 percent of poor American families have one or more cars, 50 percent
have air conditioning, 72 percent have a washing machine, 20 percent
have a dishwasher, 60 percent have a microwave, 93 percent have a color
television, 60 percent have a video player, and 41 percent own their homes
(the poverty reference is to regular income only; real estate is not included
in the income level).21
Second, the allegation of increased inequality is just wrong. The
notion that global inequality has increased is largely based on
figures from the UN Development Program, in particular its
Human Development Report from 1999. But the problem with
these figures is that they are not adjusted for purchasing power.
That is, the UNDP numbers don’t take into account what people
can actually buy for their money. Without that adjustment the
figures mainly show the level of a country’s official exchange rate
and what its currency is worth on the international market, which
is a poor yardstick of poverty. Poor people’s actual living standard,
55
needless to say, hinges far more on the cost of their food, clothing,
and housing than on what they would get for their money when
vacationing in Europe. The odd thing is that the UNDP itself
uses purchasing power–adjusted figures in its Human Development
Index (HDI), which is its universal yardstick of living standards.
It only resorts to the unadjusted figures in order to prove
a thesis of inequality.
A report from the Norwegian Institute for Foreign Affairs
investigated global inequality by means of figures adjusted for
purchasing power. Their data show that, contrary to the conventional
wisdom, inequality between countries has been continuously
declining ever since the end of the 1970s. This decline was
especially rapid between 1993 and 1998, when globalization really
gathered speed.22 More recently, similar research by Columbia
University development economist Xavier Sala-i-Martin has confirmed
those findings. When the UNDP’s own numbers are
adjusted for purchasing power, Sala-i-Martin found that world
inequality declined sharply by any of the common ways of measuring
it.23 Bhalla and Sala-i-Martin also independently found that
if we focus on inequality between persons, rather than inequality
between countries, global inequality at the end of 2000 was at its
lowest point since the end of World War II. Estimates that
compare countries rather than individuals, as both authors note,
grossly overestimate real inequality because they allow gains for
huge numbers of people to be outweighed by comparable losses
for far fewer. Country aggregates treat China and Grenada as
data points of equal weight, even though China’s population is
12,000 times Grenada’s. Once we shift our focus to people rather
than nations, the evidence is overwhelming that the past 30 years
have witnessed a global equalization.24 Comparing just the richest
and poorest tenths, inequality has increased, suggesting that a
56
small group has lagged behind (we shall be returning to see which
countries and why), but a study of all countries clearly points to
a general growth of equality. If, for example, we compare the
richest and poorest fifth or the richest and poorest third, we find
the differences diminishing.
Economists usually measure the degree of inequality by means
of the ‘‘Gini coefficient.’’ If that number is zero, complete equality
prevails, and everyone owns the same amount. If it is one, there
is total inequality, with one person owning everything. The Gini
coefficient for the whole world declined from 0.6 in 1968 to 0.52
in 1997, a reduction of more than 10 percent.
Because equality between the rich and poor within these countries
appears to have been roughly constant during this time
(having increased in half and diminished in half), global equality,
quite contrary to popular supposition, is increasing. The 1998/
99 World Bank report reviews among other things the difference
in incomes going to the richest and poorest 20 percent in the
developing countries. The review shows, of course, that the difference
is very great, but it also shows that the difference is diminishing
on all continents! The real exception is post-communist Eastern
Europe, where inequality has grown fastest in the countries
where reform has been slowest.25
The 1999 UNDP report appears to contradict this finding,
but its conclusions are doubtful, not least because the UNDP
omitted its own statistics for the years when inequality declined
fastest, 1995–97. Furthermore, their own welfare statistics, as
aggregated in the HDI, point to an even faster reduction of
inequality in the world than is indicated by the Norwegian report.
HDI adds together various aspects of welfare—the income, education
standard, and life expectancy of the population. This index
ranges from 0, representing the profoundest misery, to 1, representing
complete welfare. The HDI has increased in all groups
57
of countries over the past 40 years, but fastest of all in the poorest
countries. In the OECD countries, HDI rose from 0.8 to 0.91
between 1960 and 1993, and in the developing countries it rose
faster still, from 0.26 to 0.56.
One sometimes hears it said, on the basis of that same UNDP
report, that the richest fifth of the world’s population is 74 times
wealthier than the poorest fifth. But if we measure wealth in
terms of what these groups get for their money—that is, if we
use figures adjusted for purchasing power—then the richest fifth
is only 16 times richer than the poorest.26
World income distribution, 1960, 1980, and 2000
0
0.1
0.2
0.3
60
Annual Per Capita Income at 2000 Prices
125 273 600 1,300 2,850 6,200 13,500 29,500 64,500
1960
1980
2000
Source: Surjit Bhalla, Imagine There’s No Country (Washington: Institute for International
Economics, 2002), p. 176.
58
Standard of living is rising everywhere
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Least developed countries
Developing countries
Industrialized countries
1960 1970 1980 2000
UNDP Human Development Index
0.161
0.205
0.245
0.445
0.260
0.347
0.428
0.654
0.798
0.859 0.889 0.932
Years
Source: UNDP, Human Development Report 1997 (New York: Oxford University Press for the
United Nations Development Program, 1997).
59
Reservations
This is not by any means to say that all is well with the world,
or even that everything is getting better and better. AIDS deaths
in 2000 totaled 3 million, the highest figure ever. One of the
cruel consequences of the epidemic is that it leaves children without
parents: more than 13 million have been orphaned by AIDS,
the vast majority in sub-Saharan Africa.27 In several African countries,
more than 15 percent of the adult population are suffering
from HIV or AIDS. Something like 20 million people are now
living as fugitives from oppression, conflicts, or natural disasters.
Even though forecasts concerning the world’s water supply have
grown more optimistic, we still risk a huge shortage of pure water,
possibly resulting in disease and conflicts. About 20 countries,
most of them in southern Africa, have grown poorer since 1965.
Illiteracy, hunger, and poverty may be diminishing, but many
hundreds of millions of people are still afflicted by them. Armed
conflicts are growing fewer, but this is cold comfort to the hundreds
of thousands of people who are still being beaten, raped,
and murdered.
The remaining problems are made all the more intolerable by
our knowledge that something can actually be done about them.
When underdevelopment appears to be a natural and inevitable
part of the human condition, it is considered a tragic fate. But
when we realize that it is not at all necessary, it becomes a problem
that can and should be solved. This phenomenon is not unfamiliar:
the same thing happened when the Industrial Revolution started
60
to improve living standards in the West more than 200 years ago.
When misery is everywhere, we can easily become oblivious to
it. When it is contrasted with something else, with abundance
and prosperity, our eyes are opened to it—a good thing, because
our new awareness spurs our efforts to do something about the
problems that remain. But this must not deceive us into thinking
that the world has actually grown worse, for it has not.
No one can doubt that the world has more than its share of
serious problems. The fantastic thing is that the spread of democracy
and capitalism has reduced them so dramatically. Where
liberal policies have been allowed to operate longest, they have
made poverty and deprivation the exception instead of the rule—
and they had previously been the rule everywhere in the world,
at all times in history. Colossal changes await all of us, but at the
same time our eyes have been opened to the political and technical
solutions now available to us. And so, all things considered, there
is no reason why we should not be optimistic.
61

II
. . . and it’s no coincidence!
That’s capitalism for you!
The growth of world prosperity is not a ‘‘miracle’’ or any of the
other mystifying terms we customarily apply to countries that
have succeeded economically and socially. Schools are not built,
nor are incomes generated, by sheer luck, like a bolt from the
blue. These things happen when people begin to think along new
lines and work hard to bring their ideas to fruition. But people
do that everywhere, and there is no reason why certain people in
certain places during certain periods in history should be intrinsically
smarter or more capable than others. What makes the difference
is whether the environment permits and encourages ideas
and work, or instead puts obstacles in their way. That depends
on whether people are free to explore their way ahead, to own
property, to invest for the long term, to conclude private agreements,
and to trade with others. In short, it depends on whether
or not the countries have capitalism. In the affluent world we
have had capitalism in one form or another for a couple of
centuries. That is how the countries of the West became ‘‘the
affluent world.’’ Capitalism has given people both the liberty and
the incentive to create, produce, and trade, thereby generating
prosperity.
During the past two decades, this system has spread throughout
the world via the process termed globalization. The communist
dictatorships in the East and the military dictatorships of the
Third World collapsed, and the walls they had raised against
ideas, people, and goods collapsed with them. Instead, we have
64
seen the dissemination and widespread acceptance of the idea that
creativity cannot be centralized, that it can only be encouraged
by entitling citizens to decide for themselves, to create, to think,
to work.
Capitalism means that no one is subject to arbitrary coercion
by others. Because we have the option of simply refraining from
signing a contract or doing a business deal if we prefer some other
solution, the only way of getting rich in a free market is by giving
people something they want, something they will pay for of their
own free will. Both parties to a free exchange have to feel that
they benefit from it; otherwise there won’t be any deal. Economics,
then, is not a zero-sum game. The bigger a person’s income in
a market economy, the more that person has done to offer people
what they want. Bill Gates and Madonna earn millions, but they
don’t steal that money; they earn it by offering software and
music that a lot of people think are worth paying for. In this
sense, they are essentially our servants. Firms and individuals
struggle to develop better goods and more efficient ways of providing
for our needs. The alternative is for the government to take
our resources and then decide which types of behavior to encourage.
The only question is why the government knows what we
want and what we consider important in our lives better than we
ourselves do.
Prices and profits in a market economy serve as a signaling
system by which the worker, the entrepreneur, and the investor
can navigate. Those who want to earn good wages or make a
good profit have to seek out those parts of the economy where
they can best cater to other people’s demands. Excessive taxes
and handouts pervert these signals and incentives completely.
Price controls are destructive because they directly distort the
necessary price signals. If the government puts a ceiling on
65
prices—if it imposes a lower price than the market would have,
as it does for apartment rentals in New York—a shortage will
result. People will hang onto the apartments they have, even if
they don’t need them for the moment and even if someone else
would be willing to pay more for the use of that same apartment.
Denied the ability to charge higher rents, landlords find it less
worthwhile to invest in the purchase of new buildings, and housing
companies stop new construction. Result: housing shortage. If
instead the government sets a price floor—that is, deliberately
bids up the price of a good higher than the market would have,
as many governments do for agricultural products—a surplus will
result. When the EU pays more for foodstuffs than the market,
more people than necessary will go into farming, resulting in
surplus production and wasted resources.
Capitalism also requires people to be allowed to retain the
resources they earn and create. If you exert yourself and invest
for the long term, but someone else appropriates most of the
profit, the odds are that you’ll give up. Protection of ownership
lies at the very heart of a capitalist economy. Ownership means
not only that people are entitled to the fruits of their labors, but
also that they are free to use their resources without having to
ask the authorities first. Capitalism allows people to explore the
economic frontier for themselves.
That is not to say that any given person in the market will
necessarily be smarter than a bureaucrat. But market participants
are in direct touch with their own particular corner of the market,
and by responding to price fluctuations, they have direct feedback
on supply and demand. Central planners can never collect all this
information from all fields, nor are they nearly as motivated to
be guided by it. Even if any one person in the market is no
smarter than a bureaucrat, a million people together certainly are!
66
Their million different attempts at determining the best uses of
resources are generally wiser than a single, centralized solution.
If the government decides that all resources are to be committed
to a certain kind of collective farming and this fails, the whole
of society will be economically affected and, in the worst case
scenario, will starve. If, instead, one group of people attempts the
same type of farming, they alone will suffer the adverse effects if
the enterprise fails, and surpluses elsewhere in the market mean
that those effects won’t be as dire as starvation. A society needs
this kind of experimentation and innovation to develop, but at
the same time the risks of experimentation have to be limited so
that the whole society will not be jeopardized by a few people’s
mistakes. Therein lies the virtue of individual decisionmaking and
individual responsibility.
Personal responsibility, no less than personal freedom, is essential
to capitalism. A politician or bureaucrat handling huge sums
of money for infrastructure investment or a campaign to host the
next Olympics is not under the same pressure to make rational
decisions as entrepreneurs and investors are. If things go wrong
and expenditure exceeds income, it isn’t the politician who foots
the bill.
People who own their property act on a long-term basis because
they know that they will reap the rewards (and bear the costs) of
their actions. This is the core of a capitalist economy—people
saving part of what they already have in order to create more
value for the future. We do the same thing, create ‘‘human capital,’’
when we devote some of our time and energy today to
getting a good education that will increase our earning potential
in the long run. In the economy, this means that instead of living
from hand to mouth we set aside part of what we have and are
rewarded with interest or profits by whoever can use the money
67
more efficiently than we can ourselves. Saving and investment
elevate the economy to progressively higher levels as they finance
new machinery and organizational structures to make the workforce
more productive.
Organization is important because people can produce far more
through voluntary cooperation than they could by doing everything
single-handed. It may take a single craftsman a week to
produce a chair, but if he is especially skilled at constructing the
wooden frame, and if he joins forces with someone who can paint
and someone else who’s good at sewing chair cushions, together
they may be able to turn out one chair a day. With modern
machinery, another product of specialization and cooperation,
they can make a hundred chairs a day, which augments the value
of their labor.
Technical progress enabled new machines to manufacture old
types of goods less expensively, placing new inventions and goods
at people’s disposal. As a result of this continuous improvement
of productivity through the division of labor and technical
advancement, one hour’s labor today is worth about 25 times
more than it was in the mid-19th century. Employees, consequently,
now receive about 25 times as much as they did then,
in the form of better pay, better working conditions, and shorter
working hours. When a person’s labor grows more valuable, more
firms want to buy it. In order to get it, they then have to raise
wages and improve the work environment. If, instead, wages
increase more rapidly than productivity, through legislation or
union contracts, then jobs will have to be eliminated, because the
workers’ input is not worth what the employer is forced to pay
for it. In this case, the ‘‘surplus’’ created by the price floor in
wages comes in the form of unemployment.
Politicians can create the appearance of rising wages by accelerating
inflation, which is precisely what Swedish politicians did for
68
a long time. Because each dollar is then worth less, however, those
increases are entirely chimerical. Growth and productivity alone
are capable of raising real wages in the long run.
All political and economic systems need rules, and this includes
even the most liberal capitalism, which presupposes rules about
legitimate ownership, the writing of contracts, the resolution of
disputes, and many other matters. Those rules are a necessary
framework required for markets to operate smoothly. But there
are also rules that prevent the market economy from working—
detailed regulations specifying the uses people can make of their
property and making it difficult to start up a certain kind of
activity, owing to the need for licenses and permits or to restrictive
rules on pricing and business transactions. Those regulations
mainly serve to give more power over the economy to public
authorities who are not themselves a part of it and who have not
risked their own money. They add up to a heavy burden on the
creators of our prosperity. Just at the federal level, American
entrepreneurs have to keep track of more than 134,000 pages of
regulations, with 4,167 new rules issued by the various regulatory
agencies in 2002 alone. Little wonder, then, that more people do
not translate their good ideas into entrepreneurial activity.1
Such rules are also harmful in another way. When regulation
raises barriers to necessary activity, a large portion of a firm’s
time—time that could otherwise be devoted to production—
ends up being spent either complying with or circumventing the
rules. If this proves too burdensome, people join the informal
economy instead, thereby depriving themselves of legal protection
for their business dealings. Many firms will use their resources—
resources that could otherwise have been used for investment—
to coax politicians into adapting the rules to their needs. Many
will be tempted to take shortcuts, and bureaucrats will oblige in
69
return for generous bribes, especially in poor countries where
salaries are low and regulatory systems more or less chaotic. The
easiest way of corrupting a nation through and through is to
demand that citizens get bureaucratic permission for production,
for imports, for exports, for investments. As the Chinese philosopher
Lao Tzu declared more than two and a half millennia ago,
‘‘The more laws are promulgated, the more numerous thieves
and bandits become.’’
Economic freedom reduces corruption
0
1
2
3
4
5
6
7
8
9
10
1
(most free)
5 4 3 2
(least free)
(Freedom from corruption, by Transparency International,s rating).
2.55
3.43
3.88
4.96
7.41
The countries of the world, divided into fifths by degrees of economic freedom
(1 most corruption, 10 least corruption)
Source: James Gwartney and Robert Lawson, eds., Economic Freedom of the World 2001
(Vancouver: Fraser Institute, 2001).
If the goal is to have impartial rules and incorruptible officials,
there is no better means than substantial deregulation. Amartya
Sen argues that the struggle against corruption would be a perfectly
70
good reason for developing countries to deregulate their economies
even if no other economic benefits would accrue from doing so.2
71
Growth—a blessing
All experience indicates that it is in liberal regimes that wealth is
created and development is sustained. Politics and economics are
not exact sciences: we cannot perform laboratory experiments in
order to ascertain which systems work and which do not. But
the conflict between capitalism and central planning gives us
something close. History provides us with several instances of
similar populations, with similar preconditions and sharing the
same language and norms, subjected to two different systems, one
a market economy and the other a centrally controlled command
economy. With Germany divided into capitalist West and communist
East, people talked of an ‘‘economic miracle’’ in the Western
part, while the East fell further and further behind. The same
thing happened with capitalist South Korea and communist North
Korea. The former was numbered among the Asian tigers, convincing
the world that ‘‘developing’’ countries can actually
develop. Whereas in the 1960s it was poorer than Angola, today,
with the world’s thirteenth largest economy, South Korea is almost
as affluent as a Western European country. The North Korean
economy, by contrast, underwent a total collapse, and the country
is now afflicted with mass starvation. One can also see the difference
between Taiwan, a market economy that experienced one
of the swiftest economic developments in history, and communist
mainland China, which suffered starvation and misery until it
saw fit to start opening up its markets.3
72
The same comparison can be made all over the world. The
greater the degree of economic liberalism in a country, the better
that country’s chances of attaining higher prosperity, faster
growth, a higher standard of living, and higher average life expectancy.
People in the economically freest countries are nearly 10
times as rich as those in the least free, and they are living more
than 20 years longer!
The economic development of the past two centuries has no
counterpart in the period prior to the breakthrough of the market
economy in the 19th century. Historically, the human condition
has been one of destitution, with people surviving from one day to
the next. Mostmedieval Europeans were chronically undernourished,
Economic freedom brings prosperity
0
5,000
10,000
15,000
20,000
25,000
1
(most free)
5 4 3 2
(least free)
Per capita GDP, US$ (2000)
2,556
4,365
6,235
12,390
23,450
The countries of the world, divided into fifths by degrees of economic freedom
Source: James Gwartney and Robert Lawson, eds., Economic Freedom of the World 2001
(Vancouver: Fraser Institute, 2001).4
73
Economic freedom brings growth
–1.0
–0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1
(most free)
5 4 3 2
(least free)
Percentage growth during the 1990s
–0.85
1.44
1.13
1.57
2.56
The countries of the world, divided into fifths by degrees of economic freedom
Source: James Gwartney and Robert Lawson, eds., Economic Freedom of the World 2001
(Vancouver: Fraser Institute, 2001).
Economic freedom raises living standards
0.0
0.2
0.4
0.6
0.8
1.0
1
(most free)
5 4 3 2
(least free)
UNDP Human Development Index
0.52
0.62
0.73
0.76
0.88
The countries of the world, divided into fifths by degrees of economic freedom
Source: James Gwartney and Robert Lawson, eds., Economic Freedom of the World 2001
(Vancouver: Fraser Institute, 2001).
74
Economic freedom increases average life expectancy
0
10
20
30
40
50
60
70
80
1
(most free)
5 4 3 2
(least free)
Age
52.18
63.51
68.01 69.19
76.18
The countries of the world, divided into fifths by degrees of economic freedom
Source: James Gwartney and Robert Lawson, eds., Economic Freedom of the World 2001
(Vancouver: Fraser Institute, 2001).
owned only one article of clothing, and worked in houses which
were so filthy and vermin-ridden that, in the words of one historian,
‘‘From a health point of view the only thing to be said in
their favour was that they burnt down very easily!’’5 After the
16th century, when different parts of the world very slowly and
tentatively began trading with each other, we do find examples
of growth, but that growth was extremely marginal.
Poverty in the 18th century was much the same on every
continent. According to the best estimates, which are still highly
uncertain, Europe was only 20 percent wealthier than the rest of
the world. Then, in about 1820, Europe began moving further
ahead as a result of the Industrial Revolution. But poverty
remained appalling. Per capita income in the very richest European
countries was the equivalent of $1,000–$1,500 annually—
75
less than in present-day Bolivia or Kazakhstan. Even if all incomes
had been perfectly equally distributed, that amount would still
have been insufficient for more than a state of abject misery, with
neither clean water nor daily bread and with little more than one
garment per person. Almost the entire world population lived at
a level of poverty scarcely to be seen anywhere today: only the
very poorest countries—Mali, Zambia, and Nigeria, for example—
come anywhere near it. During the 200 years since then,
per capita incomes have multiplied several times over, worldwide.
Global growth during the 320 years between 1500 and 1820 has
been estimated at a mere 30th of what the world has experienced
since then.6 Over the course of the last two centuries, incomes
in Europe have risen more than tenfold. Asia has also picked up
speed during the past half-century and, with the path to prosperity
already known, has grown still faster. Living standards today are
eight times higher in Japan and six times higher in China than
they were in 1950.
Increased investment and the urge to devise better, more efficient
solutions to old problems enable us to produce more, and
growth accelerates. This acceleration generates new ideas and
machinery, enabling the workforce to produce more. GDP, or
gross domestic product, is a measure of the value of all goods
and services produced in a country. Dividing that by the number
of inhabitants in a country gives us GDP per capita (‘‘per head’’),
which serves as a rough measure of that country’s wealth.
Growth—the production of more goods and services—may not
strike everyone as the most exciting thing on earth, and certain
radical circles have even come to disdain it, branding those who
do care about it as ‘‘economistic’’ or ‘‘growth fanatics.’’ That may
be partly a healthy reaction to an excessive focus on high GDP
as an end in itself, but growth, quite simply, means that production
76
grows, and prosperity and opportunities grow with it. In the
affluent world, growth may allow societies to save, to consume
more, to invest in welfare, or to enjoy more leisure time. In the
developing countries, it can mean the difference between life and
death, development and stagnation, for it is growth that makes
wider access to healthy foods and pure drinking water possible.7
For everyday life in India, growth since the 1980s has meant
mud huts being replaced by brick buildings and muddy paths
being paved. Electricity has become available to everyone, and
the dark alleys now have streetlights. The alleys no longer reek
of garbage, and hotbeds of infection are removed by proper drainage.
The poor can afford clothing and footwear. As the clearest
example of what growth implies, Indian women no longer wash
their saris one half at a time. This was once necessary because
Incomes and living standards go hand in hand
1.2
1.0
0.8
0.6
0.4
0.2
0.0
UNDP Human Development Index, HDI
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
Per capita GDP, US$
Source: Arne Melchior, Kjetil Telle, and Henrik Wiig, Globalisering och ulikhet: Verdens
inntektsfordeling og levestandard 1960–1998. (Oslo: Royal Norwegian Ministry of Foreign
Affairs, 2000).
77
most women possessed only one sari and thus had to wash it
while still wearing it.
Growth also means opportunities and power for people. It
means that, instead of resorting to the local usurer and getting
into debt for a lifetime, the ordinary Indian can turn to a bank.
People can look for jobs in different places, with different entrepreneurs,
which emancipates the poor from the power of life and
death that the village landlord once had over them. Although
India has democratic elections, they do not make all that much
difference so long as the poor are completely at the mercy of the
local elite because they still have to vote as they are told. Parents
in poor parts of the world do not send their children out to work
because they like doing it, but because they need the money to
feed the family. Growth gives them better incomes and improves
the return on education, which means they can send their children
to school instead. That also gives the individual greater opportunity
within the family. A law against wife beating can be ineffective
if the woman is economically dependent on her husband for
survival, because in that case she will neither report him nor leave
him. When the economy grows and more production materializes,
the woman has a chance of getting a job away from home. She
becomes less dependent on the husband’s caprices.
‘‘In my mother’s day women had to grin and bear it. I wouldn’t have any
of it. I can speak my mind. Life isn’t just meant to be sacrifice; you also
have to be able to enjoy it. That, I think, is the great change that is
happening in Japan. People no longer want to work and work. Today they
also want to have time for a good life and a little enjoyment.’’
29-year-old Eriko, who instead of following in her parents’ footsteps and
working on the land became an advertising artist.8
78
It is sometimes argued that growth only benefits the rich, while
the poor lag behind. This is a curious notion. Why should poor
people benefit less than others from society growing richer? Two
World Bank economists, David Dollar and Aart Kraay, studied
40 years of income statistics from 80 countries to see whether
this was really true. Their studies show that growth benefits the
poor just as much as the rich. With 1 percent growth, the incomes
of the poor rise by 1 percent on average; with 10 percent growth,
they rise, on average, by 10 percent. Not always and not every-
Growth benefits the poor
12
11
10
9
8
7
6
5
4
3
Average income of the poorest one-fifth (percentage)
Per capita income (percentage)
3 4 5 6 7 8 9 10 11 12
(Correlation between prosperity and incomes of the poor in 80 studied countries).
Source: David Dollar and Aart Kraay, Growth Is Good for the Poor (Washington: World Bank,
April 2001).
79
where—there are exceptions and variations—but on average. This
finding tallies with a long line of other surveys, whereas studies
suggesting the contrary are very hard to find.9
Thus, growth is the best cure for poverty. Some economists
have spoken of a ‘‘trickle-down’’ effect, meaning that some get
rich first, after which parts of this wealth trickle down to the
poor as the rich spend and invest. This description may evoke
the image of the poor man getting the crumbs that fall from the
rich man’s table, but this is a completely mistaken picture of the
Growth benefits the poor
–20% –10% 0% 10% 20%
20%
10%
15%
5%
0%
–20%
–10%
–15%
–5%
Growth of per capita income
Average income of the poorest one-fifth
(Correlation between economic growth and incomes of the poor in 80 studied countries).
Source: David Dollar and Aart Kraay, Growth Is Good for the Poor (Washington: World Bank,
April 2001).
80
true effect of growth. On the contrary, what happens is that the
poor benefit from growth to roughly the same extent and at the
same speed as the rich. They benefit immediately from an increase
in the value of their labor and from greater purchasing power.
No country has ever succeeded in reducing poverty without having
long-term growth. Nor is there any case of the opposite, that is,
of a country having had long-term, sustainable growth that didn’t
benefit the poor population. Still more interestingly, there is no
instance of a country having had steady levels of growth in the
long term without opening up its markets. The World Bank’s
World Development Report 2000/2001 contained a good deal of
rhetoric about growth not being everything and not being sufficient
for development—rhetoric influenced, no doubt, by the
growth of the anti-globalization movement. But that report’s own
tables show that the higher a country’s growth has been in the
past 20 years, the faster it has reduced poverty, infant mortality,
and illiteracy. In the countries at the bottom of the growth league,
illiteracy had actually increased. It may be that growth in itself
is not sufficient to bring good development for everyone, but
growth is manifestly necessary.
If we have 3 percent growth annually, this means that the
economy, our capital, and our incomes double every 23 years. If
growth is twice as fast, they double about every 12 years. This
growth represents an unparalleled increase in prosperity. By comparison,
the effects of even vigorous government income redistribution
policies are insignificant—not just insignificant, but downright
dangerous, because high taxes to finance these measures can
jeopardize growth. If so, great long-term benefits for everyone are
sacrificed in favor of small immediate gains for a few.
A society’s economy is above all improved by people saving,
investing, and working. High taxes on work, savings, and capital,
81
in the words of John Stuart Mill, ‘‘impose a penalty on people
for having worked harder and saved more than their neighbors.’’10
That means punishing what is most beneficial to society. Or, as
a bumper sticker slogan has it, ‘‘A fine is a tax for doing something
wrong; a tax is a fine for doing something right.’’ We have alcohol
taxes to reduce consumption of alcohol, tobacco taxes to reduce
smoking, and environmental taxes to reduce pollution. So where
do we expect the taxation of endeavor, work, and saving to get
us? It results in many people not exerting themselves to work,
invest, and hatch new ideas, because most of the proceeds will
go to the government. It leads to firms devoting more and more
time to tax avoidance—time that could have been devoted to
constructive work. It leads to people spending more time on
things they are not good at. The surgeon stays at home to paint
the living room instead of doing what he is best at—saving lives—
because that way he avoids having to pay taxes on both his own
work and on the painter’s wages.11
In a dynamic market economy there is also social mobility.
Someone who is poor today will not necessarily be poor tomorrow.
In the absence of legal privileges and high taxes, there are great
possibilities of raising one’s standard of living through one’s own
exertions, education, and thrift. Four-fifths of American millionaires
have made their money themselves, as opposed to merely
inheriting it.
It is true that the poorest one-fifth in a capitalist economy like
that of the United States earn only 3.6 percent of the country’s
GDP. But viewing income gaps in these static terms makes it
easy to forget that there is always mobility between the various
groups—mostly upward mobility, because wages rise with higher
education and longer working experience. Only 5.1 percent of
the Americans belonging to that poorest quintile in 1975 were
82
still there in 1991. In the meantime nearly 30 percent of them
had moved up into the wealthiest one-fifth, and 60 percent of
them had arrived in the wealthiest two-fifths.
The best remedy for poverty is a chance to do something about
it. On average, those who fall below the poverty line in the United
States only stay there for 4.2 months. Only 4 percent of America’s
population are long-term poor, that is, remain poor for more
than two years. Meanwhile the poorest fifth is replenished with
new people—students and poor immigrants—who then have the
opportunity of quickly climbing the ladder of wealth.12
83
Freedom or equality? Why choose?
Many believe that liberalization and economic growth entail a
growth of inequality in a society. Once again, I would like to
point out that this is not the most important thing. If a better
standard of living is worth pursuing, then what matters is how
well situated you are, period, not how well situated you are in
relation to others. The important thing is for as many people as
possible to be better off, and across-the-board improvement
doesn’t become deterioration just because some people improve
their lot faster than others. But there are several reasons why
equality is worth aiming for. For one thing, most of us probably
believe that people should not get off to tremendously unequal
starts in life. It is important that everyone have similar opportunities—
not so important that it is worth reducing everyone’s chances
in order to make them as equal as possible, but still important
enough for great social inequality to be a problem. This, then, is
a crucial objection to scrutinize.
Another reason is that equality actually stimulates growth, quite
contrary to what is often claimed. True, in a very poor society
some degree of inequality may be necessary in order for anyone
at all to be able to start saving and investing, but many studies
have shown that societies with a high degree of equality achieve,
on average, greater economic growth than unequal societies, especially
if the inequality takes the form of very uneven land ownership.
One reason for this connection is that societies with greater
equality can be expected to have greater stability and less political
84
turbulence. Inequality can lead to conflicts, or demands for higher
taxes and more redistribution, which are threats to growth.
But a more important reason is that people must have some
basic assets—things like land in an undeveloped economy and
education in a modern one—to be able to work effectively. What
matters, then, is a degree of equality in terms of those assets and
not in what is usually meant in the political debate, equality of
incomes and profits. The crucial reform in a developing country
that has ancient, unfair feudal structures and a small, land-owning
elite is land reform, so that more people will have a share of the
land and thus will be able to participate in the economy. The
important thing is for the whole population to obtain an education
and have the opportunity to borrow money when they have ideas
for business projects. No one must be discriminated against or
marginalized, or prevented by licensing requirements, prohibitions,
and legal privileges from competing for positions and
incomes. This kind of equality spurs the economy, whereas a
reallocation of incomes, if anything, reduces it because education,
work, and the introduction of new ideas become less profitable.
To simplify matters somewhat, it is equality of opportunity
that matters, not equality of results. The goal is for all people to
have certain basic opportunities and then be at liberty to explore
their way forward and achieve different results. These are two
sides of the same coin: people have the opportunity of working
and trying new things and the right to make a profit out of the
enterprise if it does well. This results in a society that encourages
social mobility and rewards initiative and effort—and consequently
also achieves greater prosperity. It is not income differences
in themselves that are dangerous for development, but the
discrimination and privileges that cause the difference in incomes
in undemocratic states. This is corroborated by the fact that the
85
connection between inequality and growth is quite clear in nondemocratic
states, but not apparent in modern, liberal ones.13
But can the opposite effect also hold? Is it true that increased
growth leads to greater inequality, as is widely maintained? Economists
sometimes refer to ‘‘Kuznets’s inverted U-curve,’’ which is
based on a 1955 article by the economist Simon Kuznets, who
argued that economic growth in a society initially leads to greater
inequality and only after some time to a reduction of inequality.
Many have accepted this thesis as truth, and it is sometimes used
to discredit the idea of growth, or at least to demand redistributive
policies. Kuznets himself did not draw any such drastic conclusions.
On the contrary, he declared that his article was based
on ‘‘perhaps 5 percent empirical information and 95 percent
speculation,’’ adding that ‘‘so long as it is recognized as a collection
of hunches calling for further investigation rather than a set of
fully tested conclusions, little harm and much good may result.’’14
If we follow Kuznets’s recommendation and investigate what
has happened since the 1950s, we can see that his preliminary
conclusion is not universally valid. True, it can happen that growth
initially leads to inequality, but this is not a general connection.
There are countries that have had high growth followed by a
reduction in income differences, such as Indonesia, Malaysia,
Taiwan, South Korea, and Mauritius, and there are countries like
China, Thailand, Pakistan, and Brazil where growth has led to
greater income differences. Similarly, things have moved in different
directions in countries with low or negative growth. Equality
has increased in Cuba, Colombia, and Morocco, while diminishing
in Kenya, Ethiopia, and Mexico during the 1980s, and Russia
during the 1990s. Distribution hinges on other factors, such as
a country’s initial position and domestic policy. The World Bank
sums up the state of affairs by saying,
86
‘‘The available data show no stable relationship between growth
and inequality. On average, income inequality within countries
has neither decreased nor increased over the last 30 years.’’15
Economic growth does not increase inequality
Annual growth of per capita income
Annual inequality change
2
1
0
–1
–2
–5 0 5 10
(Correlation between economic growth and inequality in 80 studied countries).
Source: David Dollar and Aart Kraay, Growth Is Good for the Poor (Washington: World Bank,
April 2001).
Studying equality in 70 countries, the economist G. W. Scully
found that incomes were more evenly distributed in countries with
a liberal economy, open markets, and property rights. This was,
above all, because the middle class had more and the upper class
less in free than in unfree economies. The share of national income
87
going to the richest fifth of the population was 25 percent lower
in the ‘‘freest’’ economies than in the ‘‘least free’’ economies. The
proportion going to the poorest fifth in a society was unaffected
by how free the economy was, but their actual incomes were far
greater in liberal economies.16
Economic freedom increases equality
0
5
10
15
20
25
30
35
1
(most free)
5 4 3 2
(least free)
(Incomes of the one-fifth richest are this many times higher than of the poorest
one-fifth, in various countries).
32.49
15.67
12.41
20.07
14.37
The countries of the world, divided into fifths by degrees of economic freedom
Percentage of equality
Source: James Gwartney, Robert Lawson, and Dexter Samida, eds., Economic Freedom of the
World 2000 (Vancouver: Fraser Institute, 2000).
Contrary to popular suppositions, then, a higher degree of economic
liberalism appears to mean more economic equality. But
what about the effects of the transition to a liberal economy? Does
rapid liberalization have a negative impact on equality? Here, too,
the answer would appear to be that it does not. The Swedish
88
economist Niclas Berggren has investigated how the growth of
economic freedom affects economic equality. In countries that
have liberalized their economies since 1985, equality has increased,
while stagnating or diminishing in countries that have refrained
from liberalization. Equality is growing fastest in poor developing
countries that are quickly reforming their economies. Berggren’s
findings indicate that there are two main determinants of equality
in a society: freedom of international trade and freedom of international
movements of capital—the two most ‘‘globalizing’’
reforms.17
This pattern is corroborated by a different classification of
countries, one measuring how ‘‘globalized’’ they are. Foreign Policy
magazine and the consulting firm A. T. Kearny have tried to devise
a ‘‘globalization index,’’ an estimate of how much a country’s
inhabitants shop, invest, communicate, and travel across its borders.
The globalized countries, they discovered, are not at all more
unequal. On the contrary,
The general pattern of higher globalization and greater income
equality holds for most countries, both in mature economies and
emerging markets.18
People on the left often say that individual liberty and economic
equality are in conflict, which explains why they think they must
oppose one of these widely appreciated values. They may be right
in the sense that legislators must decide which to focus on more
in their deliberations, but it is not correct to say that the two
values are mutually exclusive. On the contrary, there is much to
suggest that equality of liberty also leads to economic equality.
Rights of ownership, freedom of enterprise, free trade, and reduced
inflation confer both growth and equality.
89
Property rights—for the sake of the poor
That economic freedom is not an enemy of equality comes as a
surprise to everyone who has been told that capitalism is the
ideology of the rich and the privileged. In fact, this is precisely
backward. The free market is the antithesis of societies of privilege.
In a market economy, the only way of holding on to a good
economic position is by improving your production and offering
people good products or services. It is in the regulated economies,
with their distribution of privileges and monopolies to favored
groups, that privilege can become entrenched. Those who have
the right contacts can afford to pay bribes. Those who have the
time and knowledge to plow through bulky volumes of regulations
can start up business enterprises and engage in trade. The poor
never have a chance, not even of starting small businesses like
bakeries or corner shops. In a capitalistic society, all people with
ideas and willpower are at liberty to try their luck, even if they
are not the favorites of the rulers.
Globalization contributes to this tendency because it disturbs
power relations and emancipates people from the local potentates.
Free trade enables consumers to buy goods and services from a
global range of competitors instead of the local monopolists. Free
movements of capital enable poor people with good ideas to
finance their projects. Freedom of migration means that the village’s
one and only employer has to offer higher wages and better
working conditions in order to attract labor, because otherwise
the workers can go elsewhere.
90
The left often portrays economic liberalism as the ideology of
the rich, because it stands up for rights of ownership. But defending
private property is not the same as cementing the prevailing
property conditions. Empirical facts tell us that it is not mainly
the rich who benefit from the protection of property rights. On
the contrary, it may be the most vulnerable citizens who have
most to lose in a society without stable rights of ownership, since
the people with political power and contacts are most able to seize
control of resources. Where there is private property, resources and
incomes are channeled mainly to those who are productive and
who offer services in the market and the workplace, and underprivileged
groups then have a much better chance of asserting themselves
than in a system governed by power and graft. Besides, it
is the poor who have most to gain from goods becoming progressively
cheaper in relation to incomes, and competition in the
context of private ownership helps to achieve just that result.
Property rights provide an incentive for foresight and personal
initiative, spurring growth and distributing the fruits of it equally,
on average, between rich and poor. Thus the introduction of
safeguards for private property in a society has a distributive effect
as favorable to the poor as a commitment to universal education.
Studies indicate that protecting private ownership is the economic
reform most conducive to growth.19
The Peruvian economist Hernando de Soto has done more
than anyone else to show how poor people lose out in the absence
of property rights. In his revolutionary book The Mystery of Capital,
he turns the orthodox view of the world’s poor upside down.
The problem is not that they are helpless or even that they lack
‘‘property,’’ in the sense of the physical assets themselves. The
problem, rather, is that they have no formal rights of ownership.
The poor are often people with great initiative who save large
portions of their income to spend on improvements to their land
91
and their homes. After many years spent traveling and researching,
de Soto roughly estimates that poor people in the Third World
and in former communist states have real estate (buildings and
the land they stand on) worth about $9.3 trillion more than is
officially registered. That is a huge sum, more than the combined
value of all companies listed on the stock exchanges of the 20
most affluent countries—the New York Stock Exchange; the
NASDAQ; the exchanges of Toronto, Tokyo, London, Frankfurt,
Paris, and Milan; and a dozen more besides. The problem is that
Third World governments generally do not recognize the rights
of ownership without tortuous bureaucratic processes. People in
the Third World occupy common lands, build simple houses in
shanty towns, which they are constantly improving, and establish
small corner shops, just as poor people in the Western world were
doing a couple of hundred years ago. The trouble is that in
developing countries today it is practically impossible to register
this as property. De Soto illustrates these problems through an
ambitious experiment. Together with a number of colleagues, he
traveled the world attempting to register property. The results of
those attempts are horrifying.
Obtaining legal title to a house built on public land in Peru
required 207 different administrative steps at 52 different public
offices. Anyone wishing to do something as simple as drive a taxi
or start a private bus service legally, could expect 26 months of
red tape first. In Haiti, people can only settle on a plot of common
land by leasing it for five years and then buying it. But just getting
a leasehold permit involved 65 steps and took more than 2 years.
Buying the freehold then took far longer. In the Philippines, the
same process could take more than 13 years. Legally registering
a plot of land in the Egyptian desert required permits from 31
authorities, which could take between 5 and 14 years, and doing
the same for agricultural land took between 6 and 11 years.
92
Getting a legal license for a factory with two sewing machines
in the shanty towns of Lima took 289 six-hour days of traveling
to the authorities, lining up to see the right people, filling in
forms and waiting for an answer. In addition to the time required,
the process cost a total of $1,231—more than 30 times the
minimum monthly wage.
To people without many resources or powerful contacts, these
are insuperable barriers. The only option remaining for poor
people is to run micro-businesses in the informal sector, outside
the law. Consequently, they have no legal protection and do not
dare to invest for the long term, even if they have the spare cash
to do so. Their property is not included in a uniform system of
ownership that records transactions and indicates who owns what.
Without clarity on this crucial point, it is not clear how transactions
are to proceed, or who is responsible for payments and
services to the address. The property remains ‘‘dead capital.’’
Properties cannot be mortgaged, depriving the de facto owner of
one source of capital for financing an education or investing in
and expanding a business. The usual way that small entrepreneurs
in affluent countries obtain capital is therefore unavailable in
developing countries. Without a registered address and the possibility
of having one’s creditworthiness investigated, it is often
impossible to establish a telephone, water, or electricity connection,
and the property cannot even be sold. Nor can entrepreneurs
expand their businesses by selling shares in them.
Owners of micro-businesses, being forced to work in the informal
sector, always have to beware of bureaucrats and the police
or else pay heavy bribes. This means they have to keep their
businesses small and hidden, and are thus prevented from taking
advantage of economies of scale. Nor do they dare to advertise
or to broaden their customer base excessively. They venture to
93
sell to the nearest precincts, but no more. Major deals can only
be concluded with members of the family or others one trusts personally.
De Soto maintains that between 50 and 75 percent of citizens
in the developing countries work outside the protection of the
law, and that roughly 80 percent of homes and land are not
registered in the names of their present owners. In one country
that de Soto visited, the urban authority had itself established an
illegal settlement on common land so that its employees would
have somewhere to live. In countries without a functioning property
system, then, the great majority of the population has assets
that the owners are not allowed to make full use of. In the absence
of ownership rights, they cannot use their property as a basis of
expansion, which was the Western world’s path to prosperity.
Only the elite in the developing countries have the contacts that
permit them to engage in modern economic activity. Capitalism
without property rights becomes capitalism for the elite only.
Millions of capable people with initiative, people who could be
the entrepreneurs of the future, become entrapped by poverty.20
That is one of the reasons why Russia’s economy took 10 years
to show any growth after the fall of communism. That was how
long it took the Russian government to even begin introducing
a uniform system of private land ownership. Land in Russia is
generally considered government property and is just lent or leased
to the farmers, making investment pointless and sale or mortgage
unthinkable. By the beginning of the 21st century, fewer than
300,000 out of a total of some 10 million Russian farmers had
anything resembling title to their land. The government imposes
severe restrictions on what people can do with land that rightfully
belongs to them. Land socialism, of course, inhibits any number
of investment opportunities, but because land is often the basis
94
of borrowing, it also impedes the development of a modern credit
system. Instead, transactions find their way into the informal
market. Russia today is sometimes portrayed as a land of manic,
unchecked capitalism. By any reasonable definition of capitalism,
this is nonsense. Russian land socialism, coupled with a formidable
welter of business regulations and trade controls, leads the Heritage
Foundation to find it only the 135th freest economy out of
161 investigated. In Economic Freedom of the World’s ranking, it
comes 116th out of 123, after countries like Syria and Rwanda.21
Economic freedom reduces poverty
0
5
10
15
20
25
30
35
40
1
(most free)
5 4 3 2
(least free)
Percentage of poor population
as per UN Poverty Index
36.62
31.82
21.79
17.17
14.60
The countries of the world, divided into fifths by degrees of economic freedom
Source: James Gwartney and Robert Lawson, eds., Economic Freedom of the World 2001
(Vancouver: Fraser Institute, 2001).
Regulation of agriculture is another important cause of inequality.
Through price regulations, delivery requirements, and a variety
of other means, many developing countries have tried to benefit
95
the urban population at the expense of farmers. This is part of
an attempt to force industrialization by taxing and regulating
agriculture and transferring the proceeds to industry. The problem
is that this has had the effect of shattering agriculture, depriving
it of resources that would have been needed in order to streamline
food production and actually generate a surplus. In many African
and Latin American countries, this has created a vicious circle,
with heavy migration from the impoverished countryside to the
towns and cities. But there is no great demand for industrial goods
because the countryside remains poor, and so unemployment
and poverty increase in the towns, and homelessness, crime, and
prostitution with them. The property that the poor themselves
acquire and save up for is not recognized and is not registered.
As a result, demand for agricultural produce does not gather
speed, and so urbanization continues. Foreign demand cannot be
counted on to fill the domestic gap because the affluent countries
have built high tariff barriers to keep out agricultural produce.22
Several types of anti-liberal policy hit the poor especially hard.
One is inflation, which ruins the value of money. By rapidly
increasing the money supply, the government obliterates the small
monetary assets of the poor, while the rich who own registered
land, properties, and businesses get off more lightly. Reducing
inflation—and, above all, avoiding the kind of hyperinflation that
has afflicted so many Third World countries—is one of the most
important things that can be done to help the less well-to-do,
according to Dollar and Kraay’s study. One classic example of
hyperinflation was Germany’s during the 1920s, which ruined
the middle class and made people receptive to Hitler’s rhetoric.
An extreme instance of the opposite occurred at the end of 1989,
when Argentina quickly reduced inflation and, in little over a
year, reduced the proportion of poor people in greater Buenos
Aires from 35 to 23 percent.
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Another of Dollar and Kraay’s findings is that public spending
seems to harm not only growth but also a country’s poorest
inhabitants. This does not ring true to those who believe that
public spending involves taking from the rich and giving to the
poor. In fact, the opposite is frequently what happens. In poor,
undemocratic countries especially, it is the elite—the leader, his
relatives and friends, and powerful corporations—who are allowed
to help themselves to public funds, while the bill is paid by those
without influence in the palaces of the capital. Bloated military
establishments co-opt the lion’s share of resources. The rulers
prefer to invest in prestigious international airports, universities,
and city hospitals rather than in the roads, schools, and local
hospitals that would really help people. In undemocratic countries,
moreover, public medical care and education are often directed
to staunch supporters of the regime. This shows how wrong many
left-wing intellectuals were in the 1960s and 1970s when they
declared that democratic rights and liberties did not matter all
that much in the developing countries, because what they first
needed to invest in was welfare policy. Without democracy, whatever
welfare policy is implemented cannot be expected to benefit
the great mass of the population.
Inefficient systems of government will not make the best possible
use of money—or, for that matter, the second best. ‘‘I heard
rumors about assistance for the poor,’’ said one poor Indonesian
of his country’s welfare policy, ‘‘but no one seems to know where
it is.’’ Presumably the money went into a local bigwig’s pockets.
The same problem exists in India, where bureaucracy and corruption
have turned poor relief into black holes for tax money. The
government there spends $4.30 to effect a transfer to the poor
of just $1.00 through a program of food subsidization. It is, of
course, a straight loss to the poor, whose supplies are taxed heavily
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so that the government can ‘‘generously’’ give them back a far
smaller amount in the form of aid.23
Capitalism is not a perfect system, and it is not good for
everyone all the time. Critics of globalization are good at pointing
out individual harms—a factory that has closed down, a wage
that has been reduced. Such things do happen, but by concentrating
solely on individual instances, one may miss the larger reality
of how a political or economic system generally works and what
fantastic values it confers on the great majority compared with
other alternatives. Problems are found in every political and economic
system, but rejecting all systems is not an option. Hunting
down negative examples of what can happen in a market economy
is easy enough. By that method water or fire can be proved to
be bad things, because some people drown and some get burned
to death, but this isn’t the full picture.
A myopic focus on capitalism’s imperfections ignores the freedom
and independence that it confers on people who have never
experienced anything but oppression. It also disregards the calm
and steady progress that is the basic rule of a society with a market
economy. There is nothing wrong with identifying problems and
mishaps in a predominantly successful system if one does so
with the constructive intent of rectifying or alleviating them. But
someone who condemns the system as such is obligated to answer
this question: What political and economic system could manage
things better? Never before in human history has prosperity grown
so rapidly and poverty declined so heavily. Is there any evidence,
either in history or in the world around us, to suggest that another
system could do as well?
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The East Asian ‘‘miracle’’
To gauge the impact of politics on development, it may be enlightening
to compare the continents presenting the big contrast in
postwar history, namely the growth ‘‘miracle’’ of East Asia and
the disastrous track record of Africa. Zambia in 1960 was almost
as wealthy as South Korea. Today South Korea has a standard of
living comparable to Portugal’s and is roughly 20 times wealthier
than Zambia. The Taiwanese used to be poorer than the population
of the Congo. Today they are as rich as the Spaniards, while
the Congo has stood still. How could things go so well for Asia
and so badly for Africa?
The end of the Second World War found Japan’s economy in
ruins and the countries it had recently occupied destitute, starving,
and wretched. The rest of the world expected these countries to
be torn apart by corruption, crime, and guerrilla warfare. But
since the 1960s these East Asian ‘‘miracle economies’’ have had
annual growth rates between 5 and 7 percent, and their incomes
have doubled every decade. Savings, investments, and exports have
all been impressive, and the countries have quickly industrialized.
Former colonies like Singapore and Hong Kong are now as prosperous
as their former colonizers.
In nearly all these countries, sometimes called the ‘‘Asian
tigers,’’ this process of development has preserved or even
increased economic equality—without any significant redistribution.
Poverty has rapidly declined. In Indonesia, the proportion
living in absolute poverty has fallen from 58 to 15 percent, and
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in Malaysia from 37 to 5 percent. Between 1960 and 1990,
average life expectancy in the East Asian countries rose from 56
to 71 years. With growth came the eventual democratization of
countries like Taiwan, South Korea, Thailand, and now Indonesia
as well.
These states have proved that it is perfectly possible for developing
countries to industrialize and develop. They also showed that
this could happen only in an open, capitalistic economy, not in
a secluded command economy. Recently, many economists have
pointed out that the miracle economies also had a great deal of
government control, implying that they actually provide counterexamples
to the claim that liberalism alone creates development.
The first point is correct. The first states in the region to develop—
Japan, South Korea, and Taiwan—had a great deal of government
intervention, though the subsequent miracles—Indonesia, Malaysia,
and Thailand—got their economies moving with less intervention.
In the former countries, the state governed investments,
regulated the banks, invested in and protected chosen industries,
and kept a whole battery of interventions in its arsenal. But
there was nothing unique about this: developing countries in all
continents have done the same. The World Bank, in its broad
evaluation of the miracles, observes:
Other economies attempted similar interventions without success,
and on average they used them more pervasively.24
What distinguished the Asian tigers from other developing countries
was that they committed themselves to establishing and
protecting rights of ownership, creating a legal code that would
protect enterprise and competition, and having a stable monetary
policy and low inflation. They implemented universal education,
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producing skilled populations capable of developing their countries.
Because the governments concentrated on elementary education,
leaving higher education to the privately funded market,
higher education establishments were attuned to the needs of
the economy.
The East Asian states introduced reforms that deprived old
elites of the land and privileges they had seized in the past.
Those reforms enabled the entire population to participate in the
economy. Farmers could now dispose relatively freely of their
surplus, saving and investing as they saw fit, which gave them an
interest in making agriculture more efficient. The increased yield
kept these countries supplied with food while releasing manpower
for industry, which in turn encountered rising demand as rural
earnings improved. The tigers were more interested in creating
job opportunities than in setting minimum wages and regulating
the labor market. This provided work for most people, and wages
then rose with productivity. Because wages could also be lowered
in a recession (as the goods those wages bought also became
cheaper), many of these countries coped with crises more smoothly
and with lower unemployment than others.
In other developing countries, enterprise is hamstrung by regulations,
and licenses and permits are needed in order to start up
business. East Asian states, by contrast, have had a notable freedom
of enterprise. Individual citizens with ideas have been able to start
up firms with a minimum of red tape and to work untrammeled
by elaborate controls and price regulations. Hong Kong went
furthest in this direction. There, one could just start a business
and then inform the authorities afterwards in order to obtain a
permit. This has been hugely important, not only opening the
field to initiative but also providing an effective antidote to the
corruption that often flourishes in the shade of permit procedures.
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Although many of the East Asian countries have steered tax
credits and subsidies into the private sector, they have been less
swayed than other developing countries by cronyism and nepotism,
vested interests, or the temptation to pursue ostentatious
but unproductive showcase projects. Instead, they have focused
their attention on genuine productive achievement and the exigencies
of the market. Prices have been far more market driven than
in other developing countries. These countries have not had price
controls and have not distorted world market prices, so investments
have occurred where they have been most likely to succeed.
Absent those distortions, investment has flowed to the sectors
where those countries are most efficient and have advantages
relative to other countries.
Many of those in the debate demand that the government
intervene and govern investments in order to slow the pace of
growth and protect existing businesses. This is precisely what was
not done by the Asian governments, which regarded ability to
withstand international competition as crucial for businesses. The
Japanese government let large corporations go bankrupt because
they did not have sufficient profit potential, and South Korea
was quite unsentimental about shutting down firms that were
unable to produce for an open market. This absence of sentimentality
has also been applied to the government itself. Whenever
subsidies and expenditure have threatened economic stability, the
government has quickly scaled down its commitments, thereby
avoiding budget crises and inflation.
Above all, these countries have been fiercely committed to
integration with the international economy. They are among the
world’s most export-oriented economies, and most of them have
welcomed investments by foreign companies. The larger the share
of these countries’ GDP accounted for by trade, the faster their
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economic growth has been. Most of them have had tariff barriers
against imports, but the same goes for the rest of Asia, Africa,
and South America. The East Asian countries are different in that
they applied this policy to a lesser extent than other developing
countries and dropped it much earlier. While the others were
busily pursuing self-sufficiency and avoiding trade, the East Asian
countries committed themselves to internationalization. In the
1960s they began encouraging exports, partly by abolishing permit
requirements and exempting exporters and their suppliers from
import duties. Tariffs on capital goods have been low. According
to the index of openness constructed by Harvard economists
Jeffrey Sachs and Andrew Warner, East Asian countries were
among the first developing countries to open up their economies
by reducing tariffs, abolishing quotas, freeing exports, and deregulating
foreign exchange. The economies of Taiwan, Thailand, and
Malaysia were ‘‘open’’ since 1963 at the latest, Japan since 1964,
South Korea since 1968, and Indonesia since 1970. Hong Kong
has pursued a more liberal trade policy than any other country
in the world.25 The same revolution did not occur in Latin America
until the beginning of the 1990s and has yet to come in most
parts of Africa.
It is highly enlightening to compare these miracle economies
with those of neighboring countries that are culturally and demographically
similar but committed to quite the opposite kind of
policy. North Korea and Burma had no time for the market,
opting instead for an ultra-protectionist policy and a rigorously
controlled economy. They were completely left out of the regional
upturn and ensnared by abject poverty, and today they are governed
by inhuman dictatorships. Far from demonstrating the
viability of regulation and state control, the East Asian miracle
shows an open, free-enterprise economy to be the sine qua non
of development.
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The African morass
Africa, especially sub-Saharan Africa, presents a painful contrast
to the East Asian miracles. In southern Africa, we find most of
the countries whose per capita GDP has actually decreased since
the mid-1960s, as well as the world’s heaviest concentration of
poverty, disease, malnourishment, illiteracy, and child labor.
Instead of the growth and prosperity that have prevailed in most
of the rest of the world, over the past 30 years this continent has
grown accustomed to a declining standard of living and growing
distress. Certain natural factors help to account for this. The
tropical climate causes parasitic diseases to flourish; the soil is less
fertile and natural disasters more common than in Europe. Onethird
of the population live in completely landlocked countries,
which makes it far more difficult for them to connect with international
markets and trade movements. The curious border definitions
and discriminatory policies of the old colonial powers have
contributed to a severe ethnic and linguistic fragmentation within
African states. A large part of the continent is being torn apart
by wars and conflicts.
But other regions with both nature and culture against them
have managed far better than Africa. Even factors like war and
famine have political causes—no democracy has ever been afflicted
by famine, and as a rule, democracies do not make war on each
other, which shows that to a great extent it is a country’s institutions
and politics that determine its prospects for development.
Africa, unfortunately, is notable for a far higher degree of political
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oppression, corruption, economic dirigisme, and protectionism
than the other continents. The African countries inherited a hierarchical,
repressive political structure from the colonial powers,
and have used it to oppress other ethnic groups and the countryside,
limit enterprise, and violate fundamental rights.
African leaders have, by and large, been intent on avoiding
both the policies of the old colonial powers and the risk of
becoming commercially dependent on their European ex-rulers.
So they have tried to build self-sufficient economies via draconian
tariffs, nationalization, and detailed control of industry. African
economies have been governed by price and exchange controls,
and public expenditure has at times run riot. The urban elites
have systematically exploited the countryside. Instead of creating
markets, countries established purchasing monopolies that paid
wretched prices and introduced government distribution of food.
The government thereby confiscated the entire agricultural surplus,
impoverishing the farmers and effectively abolishing trade.
Production fell and farmers were driven into the informal market.
That impeded plans for industrialization and posed a threat to
society when the economic downturn set in during the 1970s.
After trying to borrow their way out of the crisis, many African
states were in free fall by the mid-1980s. Structures collapsed,
people starved, there were no medicines, and machinery simply
stopped when spare parts were missing and batteries went flat
and could not be replaced. The fall has stopped since then, but
has not yet been followed by an upturn. Between 1990 and 1998,
southern Africa’s combined GDP declined by 0.6 percent.
The cause of Africa’s hunger and suffering is not the desert
and drought but political oppressors who have systematically shattered
the countries’ potential. Instead of becoming ‘‘dependent’’
on trade, these states have become dependent on development
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aid. Sub-Saharan Africa has received more development assistance
per capita than any other region in the world. Some states have
received development assistance equal to twice their own incomes.
But instead of going to people in distress, the money has often
been used to sustain rogue regimes that exploited their people.
Many Western donors declared that these countries were not ripe
for democracy and individual rights, that they should rely on
planning the economy and reducing their dependence on trade.
The consequences of following that prescription were not long
in coming. Potential entrepreneurship has been snuffed out, and
whereas in the 1960s Africa had 5 percent of the world’s trade,
today it has only 1 percent.
Africa has been afflicted with long-lived leaders like Mugabe in Zimbabwe,
Moi in Kenya, and Mobutu in Zaire who have clung to power with the
support of development aid from the Western world. African economist
George Ayittey has characterized many of those governments as ‘‘vampire
states,’’ marked by public sectors that are not interested in stimulating
creativity and growth, only in feathering their own nests with the productive
resources of society—much like an army of occupation. Often the leaders,
and the clique surrounding them, have seized property by means of direct
expropriation and massive peculation of government funds. Mobutu is
understood to have amassed a fortune of about $4 billion while his country
was bleeding to death.
Anyone who believes that hierarchy is synonymous with efficiency
should study some of these countries. Chaos prevails throughout
the public sector. The bureaucracy often ignores routine matters;
officials disregard orders from superiors and, not infrequently, do
the opposite of what they are told to. The courts, which are
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seldom impartial, do not protect contracts or property rights.
Corruption is amazingly widespread, paralyzing whole states. Officials
demand bribes simply to allow people to work and trade,
which makes it hard for businesses—and impossible for the
poor—to do so. Political decisions are often based on ties of
friendship and kinship, not merit. Arbitrary rule and corruption
have deterred entrepreneurship, and many of these countries are
receiving no foreign investments at all. Africa has been marginalized—
on that point the anti-globalization movement is perfectly
right—but the reason is that the African countries have retreated
from globalization and have instead been subjected to socialism,
gangster rule, and protectionism. To the peoples of Africa, globalization
has meant little more than their leaders flying off to
conferences in other countries.26
Some African countries have in recent years succeeded in balancing
their national budgets, but such change is only marginal.
Challenging strong vested interests, taking vigorous action against
corruption, reducing the apparatus of government, and opening
the economy to competition have proved more difficult. A bare
majority of the countries south of the Sahara have relatively democratic
regimes, and those countries have the world’s least liberal
economic systems. Estimating the amount of economic freedom
in the region, the Canadian Fraser Institute found that, ignoring
those countries too war torn to make measurement possible, 14
of the world’s 20 least free economies are in Africa. All but four
of the African countries for which data were available fell into
the least free half of the 123 countries ranked.27
Zimbabwe, a long-standing recipient of Western development
assistance, has undertaken the world’s fastest and most consistent
retreat from the alleged evils of globalization and liberalization.
Under dictator Robert Mugabe, the country’s trade with the
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outside world has been drastically limited, government spending
has skyrocketed, and price controls have been introduced.
Recently, oppression has escalated, with large-scale expropriation
of property, suppression of freedom of expression, and acts of
terror against the opposition. In just five years, the country has
lost more than a third of all its wealth, and absolute poverty has
grown by more than 10 percentage points. Zimbabwe was once
a major exporter of foodstuffs, but over the course of only a few
years, cereal production has collapsed to one-third its former level,
and more than 6 million people are now facing starvation.28
Nigeria is another example. This huge country, despite abundant
natural resources and agricultural land, has remained abysmally
poor because of a very strictly regulated and corrupt economy.
On the advice of the IMF, among others, certain structural
reforms were inaugurated at the end of the 1980s, but their
unpopularity led the Nigerian government to drop them at the
beginning of the 1990s. Regulations were reintroduced, the credit
and exchange market was abolished, and interest rates were controlled.
Inflation and unemployment resulted. Between 1992 and
1996, the proportion of the absolutely poor rose from 43 to an
incredible 66 percent of the national population. Nigeria today
accounts for a quarter of all absolute poverty in sub-Saharan
Africa, and despite the advent of a new, democratic government,
reforms have progressed very slowly. Per capita income today is
lower than it was thirty years ago, and health and education
standards have fallen.
The economists Jeffrey Sachs and Andrew Warner have studied
the growth that different political reforms have brought in various
African countries. They have attempted, on the basis of various
country studies, to calculate what growth the continent would
have had if it had adopted the East Asian policy of open markets,
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freedom of enterprise, protection of property rights, and a high
level of saving. Sachs and Warner maintain that, despite its poor
natural conditions, Africa would then have been capable of achieving
an average per capita growth of about 4.3 percent annually
between 1965 and 1990. That would almost have tripled the
population’s incomes. Of course, any such estimate has to be
taken with a grain of salt, but even with a generous margin of
error, the figure remains shockingly high compared with Africa’s
actual growth during the years in question—a mere 0.8 percent
per year.29
If we examine the track record of the African countries that
have opted for free trade and more open economies, it seems
entirely plausible that a liberal policy could have been so successful.
The cattle farmers of Botswana were quick to realize that it was
in their interest to campaign for more open markets, and that
meant that large parts of the economy were already exposed to
competition by the end of the 1970s. Botswana has protected
rights of ownership and has never nationalized businesses.
Through its association with the EU, the country’s exports to
Europe are exempt from duties and quotas. Since independence
in 1966, Botswana has been the exception in a continent dominated
by dictatorships, which has helped to make it one of the
least corrupt nations in Africa, on par with European countries.
Botswana’s economic growth has actually surpassed that of the
East Asian countries, with annual growth levels of more than 10
percent between 1970 and 1990. Another state that committed
itself to free trade early on is the island nation of Mauritius.
Through reduced military expenditure, protection of property
rights, reduced taxes, a free capital market and increased competition,
the country has achieved growth rates on the order of 5
percent annually. Today nearly everyone there has access to clean
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water, and education and health care are expanding. If countries
like Mauritius and Botswana can achieve this degree of growth,
why shouldn’t the rest of Africa be able to? The populations of
the other African countries are no less inventive and enterprising
than the people of Mauritius or Botswana, but they are forced
to use their creative powers to evade corruption and regulations
and to cope with working in the informal sector.
Another interesting African country is Ghana, which began liberalizing
its economy in 1983 and gradually became more prosperous
while its neighbors grew slowly poorer. In particular, Ghana deregulated
agriculture and abolished tariffs, price controls, and subsidies.
Production has risen fast, which above all has benefited cocoa
farmers—but because the farmers have now been able to invest
and to afford more goods and services, many others have also
benefited from the farming boom. Absolute poverty in Ghana fell
during the 1990s from 36 to slightly more than 29 percent of the
population, and in 2000 the leadership of the country was, for the
first time, transferred peacefully and democratically.
Uganda has developed along similar lines and is one of the
countries that liberalized fastest over the course of the 1990s. Trade
there has been quickly liberated, price controls abolished, taxes
lowered, inflation reduced, and the first steps taken toward protecting
property rights and deregulating financial markets. Those factors,
coupled with extensive development assistance, have produced
annual growth of more than 5 percent, while inequality has diminished.
During the 1990s, absolute poverty in Uganda fell from 56
to 35 percent. A relatively high degree of openness and the educational
work of independent organizations have made Uganda the
first country in Africa where the incidence of HIV/AIDS in the
towns and cities has begun to diminish.
These examples of African ‘‘lion economies’’ (the counterpart
of Asian ‘‘tigers’’ and ‘‘dragons’’) have shown, despite their setbacks,
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that poverty is not imposed by some law of nature. Slowly, very
slowly, certain sub-Saharan states are beginning to use their
resources more efficiently and to give their citizens greater economic
liberties. The democracies are growing in number and urbanization
is breaking up old tribal loyalties that have hitherto stood in the
way of equality before the law. Competition is reducing corruption
because rulers no longer have the same power to confer and withhold
permits and privileges. Interest in foreign investments is
another motive force, because companies shun investment in corrupt
economies. The controlled economies are becoming a little
frayed at the edges. The proportion of national budgets devoted
to health and medical care increased, albeit marginally, during
the 1990s.
Africa has an incredibly long way to go, but contrary to what
some maintain, improvement is possible. From being in free fall,
many African countries have been stabilized, albeit at an extremely
low level. It will take determined democratic and liberal reforms
to move things forward, and the implementation of those reforms
will require leaders with the courage to put the people’s interests
before those of their friends, or of the bureaucracies. Given the
grim starting point, it is unlikely but not impossible for the 21st
century to be Africa’s century.
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III
Free trade is fair trade
Mutual benefit
Following demonstrations against the Seattle meeting of the
World Trade Organization by tens of thousands of people at the
end of 1999, the benefits of free trade have once again begun to
be questioned in public debate. Voices have been raised calling
for countries to be self-sufficient, or saying that the developing
countries should ‘‘protect’’ themselves with tariffs until their
industries have become mature, or that we need ‘‘new rules’’ for
international trade. Often, the criticisms are summed up in the
slogan that we ought to have ‘‘fair trade, not free trade.’’ But in
my view, free trade is by nature fair trade, because it is based on
voluntary cooperation and exchange. Free trade means you, not
the government, decide where you will buy your goods, without
extra costs being imposed on them merely because they happen
to cross a border. Tariffs, which impose a tax on products whenever
they cross a border, and quotas, which limit the number of
goods of a particular kind that may enter a country, are direct
restrictions of citizens’ freedom to make decisions about their
own consumption for themselves. Freedom from those things—
free trade—gives us freedom of choice and gives all people the
opportunity of raising their living standard.
It may seem odd that the world’s prosperity can be augmented
just by people swapping things with each other. But every time you
go shopping, you realize (if only subconsciously) how exchange
augments wealth. You pay a dollar for a carton of milk because
you would rather have the milk than your dollar. The shopkeeper
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sells it at that price because he would rather have your dollar than
keep the milk. Both parties are satisfied with the deal, otherwise
it would never have taken place. Both of you emerge from the
transaction feeling that you have made a good exchange, that
your needs have been better provided for.
Trade results in the person who has a knack for making bicycles
doing just that, the person who is best at cutting hair working
as a hairdresser, and the person who is best at manufacturing
television sets taking a job in the TV factory. Then those workers
exchange, so as to get what they each want. Through free trade,
we can consume goods and services that we could never have
produced ourselves. The possibility of free choice means that we
can choose the best and cheapest goods possible. Free choice gives
us access to goods that we cannot procure by ourselves. In a
Minnesota grocery, we can buy bananas and pineapples, even
though neither is likely to be found on a Minnesota farm. Even
in northern latitudes, fresh green vegetables are on sale all winter,
and people in landlocked countries can buy salmon from Norway.
Free trade results in goods and services being produced by whoever
is best at producing them and then being sold to whoever wants
to buy them. That’s really all there is to it.
But in fact the argument for free trade is even stronger. Perhaps
most people are aware that you can make money out of trade so
long as you produce something better than everyone else, but
much of the criticism of free trade is based on the fear that some
countries may be better at everything. Certain countries and
enterprises are more advanced than others, and can perhaps do
everything more efficiently than their weaker trading partners.
But the fact is that you gain by trade even if you manufacture
things less well than others could. The important thing is to do
what you are relatively best at, not to be better than everyone
else at doing it.
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Imagine a simple case of trade between two people. Julia is
highly trained, an outstanding surgeon, and also a pretty good
cook. The other is John, who has not trained for any particular
occupation and, moreover, is not quite as good at baking as Julia.
John would like to do something simple that he can learn easily,
in the home, and then use it in exchange for things that are more
difficult to produce, such as surgery and medical care. But why
should Julia agree to any such exchange when she is also the
better cook? For the simple reason that she profits by concentrating
on what she does best of all. Even if she is twice as good a chef
as John is, she is a thousand times better at surgery than he is.
So she produces the greatest value by devoting her limited time
to surgery and then using part of her earnings from that source
to buy dinner from somebody else. By concentrating on what
she is best at, she has still more resources left over, and can thus
afford to buy other goods and services that she wants.
Those who do not want free trade because it takes place ‘‘on
unequal terms’’ and is based on ‘‘unequal circumstances’’ would
urge John to shut himself off and not do business with Julia. But
the fact is that he would profit handsomely by free trade. Through
trade, he can concentrate on what he does best, in relative terms,
and exchange it for what he needs, things that he would be far
worse at producing, such as bicycles or medical care. This example
illustrates what economists call ‘‘comparative advantage.’’ John
does not need to be absolutely best at his kind of production. It
is enough for him to be best at it in relative terms—producing
it better than other things he needs. It will still be worth his while
to concentrate on that particular thing instead of trying to produce
everything he needs by himself. He concentrates on the area in
which he has a comparative advantage.
There need not even be any difference of training or education—
different degrees of industry or good luck will suffice.
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Imagine the two people in our example are stranded on a desert
island, where each needs to eat a fish and a loaf of bread every
day in order to survive. To achieve this, Julia has to spend two
hours baking and one hour fishing. John needs two and one-half
hours to bake and five hours to fish. So again Julia is best at both
jobs. But she still gains by swapping with John, because then she
can devote her time to what she is absolutely best at—fishing.
She can then catch three fish in that same three hours, while
John in the course of his same seven and one-half hours can bake
three loaves. They then exchange the surplus, getting one and a
half of each. Thus, without working an iota harder or a minute
longer, John and Julia have increased their daily output from two
fish and two loaves to three fish and three loaves. They can opt
for this higher output level and have a better meal, or they can
each work a bit less and make do with the old quantities. Or
they can spend the additional time they’ve freed up on building
a hut or a boat. If they were able to trade with other islands in
the vicinity, they would be able to trade off their surplus for
clothing or tools that represented someone else’s comparative
advantage.
Of course, this is a greatly simplified example, but it illustrates
how specialization works in more complicated cases as well. Comparative
advantage is just as important between countries as
between individuals. In the above examples, John and Julia can
be replaced with the United States and Canada, and the fish
and bread with computers, clothing, tractors, or medicine. The
principle that it is a good idea to concentrate on what one is
relatively best at still applies. One’s comparative advantage need
not be a result of naturally given factors, such as the United States
having plenty of farmland and Venezuela and the Middle East
having oil. A country can acquire comparative advantages by
117
chance. Computer corporations pop up in Silicon Valley and
fashion tycoons set up shop in Milan, not because nature smiles
on them, but because they can make use of the specialized contacts,
knowledge, and manpower that, for one reason or another, have
begun to accumulate in each place.
Free trade brings prosperity
0
5,000
10,000
15,000
20,000
25,000
1
(most open
economies)
5 4 3 2
(least open
economies)
Per capita GDP in USD (1998)
2,916
4,794
6,397
13,984
22,306
The countries of the world, divided into fifths by degrees of economic freedom
Source: James Gwartney and Robert Lawson, eds., Economic Freedom of the World 2001
(Vancouver: Fraser Institute, 2001).
The simple examples given above expose the hollowness of the
argument that countries should be self-sufficient and produce for
their own populations. Under free trade, producing for others is
producing for yourself. It is by producing and exporting what we
are best at that we are able to import what we need. After World
War II, many developing countries in South America, Africa,
and elsewhere believed that self-sufficiency was the right policy.
118
Cheered on by the Western world, they were going to produce
‘‘for use and not for profit.’’ In practice, this meant trying to do
everything themselves, at huge expense. The East Asian countries
Free trade brings growth
0,0
0,5
1,0
1,5
2,0
2,5
1
(most free)
5 4 3 2
(least free)
Per capita percentage GDP growth (1980–98)
0.5 0.5
1.3
2.0
2.4
The countries of the world, divided into fifths by degrees of economic freedom
Source: James Gwartney and Robert Lawson, eds., Economic Freedom of the World 2001
(Vancouver: Fraser Institute, 2001).
did the opposite. They made what they were best at and exported
it, and in return were able to purchase, at lower cost, what they
themselves needed. South Korea’s first export commodities
included wigs and particleboard; Hong Kong prospered with
plastic flowers and cheap toys. Those aren’t the first things a
central planning committee would decide that people needed,
but by exporting those things they acquired economic scope for
catering to their own needs.1
119
Important imports
The logic above exposes the vacuity of another myth about trade,
the notion that exports to other countries are a good thing but
that importing from other countries is somehow a bad thing.
Many still believe, like the ‘‘mercantilist’’ economists of the 18th
century, that a country grows powerful by selling much but buying
little. All experience indicates that this is not a stable situation.
Import quotas designed to keep out products from abroad would
just drive up prices in the United States by shielding domestic
producers from competitive pressures. Those producers would
then find it more profitable to focus on the high-priced American
market than to export and sell their goods at lower world prices.
Import barriers, then, actually reduce exports as well.
The truth is that we get richest by exporting what we make
best, so as to be able to import things we make (relatively) less
well. Otherwise we have to do everything ourselves and forsake
the advantages of specialization. We can make a pile of money
by just selling, but our standard of living will not rise until we
use that money to buy things that we would not have had otherwise.
One of the first trade theorists, James Mill, quite rightly
argued, in 1821, ‘‘The benefit which is derived from exchanging
one commodity for another, arises, in all cases, from the commodity
received, not the commodity given.’’2 The only point of exports,
in other words, is to enable us to get imports in return.
The absurdity of the idea that we must avoid cheap imports
becomes clear if we imagine it applied to non-national boundaries—
for example, if Los Angeles were to try to prevent the
120
importation of goods from San Francisco, on the grounds that
it had to protect its markets. If imports really were economically
harmful, it would make sense for one city or state to prevent its
inhabitants from buying from another. According to this logic,
Californians would lose out if they bought goods from Texas,
Brooklyn would gain by refusing to buy from Manhattan, and it
would be better for a family to make everything themselves instead
of trading with their neighbors. It’s obvious that such thinking
would lead to a tremendous loss of welfare: the self-sufficient
family would be hard pressed just to keep food on the table.
When you go to the store, you ‘‘import’’ food—being able to do
so cheaply is a benefit, not a loss. You ‘‘export’’ when you go to
work and create goods or services. Most of us would prefer to
‘‘import’’ so cheaply that we could afford to ‘‘export’’ a little less.
Trade is not a zero-sum game, in which one party loses what
the other party gains. On the contrary, there would be no exchange
if both parties did not feel that they benefited. The really interesting
yardstick is not the ‘‘balance of trade’’ (where a ‘‘surplus’’
means that we are exporting more than we are importing) but
the quantity of trade, since both exports and imports are gains.
Imports are often feared as a potential cause of unemployment:
if we import cheap toys and clothing from China, then toy and
garment manufacturers here will have to scale down. If we take
a more internationalist perspective, we might ask why jobs and
investments are more important in the United States than in
poorer countries. Don’t those countries need the jobs more thanwe
do, unable as they are to compensate the unemployed? But this
is also a mistaken way of looking at things. By obtaining cheaper
goods from abroad, we save resources in the United States and
can therefore invest in new industries and occupations, which
121
‘‘Nothing, however, can be more absurd than this whole doctrine of the
balance of trade, upon which, not only these restraints, but almost all the
other regulations of commerce are founded. When two places trade with
one another, this doctrine supposes that, if the balance be even, neither
of them either loses or gains; but if it leans in any degree to one side,
that one of them loses and the other gains in proportion to its declension
from the exact equilibrium. Both suppositions are false. A trade which is
forced by means of bounties and monopolies may be, and commonly is,
disadvantageous to the country in whose favor it is meant to be established,
as I shall endeavour to show hereafter. But that trade which, without force
or constraint, is naturally and regularly carried on between any two places
is always advantageous, though not always equally so, to both.’’
Adam Smith, 1776 3
results in the Chinese having more money to spare and being
able to buy software or Britney Spears albums from us. Besides,
most businesses and producers are dependent on raw materials
from suppliers and subcontractors in other countries. For the
production of mobile phones, for example, the Swedish company
Ericsson needs electronic components produced in Asia. So when
the EU raises tariff barriers against Asia, allegedly for the protection
of European jobs, European companies like Ericsson sustain
added costs and therefore sell less, which means they are not able
to create as many new jobs as they otherwise could have.
Thus, the world’s politicians are in one sense acting foolishly
when they gather in Seattle or Qatar to negotiate the reduction
of tariffs within the framework of the World Trade Organization
(WTO). The politicians say that they will consent to reduce a
tariff only on the condition that other countries do the same. But
that is fundamentally irrational, because each country benefits by
122
reducing its own tariffs and being able to import cheaply, whether
or not other countries follow suit. The best policy is unilateral
free trade, that is, the United States dismantling its own tariffs
and quotas even if other countries retain or even increase theirs.
Why should we subject our population to more tariffs and prohibitions
merely because other countries do so to their populations?
To borrow an analogy from the British economist Joan Robinson,
there is nothing very clever about tipping boulders into your own
harbors just because your neighbors have rocky and inaccessible
coastlines that make it hard for your own ships to dock. Saying
‘‘I’m not going to allow myself to choose from a wider range of
good, cheap products unless you do the same’’ is a sacrifice, not
a cunning reprisal.
Even so, there are good arguments in favor of multilateral trade
negotiations between lots of countries under WTO auspices. For
one thing, such negotiations can make it easier for vested interests
to accept free trade reforms. If the United States unilaterally
reduces its tariffs, the reduction may meet with fierce resistance
from American companies and trade unions that would rather
not have the competition. That competition would benefit consumers,
of course, but consumers as a class are dispersed and
unorganized, unlikely to make too much noise about any single
tariff. The industries for whom those trade barriers represent a
kind of monopoly protection, however, will fight tooth and nail
to retain the captive market tariffs give them. Multilateral agreements
can shift the balance of political interests. When many
countries reduce their tariffs at the same time, businesses and
unions in export industry will support the reform in hopes of
opening up new markets. Negotiations can make it easier to
introduce tariff reductions and to get other countries to do the
same, but they can also make it more difficult. If politicians
123
behave as though tariffs are something beneficial, something to
remove only if we get something in return, voters will end up
believing this is true. Voters will get the impression that tariffs
are a good thing that the politicians are selling out, whereas in
fact tariffs are harmful. If trade talks are not combined with a
strong mobilization of opinion against tariffs and quotas and in
favor of imports, there may come a protectionist backlash, as the
collapse of negotiations following the December 1999 WTO
meeting in Seattle suggests.4
The WTO offers the promise of a second, broader benefit as
well: the establishment of an impartial code of rules to ensure
that all countries honor their agreements. The norm throughout
history has been that powerful countries could behave as they
liked toward the weaker ones. Many of the world’s countries
wanted a trade organization with uniform rules to prevent, above
all, unilateral actions by the United States against its trading
partners. The United States, on the other hand, had wanted only
a weaker agreement to begin with, not an organization to resolve
disputes. Through the WTO, member states have pledged not
to discriminate against foreign enterprises and not to introduce
arbitrary trade barriers—over and above the ones they have
already, anyway. It was in order to benefit from these protections
that the poorer countries of the world quickly ratified the 1995
WTOagreement, whereas the EU, the United States, and Japan—
accustomed to doing as they liked—held back. Powerful countries
like the United States have since been defeated in WTO disputes,
something that could never happen at the United Nations, where
they have a veto.
Another advantage of the WTO is that all member states have
pledged to give the others ‘‘most favored nation’’ treatment, which
entails automatic access to all tariff reductions granted to any
124
other country. The United States and the EU used to reduce
tariffs in relation to each other without a thought of increasing
freedom of trade with the rest of the world. Now tariff reductions
also have to apply to the poor countries, with the unfortunate
exception of those contained in regional trade agreements of the
sort existing between EU countries or the signatories of the North
American Free Trade Agreement (NAFTA).
But the obstacles to unfair tariffs are not all that great. The
WTO has no specific rights to forbid anyone to impose tariffs;
it can only entitle the injured party to introduce compensatory
trade barriers. This is not an ideal situation, because countries
should phase out their tariffs regardless of what others do. It would
be better if the losing party had to pay monetary compensation
or lower other tariffs to compensate. But these relatively stable
procedures are at least an improvement on the old days, when a
petty dispute could develop into a full-scale trade war. Now states
are at least prevented by their honor from reneging on their
agreements. In several widely noted instances, however, the EU
has tried to retain trade barriers condemned by the WTO. One
example is the attempt made for many years to discriminate
against Latin American bananas and hormone-treated meat. The
EU governments act as though one yardstick should apply to the
industrialized nations and another to the developing countries,
which in the long term will severely damage the WTO’s credibility.
Once the benefits of imports are perceived, it also follows that
antidumping measures are harmful. Politicians often say that they
must protect the people from ‘‘price dumping’’ by other countries,
meaning, for example, that if Malaysia sells us extremely cheap
shoes, priced below production cost or cheaper than they are
sold in the Malaysian market, this is ‘‘unfair competition.’’ The
125
Malaysian producers are then ‘‘dumping,’’ and this is something
we have to protect ourselves against. But, as economist Murray
Rothbard has quipped, you should keep a sharp eye on your
wallet when somebody says that they want ‘‘fair competition,’’
because it means that your pocket is about to be picked. That
certainly is true where antidumping tariffs are concerned. What
they really ‘‘protect’’ us from is cheap shoes, TV sets, and foodstuffs.
The question is why we should need protection from these
things. There need not be anything unfair at all about foreign
producers engaging in ‘‘dumping.’’ For example, they may be
forced to do so in order to penetrate a new market, surely a
legitimate goal. New domestic firms are allowed to do this, so
why not foreign ones? Surely, having different rules for domestic
and foreign businesses amounts to a greater injustice than dumping.
It may also be that the Malaysian shoe manufacturers sell
their products more expensively in the home market because they
have advantages there that they do not enjoy here—advantages
like protective tariff walls!
The United States, which claims to support free trade, is in
fact the biggest transgressor when it comes to introducing antidumping
tariffs. Not only do these tariffs harm the enterprise
sectors of other countries, but the American economy loses billions
of dollars every year to higher prices and lower efficiency. The
use of such tariffs has grown in the past decade. When the WTO
and international agreements make protectionism harder to introduce
through the front gate, the United States and the EU let it
in the back door with antidumping tariffs.5
WTO rules notwithstanding, countries can and do still erect
de facto trade barriers in the form of domestic subsidies. The
American steel industry, for example, has been the beneficiary of
a welter of government pension guarantees, loan guarantees, spe-
126
cial tax and environmental exemptions, and research and development
grants. Conservative estimates place the value of those subsidies
at some $23 billion since 1975, and other studies found
that they totaled more than $30 billion just in the 1980s. American
taxpayers have ample reason to resent this massive outlay of corporate
welfare, which, in addition to wasting tax money, props up
noncompetitive firms and thereby ties up resources inefficiently.
But consumers abroad, far from demanding ‘‘protection’’ against
this ‘‘unfair’’ practice, should be grateful (if a bit perplexed) that
the United States has chosen to underwrite cheaper steel for them.
American taxpayers are in fact subsidizing Swedish consumption
of steel and other products. By the same token, we should regard
a decision by a foreign government to subsidize export industry,
not as a threat, but as a somewhat misguided gift.6
127
Free trade brings growth
Free trade is primarily a good thing because it brings freedom:
freedom for people to buy what they want from whoever they
please, but also to sell to whoever wants to buy. As an added
economic benefit, this freedom leads to the efficient use of
resources and capital. A company, a region, or a country specializes
where it has comparative advantages and can therefore generate
the greatest value. Capital and labor from older, less competitive
sectors are transferred to newer, more dynamic ones. That means
that a country switching to a more free-trade-friendly policy rises
to a higher level of production and prosperity, and can therefore
anticipate a substantial acceleration of growth for at least the first
few years. But economic openness also leads to an enduring effort
to improve production, because foreign competition forces firms
to be as good and cheap as possible, and this leaves consumers
free to choose goods and services from the seller making the best
offer. As production in established industries becomes ever more
efficient, resources are freed up for investment in new methods,
inventions, and products. This same argument supports competition
generally; it simply extends competition to even bigger fields,
thus making it more intensive.
One of the most important benefits of free trade, but one that
is particularly hard to measure, is that a country trading a great deal
with the rest of the world imports new ideas and new techniques in
the bargain. If the United States pursues free trade, our companies
are exposed to the world’s best ideas in their particular fields.
128
That compels them to be more dynamic themselves, and they
can borrow other companies’ ideas, buy their technology, and
hire foreign manpower. Openness to other people and other ways
of doing business has always been a path to development, while
isolation means stagnation. It is no coincidence that the most
dynamic regions in history have often been in coastal locations,
close to towns and cities, while those that lag behind are inaccessible,
often in mountain regions.
The world’s output today is 6 times what it was 50 years ago,
and world trade is 16 times greater. There is cause to believe
that production has been led and driven by trade. Exactly what
difference open markets make is hard to tell, but virtually no
economist denies that the effect is positive. There are huge quantities
of empirical fact to show that free trade creates economic
development.
One comprehensive and frequently cited study of the effects
of trade was conducted by Harvard economists Jeffrey Sachs
and Andrew Warner.7 They examined the trade policies of 117
countries between 1970 and 1989. After controlling for other
factors, the study reveals a statistically significant connection
between free trade and growth that the authors were unable to
find, for example, between education and growth. Growth was
between three and six times higher in free trade countries than
in protectionist ones. Open developing countries had on average
an annual growth rate of 4.49 percent those two decades, while
closed developing countries had only 0.69 percent. Open industrialized
countries had an annual growth of 2.29 percent, while
closed ones experienced only 0.74 percent growth.
It must be emphasized that this is not a matter of how much
countries earn because others are open to their exports, but of
how much they earn by keeping their own markets open. The
129
results show that the open economies had a faster growth rate
than the closed ones every year between 1970 and 1989. No free
trade country in the study had an average growth rate of less than
1.2 percent annually, and no open developing country had a
growth rate of less than 2.3 percent!
Free trade and growth during the 1970s and 1980s
Percentage GDP growth
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Open
developing
countries
Closed
developing
countries
Open
industrialized
countries
Closed
industrialized
countries
0.74
2.29
0.69
4.49
Source: Jeffrey Sachs and Andrew Warner, ‘‘Economic Reform and the Process of Global
Integration,’’ Brookings Papers on Economic Activity 1, 1995.
In all regions, free trade policies led to an acceleration of growth
after a short time, even in Africa. The positive results of free
trade were even apparent when liberalization was only temporary.
Countries that opened up their economies briefly and then closed
them again showed faster growth during the open period than
before or after.
Slower growth and reduced investments did not afford the
protectionist economies greater stability, either. Sachs and Warner
130
showed that closed economies were far more liable than free trade
economies to be affected by financial crises and hyperinflation.
Barely 8 percent of the developing countries judged open from
the 1970s onward suffered from crises of this kind during the
1980s, whereas more than 80 percent of the closed economies
did so.
Criticism has been leveled at this type of regression analysis,
which is based on statistics from many economies and tries to
control for other factors that can affect economic outcomes,
because of the many problems of measurement that such analysis
involves. Coping with enormous masses of data is always a problem.
Where exactly is the line between open and closed economies?
How does one distinguish between correlation and causation?
How can the direction of causation be established? Consider, after
all, that it is common for countries implementing free trade to
also introduce other liberal reforms, such as protection for property
rights, reduced inflation, and balanced budgets. That makes
it hard to separate the effects of one policy from the effects of
another.8 The problems of measurement are real ones, and results
of this kind always have to be taken with a grain of salt, but it
remains interesting that, with so very few exceptions, those studies
point to great advantages with free trade. All the same, they have
to be supplemented with theoretical analysis and case studies of
individual countries before and after trade liberalization measures.
Such studies also quite clearly bring out the advantages of free
trade.
The economist Sebastian Edwards maintains that the important
thing is not to devise exact, objective measurements but to test
many different variables, so as to see whether a pattern emerges.
Using 8 different yardsticks of openness, he has made 18 calculations
based on several data sets and using a variety of calculation
131
methods. All but one of the calculations indicated a positive
connection between free trade and growth. Edwards estimates that
growth rates have been twice as high in free-trading developing
countries as in protectionist ones. In a report to the Swedish
parliamentary committee Globkom, the economist Håkan Nordstro
¨m reviews 20 different studies of free trade, all of which clearly
show that open markets give rise to better economic development.9
Another attempt to quantify the benefits of trade has been
made by the economists Jeffrey Frankel and David Romer. On
the basis of their research, they maintain that if a country increases
its trade in relation to GDP by 1 percent, its per capita income
can be expected to rise by between 0.5 and 2 percent. That means
that if a country boosts its trade volume by 10 percentage points,
the incomes of the poor rise by 5–20 percent. These are, of
course, averages, not universal truths. But if we work out what
this actually means to the poor of the world, we find that a 10
percent increase in trade relative to GDP in a country like Nigeria
would enable 25 million people to escape from poverty. In a
country like India, it could mean ten times that number being
lifted out of absolute poverty. This is a hypothesis, not an ironclad
guarantee, but it conveys something of the explosive potential
inherent in free commercial exchange.10
A clear connection exists between greater free trade and growth
on the one hand and poverty reduction on the other. We can
see the differences between similarly situated countries that have
introduced, or refrained from introducing, liberalization measures
and open markets. We see this difference between liberalizing
Vietnam and nonliberalizing Burma, between Bangladesh and
Pakistan, between Costa Rica and Honduras, between Uganda
and Kenya, between Chile and its neighbors in Latin America,
and so on.
132
What about trade and inequality? There does not seem to be
any strong and unambiguous connection between increased trade
and changes in equality—except, possibly, a slightly positive connection.
Certain groups lose out by free trade, but they are as
likely to be the protected rich as the poor. Changes in equality
depend primarily on overall policy. Results in trade-liberalizing
countries varied during the 1990s: in China, inequality increased,
in Costa Rica and Vietnam it remained constant, and in countries
like Ghana and Thailand it diminished. After many years of a
communist-planned economy and deepest poverty, Vietnam since
the end of the 1980s has introduced free trade reforms and measures
of domestic liberalization. Those changes have made possible
a substantial growth in exports of such labor-intensive products
as shoes, and of rice, which is produced by poor farmers. This
has resulted in rapid growth and a uniquely swift reduction of
poverty. Whereas 75 percent of the population in 1988 were
living in absolute poverty, by 1993 this figure had fallen to 58
percent, and 10 years later had been reduced by half, to 37 percent;
98 percent of the poorest Vietnamese households increased their
incomes during the 1990s.11
One seldom observed aspect of Sachs and Warner’s findings
is that they show open poor economies to have grown faster than
open affluent ones. It may seem natural for poor countries to
have higher growth than affluent ones. They have more latent
resources to harness, and they can benefit from the existence of
wealthier nations to which they export goods and from which they
import capital and more advanced technology, whereas affluent
countries will have already captured many of those gains. But
economists had not found any such general connection previously.
The reason is simple: the economies of protectionist developing
countries cannot make use of these international opportunities,
133
and so grow less rapidly than those of the affluent countries. But
when Sachs and Warner studied the developing countries that
had been open to trade and investments, those in a position to
benefit from the opportunities provided by the industrialized
nations, those countries were found to grow more rapidly than
the open affluent countries. The poorer they were at the outset,
the faster their economies grew once they were opened up. No
such connection exists for closed countries, which suggests that
free trade is not only the best way to promote growth, but also
the best way for developing countries to catch up with the industrialized
nations. In short, poor countries grow faster than rich ones
as long as the two are united by flows of trade and capital.
The same pattern was even clearer in the 1990s. During that
decade, per capita GDP fell by an average of 1.1 percent in closed
developing countries. In the industrialized countries it rose by
1.9 percent, but the fastest growth of all—5 percent annually on
average—occurred in developing countries that had opened their
markets and frontiers. It is free-trading developing countries that
are developing their economies fastest, more so than the affluent
countries. One pair of economists sum up their findings as follows:
Thus, the globalizers are catching up with rich countries while
the non-globalizers fall further and further behind.12
History shows that economies can grow faster by riding on the
prosperity and technology of other countries. From 1780, it took
England 58 years to double its wealth. A hundred years later,
Japan did it in only 34 years, and another century later it took
South Korea only 11 years.13 The convergence, in terms of wealth,
of countries associated with one another is confirmed by many
other epochs and groups of countries. During the globalization
134
of the late 19th century, poorer economies like Ireland and Scandinavia
moved closer to the wealthier countries. During the postwar
era, poor OECD countries have moved closer to the more
affluent ones. Differences between countries have diminished
within the European Free Trade Association (EFTA) and EU free
trade zones. The same result has also been discovered in different
parts of such large economies as the United States and Japan.
Free trade and mobility, then, make the poor richer and the rich
also richer, but the rich do not get richer as fast as the poor do.14
Globalization and growth during the 1990s
–2
–1
0
1
2
3
4
5
Post-1980
globalizers
Industrialized Nonglobalizers
countries
Percentage GDP growth
1.9
–1.1
5.0
Source: David Dollar and Aart Kraay, Trade, Growth and Poverty (Washington: World Bank,
2001).
135
No end of work
If free trade is constantly making production more efficient, won’t
that result in the disappearance of job opportunities? When Asians
begin manufacturing our cars and South Americans producing
our meat, auto workers and farmers in the United States lose their
jobs and unemployment rises—so the argument goes, anyway.
Foreigners, developing countries, and machines will compete to
produce the things we need, until in the end we will not have
any jobs left. If everything we consume today could be produced
by half the U.S. labor force in twenty years’ time, doesn’t that
mean that the other half will be put out of work? Such is the
horror scenario depicted in many of the anti-globalization writings
of our time. In the book The Global Trap, two German journalists
maintain that, in the future, 80 percent of the population will
not be needed for production. American readers may be more
familiar with One World, Ready or Not: The Manic Logic of Global
Capitalism, a breathless tome in which William Greider, then a
reporter for Rolling Stone, frets that global supply is outstripping
demand, leaving the world poised on the verge of mass unemployment.
Those fears are based on an unpleasant view of human
nature, according to which few people will have the qualities that
cause society to ‘‘need’’ them. I’m happy to report that this view
is completely misguided.
The notion that a colossal unemployment crisis is looming just
around the corner began to grow popular in the mid-1970s, and
since then production has been streamlined and internationalized
136
more than ever. All over the world, however, far more jobs have
been created than have disappeared. In the past few decades, the
number of gainfully employed people in the world has risen by
about 800 million. We have more efficient production than ever
before, but also more people at work. Between 1975 and 1998,
employment in countries like the United States, Canada, and
Australia rose by 50 percent and in Japan by 25 percent. Within
the EU, where unemployment has gained a stronger hold than
in many other places, more people found jobs during this period
in almost every country. Sweden, Finland, and Spain were the
only exceptions, but in these countries the employment participation
rate has risen since 1998.
It is also interesting to note that it is in the most internationalized
economies, those making the most use of modern technology,
that employment has grown fastest. The United States is the
clearest instance. Between 1983 and 1995 in the United States,
24 million more job opportunities were created than disappeared.
And those were not low-paid, unskilled jobs, as is often alleged
in the course of debate. On the contrary, 70 percent of the new
jobs carried a wage above the American median level. Nearly half
the new jobs belonged to the most highly skilled, a figure which
has risen even more rapidly since 1995.15
So allegations of progressively fewer people being needed in
production have no empirical foundation. And no wonder, for
they are wrong in theory too. It is not the case that only a certain
number of jobs exist and that when these can be done by fewer
people, more become unemployed. Imagine a pre-industrial economy
where most of what people earn is spent on food. Then
food production is improved by new technologies; machines begin
doing the work of many farmers, and foreign competition makes
farming more efficient. That results in a lot of people having to
137
leave the agricultural sector. Does this mean there is nothing for
them to do, that consumption is constant? No, because it also
means more scope for consumption. The money that used to
go to labor costs in agriculture can now be used to buy other
commodities, such as better clothing, books, and industrial goods.
The people who are no longer needed in agriculture can then
switch to those lines of business instead.
This is not merely conjecture; it describes precisely what happened
in Sweden with the improvement of agricultural efficiency
from the beginning of the 19th century onward. Before then,
about 80 percent of Sweden’s population had been employed on
the land. Today the figure is less than 3 percent. But does this
mean that 77 percent of the Swedish population are now unemployed?
No, because instead people started demanding other goods
and better services, and manpower went into industry and services
in response to that demand. By doing a job efficiently, we get a
larger total of resources with which to satisfy our needs. The
manpower which used to be necessary in order to feed us could
then clothe us and provide us with better housing, entertainment,
travel, newspapers, telephones, and computers, thus raising our
standard of living.
The notion that the quantity of work to be done is constant,
that a job gained by one person is always a job taken from someone
else, has provoked a variety of responses. It has led some to
advocate that jobs be shared, others to smash machinery, and
many to advocate raising tariffs and excluding immigrants. But
the whole notion is wrong. Greider’s turgid and rigorous-seeming
book has been enormously influential among anti-globalization
activists. Yet all of its dire predictions are based on this one simple
error, which Princeton economist Paul Krugman, in his scathing
review of the book, described as a ‘‘transparent fallacy.’’16 But
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Greider is not alone in making this mistake. Susan George, vice
chairman of the French anti-globalization organization ATTAC,
declares that globalization and international investments rarely
provide any new jobs at all:
Not everything called investment leads to new job opportunities.
Eight out of ten investments the world over in the past five years
have been concerned with mergers and take-overs, and things like
that mostly result in job losses.17
But it is this very process—a task being done more efficiently,
thus enabling jobs to be shed—that enables new industries to
grow, providing people with new and better jobs.
Here, somebody might reasonably ask: ‘‘Will it never end?
What happens when all our needs are being satisfied by a small
portion of the workforce?’’ And when, I wonder, is that supposed
to happen? I believe that people will always, for example, be in
need of more security, convenience, and entertainment. I don’t
believe we will ever come to think that we are giving our children
enough education, that we know enough, that we are doing just
the right amount of research or that we are getting enough remedies
for our aches and pains. It is hard to see a limit to the quality
of housing we would like to have, the quality of food we want
to eat, the extent we wish to travel, or the quality of entertainment
we would like to experience. When our productive abilities
increase, we will always choose to satisfy new needs, or to satisfy
old ones better than ever. If we think we have all that we need,
we can demand more leisure instead. Ask yourself whether you
could not conceive of two full-time jobs for people to provide
you with services and products. Finding the money to employ
them, I suspect, is more difficult than thinking of things for them
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to do. If you and I and everyone else can think of things that we
would like two people to do, we have a permanent manpower
deficit, with 6 billion people wanting at least 12 billion employees.
This is why we will never have too much manpower, no matter
how prosperous we become or how efficient our production gets.
Efficiency does, of course, have a flip side. Economist Joseph
Schumpeter famously described a dynamic market as a process
of ‘‘creative destruction,’’ because it is concerned with ‘‘destroying’’
old solutions and industries, but with a creative end in view,
namely the transfer of manpower and capital to more productive
occupations. This gives us a higher standard of living, but as the
word ‘‘destruction’’ suggests, not everyone benefits from every
market transformation in the short term. It is, of course, painful
for those who have invested in the old solutions and for those
who are laid off in less efficient industries. Drivers of horse-drawn
cabs lost out with the spread of automobiles, as did producers of
paraffin lamps when electric light was introduced. In more modern
times, manufacturers of typewriters were put out of business by
the coming of the computer, and LP records were superseded
by CDs.
Painful changes of this kind are happening all the time as a
result of new inventions and methods of production. Some friends
of free trade attempt to explain them away by saying that job
losses are primarily due to technical advances, not to competition
from other countries. That premise is true as far as it goes, but
as a defense it rings hollow because the competition stimulated
by free trade helps to accelerate the introduction of those new
technologies. Unquestionably, such changes can cause enormous
problems and traumas for those affected, especially if a new job
is hard to find. The very fear of the risks involved causes certain
conservative ideologues to reject the capitalist system entirely. A
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modern society based on a market economy does indeed present
new risks and problems, and of course it is very stressful to be
in danger of losing one’s job, with the reduction of living standard
and blow to self-esteem this implies. But that risk still cannot be
compared with the stress in ages past of perhaps not being able
to earn one’s daily bread or of drought or flood completely obliterating
one’s livelihood. It cannot be compared with the anxiety
of the present-day Ethiopian farmer, whose life may depend on
the coming of rain and on the health of his livestock.
The most foolish possible way to counter the problems that such
economic adjustments entail is to try to prevent the adjustments.
Without ‘‘creative destruction,’’ we would all be stuck with a lower
standard of living. The whole point of trade and development is
to direct resources to the point where they can be used most
efficiently. A Chinese proverb has it, ‘‘When the wind of change
begins to blow, some people build windbreaks while others build
windmills.’’ The idea that we should halt change now is as misguided
as the idea that we should have obstructed agricultural
advances two centuries ago to protect the 80 percent of the
population employed on the land at that time. Changes are hard
to stop anyway, because the most common cause of structural
change in different branches of economic activity is the changing
tastes of consumers. A far better idea would be to use the economic
gains that change brings about to alleviate the consequences for
those adversely affected.
There is a lot we can do to make changes proceed as smoothly
as possible. We should not try to prop up old industries by means
of subsidies or tariff walls. Enterprise and financial markets should
be free enough for people to invest in the new industries. Wages
should be flexible and taxes low, so that people will be drawn to
the new and more productive sectors, and the labor market should
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be free as well. Schools and other education opportunities must
be good enough for people to acquire the skills required by the
new jobs. Social safety nets must provide transitional security,
without preventing people from entering new jobs.
But these problems are seldom as widespread as a scan of the
newspaper headlines might suggest. It is easy to report that 300
people lost their jobs in a car factory due to Japanese competition.
It is less easy and less dramatic to report on all the thousands of
jobs that have been created because we have been able to use old
resources more efficiently. It is less easy to report on how much
consumers have gained from the wider selection, better quality,
and lower prices spurred by competition. Hardly any of the world’s
consumers are aware that they have gained between $100 billion
and $200 billion annually from liberalization measures implemented
following the Uruguay Round of trade negotiations, but
the difference is visible in our refrigerators, in home electronics,
and in our wallets. Costs affecting a small group on an isolated
occasion are easier to see and observe, while benefits that gradually
accrue to nearly everyone creep up on us without our giving them
a thought.
A review of more than 50 surveys of adjustment following
openness reforms in different countries clearly shows these changes
to be milder than the debate on them indicates. For every dollar
of adjustment costs, roughly $20 is harvested in the form of
welfare gains. A study of 13 cases of trade liberalization in different
countries showed industrial employment to have already increased
one year after the liberalization in all countries but one. One
reason why changes are less painful in poor countries is that the
old jobs mostly offered poor wages and bad working conditions.
The people who are usually most vulnerable—those without any
specific training—find new work more easily than those with
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special skills. Poor countries have comparative advantages in laborintensive
sectors, leading, on average, to a rapid rise in wages for
the workers concerned. Broadbased liberalization measures also
have the effect of cheapening the goods workers need.
Costs are also small compared to benefits in affluent countries
that liberalize trade. The sectors badly affected by competition
and new breakthroughs of technology go through something
resembling an ordinary recession. The number of people in other
sectors who retire or leave jobs of their own free will is often so
great as to swallow the job loss as the economy adjusts to reforms.
If the changes contribute to a high level of growth, they can even
subdue painful restructuring problems, which are always at their
greatest in downturns. Unemployment usually lasts for only a
short time, whereas the positive effects on the economy keep on
growing. The process, in other words, turns out to be far more
creative than destructive.18
The problems ought to be greatest in the United States, with
its constant economic transformation, but our job market is a bit
like the Hydra in the legend of Hercules. In the myth, every time
Hercules cut off one of the beast’s heads, two new ones appeared.
For every two jobs that disappeared in the United States during
the 1990s, three new ones were created. This pattern greatly
increases the individual person’s chances: there is no better safeguard
against unemployment than the prospect of a new job. The
danger of having to continue changing between different jobs all
one’s life is exaggerated, especially as firms are exerting themselves
more and more to train employees for new tasks. The average
length of time an American stays in a particular job increased
between 1983 and 1995 from 3.5 years to 3.8. Nor is it true, as
many people believe, that more jobs are being created in the
United States because real wages have stagnated or fallen since
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the 1970s. A growing proportion of wages has been paid in
nonmonetary forms, such as health insurance, stock, 401k contributions,
day care, and so forth, to avoid taxation. If benefits of
this new kind are included in wages, then American wages have
gone on rising with productivity. The proportion of consumption
among poor Americans that is devoted to food, clothing, and
housing has fallen since the 1970s from 52 to 37 percent, which
clearly shows that such people have money to spare for more than
the bare necessities of life.19
One of the most drastic trade liberalizations in modern history has been
carried out by the Baltic nation of Estonia. Soon after the country gained
its independence from the Soviet Union in 1992, the Estonian government
decided to abolish all tariffs in one fell swoop. The average tariff level is
now 0 percent. The tariff measure proved an unqualified success. The
Estonian economy has been rapidly restructured on a competitive basis.
Western Europe, which in 1990 accounted for only 1 percent of Estonia’s
international trade, today accounts for two-thirds of it. The country is
attracting large direct investments and can boast an annual growth rate
of around 5 percent. Average life expectancy has grown and infant mortality
has fallen, in contrast to those former communist states that have reformed
slowly. The change to a liberal system has made Estonia one of the EU’s
most promising candidate countries. Unfortunately, EU membership will
mean that Estonia has to adjust to EU protectionism. Instead of having no
tariffs at all, the country will have to introduce 10,794 different tariff levels,
which among other things will raise food prices appreciably. In addition,
Estonia will have to introduce various quotas, subsidies, and antidumping
measures.20
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Freedom of movement—for people as well
Even if a world in which we are free to buy and sell goods and
services across national borders is a long way off, that world is
what many people are aiming for. The world’s politicians meet
regularly in an attempt to extend free trade, albeit far too slowly.
But when it comes to the mobility of human beings, the politicians,
unfortunately, meet regularly to do everything in their
power to reduce it. Reducing mobility has been a very conspicuous
aim of the affluent European states ever since the 1970s. At the
same time that the Schengen Agreement has given Europeans free
mobility within Europe, the EU governments are trying to prevent
outsiders from penetrating Europe’s borders. The result is very
high walls against the outside and stricter controls on the internal
movement of persons.
Of course, since the terrorist attacks of September 11, 2001,
some new walls and controls have been introduced, with the goal
of preventing a recurrence of that horrific event. Some of those
controls are doubtless justifiable: citizens everywhere rightfully
demand to know that newcomers to their countries have come
as workers, tourists, students, and neighbors—not as mass murderers.
The fundamental duty of any government is to protect
its own citizenry, and one way of doing that is to ensure that
terrorists and violent criminals cannot enter the country. The
major effort to that end in the United States, the Enhanced Border
Security and Visa Entry Reform Act of 2002, is a good example of
a reasonable response. The act implemented measures to exclude
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potential terrorists without rolling back levels of legal immigration
or cracking down on undocumented (but harmless) workers.
Sadly, some who have long wanted stricter immigration rules
anyway, as a means of closing borders to peaceful workers and
immigrants, have seized upon the tragedy of September 11 to
advance that agenda by calling for far broader restrictions. Such
tactics are not only cynical and exploitative, but also counterproductive.
The crucial task of stopping terrorists becomes far more
difficult when restrictive immigration laws force law enforcement
officers to waste energy and resources combing through the many
millions of immigrants who seek only a better life. Surely it would
be more efficient to focus on the relatively very few who mean
to harm Americans. It is important, then, to distinguish between
measures targeted at keeping out the dangerous and measures
that would pointlessly sacrifice the very freedom and openness
that the terrorists and their allies despise. The latter measures are,
sadly, all too common.
Although immigration policy in the United States has, fortunately,
grown more enlightened and inclusive since the days when
Congress enacted racist legislation, such as the Chinese Exclusion
Act of 1882, to keep out ‘‘inferior’’ peoples, tight regulations
remain in effect. Strict quotas limit how many people may come
to the United States from different regions, and prospective workers
must first find a sponsor in the United States who is willing
to wade through extensive red tape in order to employ them.
Some come to the United States as refugees from war, natural
disaster, or persecution, but the number of such immigrants
admitted annually has fallen in recent years. Under President
George H. W. Bush, the average was 121,000 per year. Under
President Clinton, that average dropped to 82,000, and under
President George W. Bush it fell below 70,000. Because screening
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of refugees is extraordinarily thorough, it is difficult to justify this
precipitous decline by an appeal to security concerns.21
The costs of too-strict immigration policies around the world
have manifested themselves in tragic ways. A port official opening
a container in England finds 58 Chinese refugees who have died
from heat and suffocation after trying to hide from immigration
officials. Africans are found dead on the southern coast of Spain,
having drowned in the attempt to cross the Mediterranean swimming
or in flimsy crafts. The bodies of 11 Mexicans are found
sealed in a rail car in Iowa. The big tragedies attract attention,
but they have their lesser daily counterparts. The Dutch charity
United has estimated that one person dies every day attempting
to cross the borders of the EU. There are many women whose only
chance of escaping desperate conditions in their home countries is
through criminal syndicates that force them into prostitution and,
when the women try to break free from this degradation, threaten
to report them to the authorities. If, through visa requirements
and barriers, people are prevented from entering a country legally,
they resort to drastic and dangerous ways of doing so illegally.
Often they fall into the clutches of unscrupulous refugee smugglers
who demand exorbitant payments but do not think twice about
risking the lives of their desperate clients.
When the EU or the United States try to prevent outsiders
from moving there, by means of progressively stricter quotas and
tougher enforcement, refugees are forced to take even bigger risks.
If people are willing to take those risks in order to come to a
freer country, politicians should seriously reconsider whether they
have correctly assessed the refugees’ need for protection. The
ultimate goal must be for peaceful people to be able to evaluate
their own interests in fleeing or migrating to another country.
The same goes for so-called economic refugees, people who
wish to leave economic deprivation behind them and come to a
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country where they have the chance of creating a better life. No
genuine economic globalization can occur so long as people are
not allowed to cross national boundaries in search of employment.
That is precisely what the ancestors of contemporary Americans
did: since 1820, some 66 million immigrants have legally entered
the United States. The Western world rightly castigated the communist
states for not allowing their citizens to emigrate. But now
that they are permitted to do so, we are forbidding them to enter
our countries.
There is no concession or generosity involved when rich countries
open their borders to refugees and immigrants, any more
than there is in opening them up to imports. Greater immigration
may be a prerequisite for our still having a viable economy and
security of welfare a generation from now, especially in a sparsely
populated country like Sweden. The EU countries are greatly
troubled by falling birth rates and aging populations. The United
Nations Population Fund (UNFPA) has estimated that to keep
the EU population at its present level until 2050, 1.6 million
immigrants annually will be needed. And to maintain a steady
ratio between working and retired populations, the EU would
need to take in 13.5 million immigrants every year. In the United
States, a similar demographic trend threatens to drive the Social
Security system into bankruptcy, as fewer and fewer workers
finance the benefits of more and more retirees. Immigration alone
cannot ultimately solve the system’s deeper structural problems,
but an influx of immigrant workers could ease the burden of
transition to one of the alternative systems that various reformers
have advocated. The challenge for the future will consist in attracting
new immigrants, not in trying to keep them away.
It is a profound error to regard immigrants as a burden on a
country. They represent a manpower and consumption boost that
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leads to market growth. More immigration means more people
to work, spend, and hatch new ideas. Seeing that as a problem
makes no more sense than viewing increased domestic birth rates
as a problem. So long as wages mirror productivity (the amount
workers are able to produce), there is no reason why this should
create unemployment. Over the course of a lifetime, even those
getting off to a poor start in a new country generally put more
back into society—and the national treasury—than they get out
of it. Far from being a drain on public resources, extensive research
by economist Julian Simon found that the average legal immigrant
receives less from government and pays in a greater amount in
taxes than the average native-born citizen. Though calculations
for illegal immigrants are more difficult, even here Simon found
a likely net benefit to the host society. Summing up his findings,
Simon even estimates the rough dollar amount of benefit each
new immigrant provides his host country:
Evaluating the future stream of differences as one would when
evaluating a prospective dam or harbor, the present value of a
newly arrived immigrant family discounted at 3% (inflation
adjusted) was $20,600 in 1975 dollars, almost two years’ average
earnings of a native family; at 6% the present value was $15,800,
and $12,400 at 9%. 22
If some immigrants do become permanently dependent on handouts,
that merely illustrates one reason to seriously reform our
welfare policy and labor market regulations. For people who come
to the United States, especially those starting out with few skills
and a shaky grasp of the language, not being able to compete by
working for lower pay will naturally tend to impair their chances.
They will then be made to depend on handouts, perhaps for life,
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and their self-respect will be correspondingly eroded. Entering
the job market at a low pay level, which rises later on with growing
experience, is therefore a better option. In a healthy economy,
low starting wages need not mean a general reduction of real
earnings, because low wages keep down the prices of the goods
and services we all consume.
Openness to immigration and emigration is also important for
the sake of a living society. A diverse population, comprising
people with different starting points and values, provides a greater
variety of perspectives on long-standing social problems, and perhaps
also a better chance of finding creative solutions to them.
Immigrants can take what is most viable in American culture
and combine it with traditions of their own, and native-born
Americans can do likewise. Cultural innovation almost always
flows from the contact or fusion of different cultures. It is no
coincidence that the United States, the most dynamic society
in history, was built by immigrants. President Franklin Delano
Roosevelt once opened a speech by saying, ‘‘My fellow immigrants.’’
Even today, in spite of all the restrictions, the United
States receives far more immigrants than other countries. In this
way the United States is constantly renewing itself and laying the
foundations of continued global leadership—economic, cultural,
and scientific.
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IV
The development of the
developing countries
An unequal distribution—of capitalism
Twenty percent of the world’s population (we often hear) consumes
more than 80 percent of the earth’s resources, while the
other 80 percent consume less than 20 percent. Critics of globalization
never tire of reminding us of this injustice. Far less often
do we hear a proper analysis of the reason for this state of affairs.
The critics make it sound as though the poor are poor because
the rich are rich, as if the richest 20 percent had somehow stolen
those resources from the other 80 percent. That is wrong. Natural
resources were, of course, stolen in the age of imperialism, but
those thefts have played a relatively small part in the prosperity
of the Western world and the poverty of the poor. Even though
colonialism did great harm and was cruelly oppressive in places,
this in itself does not account for differences between North
and South. The affluent world has grown fastest since losing its
colonies. And the regions the imperialist countries subjugated
grew faster after becoming colonies than they had previously.
Several of the world’s richest countries—such as Switzerland and
the Scandinavian countries—never had any colonies of importance.
Others, such as the United States, Canada, Australia, New
Zealand, Hong Kong, and Singapore, were colonies themselves.
On the other hand, several of the world’s least developed countries—
Afghanistan, Liberia, and Nepal, for example—have never
been colonies.
Perhaps surprisingly, it is not the countries with abundant raw
materials that have grown fastest. In fact, those countries are often
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held back because abundant natural resources can reduce the
incentive to develop good policies and institutions. It is no accident
that the major oil producing nations of the Middle East and
Africa are all, with the exception of Kuwait, ranked ‘‘unfree’’ by
Freedom House. State-owned oil wells provide the region’s despotic
regimes with funds they could not otherwise obtain without
freeing up their economies.
The main reason for that 20 percent consuming 80 percent of
resources is that they produce 80 percent of resources. The 80
percent consume only 20 percent because they produce only 20
percent of resources. It is this latter problem we ought to tackle—
the inadequate productive capacity of the poor countries of the
world—instead of waxing indignant over the affluent world producing
so much. The problem is that many people are poor, not
that certain people are rich.
Critics of capitalism point out that per capita GDP is more
than 30 times greater in the world’s 20 richest countries than in
the 20 poorest. The critics are right to say that this inequality is due
to capitalism—but not for the reasons they think. The difference is
due to certain countries having taken the path of capitalism,
resulting in fantastic prosperity for their inhabitants, while those
choosing to impede ownership, trade, and production have lagged
behind. Factors such as climate and natural disasters are not
unimportant, but most of the gap can still be put down to certain
countries having opted for liberalization and others for control.
The 20 economically most liberal countries in the world have a
per capita GDP about 29 times greater than the 20 economically
least liberal. If, then, we are serious about closing the North-
South divide, we should hope with all our hearts that the South
will also gain access to a free economy and open markets. Developing
countries that have had openness in recent decades have not
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only grown faster than other developing countries—they have
grown faster than the affluent countries too.
The world’s inequality is due to capitalism. Not to capitalism
having made certain groups poor, but to its making its practitioners
wealthy. The uneven distribution of wealth in the world
is due to the uneven distribution of capitalism.
Arguments that capitalism is somehow to blame for world
poverty are oddly contradictory. Some argue that capital and
corporations make their way only into the affluent countries,
leaving the poor ones up the proverbial creek. Others maintain
that capital and corporations flock to poor countries with low
production costs, to the detriment of workers in the developed
world. The truth seems to be that they make their way into both.
Trade and investment flows in the past two decades have come
to be more and more evenly distributed among the economies
that are relatively open to the rest of the world. It is the really
closed economies that, for obvious reasons, are not getting investments
and trade. Moreover, the differences between these groups
of countries are increasing. Clearly, instead of globalization marginalizing
certain regions, it is the regions that stand back from
globalization that become marginalized.1
A quarter of direct international investments between 1988
and 1998 went to developing countries. Since the beginning of
the 1980s, investment flows from industrialized to developing
countries have risen from $10 billion to $200 billion annually.
If we look only at capital flows to the developing world, we find
that 85 percent of direct investment there goes to a mere 10
countries, often the most liberalizing. But because those investments
have been growing by 12 percent annually in the past
three decades, tremendous increases also accrue for countries not
included in the top 10.
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Between 1990 and 2000, private investors channeled a trillion
dollars from the affluent world to the poor countries in direct
investments. That is roughly ten times as much as in earlier
decades, and it also happens to be rather more than the sum total
of assistance given by all affluent countries to all developing
countries during the past 50 years. Of course, unlike development
assistance, such investments are not primarily intended to alleviate
poverty. But in the long term, investment makes a far greater
contribution to that goal, because it develops the country’s productive
forces instead of flowing to governments, which may or
may not use that aid wisely.
The affluent OECD countries accounted for 80 percent of
world GDP in 1975, a share that has fallen to 70 percent today. As
has already been mentioned, poor countries opting for economic
liberalization and free trade have had faster growth than the affluent
countries in recent decades. Free trade and economic liberalism,
it seems, are a way for developing countries not only to get
richer, but also, possibly, to catch up with the wealthier countries.
As UN Secretary-General Kofi Annan said at an UNCTAD Conference
held in February of 2000, soon after the demonstrations
against the WTO:
The main losers in today’s very unequal world are not those who
are too much exposed to globalization. They are those who have
been left out.
Africa is the most prominent example. Isolation and regulation
cause poor countries to remain poor countries.
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The white man’s shame
Although the Western world has paid lip service to free trade, it
has not done very much to aid the process. On the contrary, its
highest barriers have been raised against the developing countries,
a policy that persists today. In the big rounds of free trade negotiations,
tariffs and quotas for the Western world’s export products
have been steadily reduced. In the areas of greatest importance to
the developing countries, such as textiles and agricultural produce,
liberalization measures have failed to materialize. The tariff reductions
agreed to during the Uruguay Round of WTO negotiations
were smallest for the least developed countries. Asia and Latin
America gained relatively little. Africa gained nothing at all.
Today, Western duties on export commodities from the developing
world are 30 percent above the global average. The iron
curtain between East and West has fallen, only to be replaced by
a customs curtain between North and South. This is not just an
act of omission; it is a deliberate attempt to keep poor states out
of the running. We may allow them to sell us a few things that
we are unable to produce ourselves, but heaven help them if they
threaten to put us out of business by doing something cheaper
and better than we can. The Western world maintains higher
tariffs on clothing than on cotton, on roasted coffee than on
coffee beans, and on marmalades and jams than on the fruits they
are made from. Protectionism is a way of penalizing work inputs
and development and of ensuring that poor countries sell us only
raw materials, which we then process and resell to them as finished
156
products. Duties on processed products from the developing countries
are no less than four times higher than duties on corresponding
goods from industrialized countries.
It is goods of the very kind that the Third World could produce
that are worst hit by protectionism—labor-intensive industrial
goods and services such as toys, electronics, transportation services,
textiles, and garments. If the duties are between 10 and 30 percent
of the value of the goods, a substantial difference in quality and
price is necessary for those goods to get into our markets at all.
The Western countries have pledged themselves to remove their
textile quotas by 2005, but even if that pledge is honored—
which is uncertain—textile tariffs will remain, averaging about
12 percent.
The developing countries would be the principal beneficiaries
of increased global free trade in manufactures. One study estimated
that the world economy would gain about $70 billion a
year from a 40 percent tariff reduction, and that some 75 percent
of the total gains would be harvested by the developing countries.2
That would equal the total amount of international development
assistance to the developing countries, and it is almost three times
the monthly income of all the world’s absolutely poor taken
together. The absence of a real breakthrough in WTO talks is a
tragedy for the people of those countries.
The most startling protectionism on the part of the affluent
countries concerns agricultural produce. World trade in agriculture
is growing far more slowly than trade in other commodities,
and this too is due to the policy of the affluent countries. Most
of them are determined at all costs to maintain a large-scale
agricultural industry of their own, even if they have no comparative
advantages in this sector. They therefore subsidize their own
farmers and exclude those of other countries by means of trade barriers.
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There is no easier way of squandering money than through an
advanced agricultural policy. Affluent countries are drenching
farmers with money through protectionism, subsidies, and export
grants. The total cost of agricultural policy in the 29 affluent
OECD countries burdens taxpayers and consumers with a staggering
$360 billion. For that money, you could fly the 56 million
cows in these countries once around the world every year—
business class—with plenty of change left over. If they’re willing
to fly coach, the cows could also be given $2,800 each in pocket
money to spend in tax-free shops during their stopovers in the
United States, the EU, and Asia.3
The European Union’s Common Agricultural Policy (CAP)
involves quotas on foodstuffs, and tariffs of about 100 percent
on things like sugar and dairy products. Here again, the EU
wishes to exclude processed products that can compete with European
ones. Tariffs on basic foodstuffs average only half of those on
upgraded foodstuffs. Coffee and cocoa, which European countries
don’t produce themselves, can slip in without any serious customs
markups. Meanwhile EU tariffs on meat are several hundred
percent. The hollowness of self-appointed solidarity movements
like the French ATTAC is exposed by their defense of such tariffs
against the Third World.4
Not only is the EU excluding foreign products, but production
and transport by European farmers are being subsidized to a
fantastic degree, by nearly half the EU budget. The average cow
receives $2.50 support daily, at the same time that nearly three
billion of the world’s human inhabitants have less than $2.00 a
day to live on. Because those grants are paid according to acreage
and head of livestock, they are mainly a subsidy for the wealthiest
large-scale operations—it is rumored that the biggest beneficiary
is the British royal family. OECD figures show the wealthiest 20
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percent of farmers receiving something like 80 percent of the
grants. In other words, nearly 40 percent of the entire EU budget
goes to less than one percent of the EU’s population.
The grants give rise to a huge surplus of foodstuffs, which has
to be disposed of. One way that the EU does this is by paying
farmers not to grow anything. Worse still, through export subsidies
the EU dumps its surplus on the world market, so that poor
countries are unable to compete. That means that the CAP not
only prevents Third World farms from selling to Europeans, it
also knocks them out of business in their own countries.
For consumers in the developed world, as was previously
argued, export subsidies in other countries are a gift: the artificially
low cost of goods is paid by foreign taxpayers, and the savings
can be diverted to other sectors. But for the developing world,
the North’s agricultural policy is a different story. It is a deliberate
and systematic means of undermining the very type of industry
in which the developing countries do have comparative advantages.
The poor countries don’t get a stable supply of specific
goods; rather, one year the EU dumps one product that is being
overproduced then, but the next year it dumps a totally different
product, thus undermining any attempt by producers in the poor
country to specialize. It is one thing for imports to spur farmers
to produce more competitively, but subsidies guarantee that farmers
in the developed world cannot compete, even when they are
more efficient. These countries are so poor that there are few
other sectors in which to invest: most of them must expand
agriculture before other sectors can be developed. The CAP is
estimated to cause the developing countries a welfare loss in the
region of $20 billion annually, which is twice Kenya’s entire
GDP.5
The EU’s trade policy is irrational and shameful. It protects a
small circle of lobbyists and farmers who ignore the fact that their
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walls are condemning people in other continents to poverty and
death. That is a moral disaster. The cynicism of the policy is
made all the more apparent by the realization that the EU as
a whole gains nothing by it either. The Swedish government’s
calculations suggest that a Swedish household with two children
could gain about $250 a year by being spared the EU’s duties
on garments, and no less than $1,200 a year if all agricultural
policies were abolished.6 European taxpayers pay millions of dollars
in taxes every year so that their shops can have a smaller
selection of food at higher prices. EU governments subsidize
agriculture to the tune of about $90 billion a year and the manufacture
of basic industrial products by about the same amount.
All cracks through which goods from the developing countries
could sneak in are promptly plugged with antidumping tariffs
and technical stipulations, concerning, for example, packaging
and hygiene—stipulations exclusively tailored to EU enterprises.
On the basis of statistics from the European Commission, the
French economist Patrick Messerlin has estimated the cost of
all EU trade barriers, including tariffs, quotas, export subsidies,
antidumping measures, and the like. His findings indicate a total
annual loss of 5–7 percent of the EU’s GDP. In other words,
completely free trade would mean that the EU could add the
equivalent of nearly three Swedens to its prosperity every year.
Messerlin maintains that roughly 3 percent of the jobs in the
sectors he has investigated have been rescued by protectionism.
Each job costs about $200,000 per year, which is roughly 10
times the average wage in these industries. For that money every
tariff-protected worker could receive an annual Rolls Royce
instead; it would not cost us more, and it would not be done at
the expense of the world’s poor.7 ‘‘Either a branch of enterprise
is profitable, in which case it needs no tariff protection; or else
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it is unprofitable, in which case it deserves no tariff protection,’’
as economist Eli F. Heckscher once put it.8 With tariff protection
and subsidies, manpower and capital that could have developed
the EU’s competitive strength linger on in sectors where there is
no comparative advantage. Thus the EU ties the developing countries
to poverty, not for the benefit of the European people, but
for the sake of a narrow, vociferous vested interest.
The United States, which had miraculously bucked the special
interests to roll back subsidies in 1996, has recently abandoned
many of those gains. A bill passed in 2002 included subsidies
projected to total $180 billion over the first 10 years alone. Those
subsidies, too, disproportionately benefit the wealthy. The largest
7 percent of farms received 45 percent of subsidy payments in
1999.
Both the United States and the EU have introduced symbolic
free trade reforms in relation to the poorest countries in recent
years. The only trouble is that those reforms exclude the goods
that would provide real competition for domestic producers in
the North. The United States Africa Growth and Opportunity
Act meant free trade in everything that Africa is not good at
producing, and exclusion of goods like tobacco and peanuts. The
EU’s Everything-but-Arms initiative meant the abolition of tariffs
against the world’s least developed countries, but with long transitional
periods of tariff retention for bananas, sugar, and rice.
These measures are often rendered ineffective by strict rules concerning
the origin of components of the relevant goods. Haiti is
welcome to export coffee to the EU, but not T-shirts if the
material is imported from another country, such as China. And
other goods can be excluded by arbitrary environmental, security,
or safety rules—rules often passed precisely for this protectionist
effect, and not for their contribution to safety, security, or environmental
quality.
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It is, of course, hard to quantify the loss that the developing
countries sustain as a result of protectionism, but many people try
to. The British Labour government’s white paper on globalization
issues asserts that a 50 percent reduction of import duties in
industrialized and developing countries would lead to a growth
of prosperity in the developing countries by something like $150
billion, or three times as much as global development assistance.
The United Nations Trade and Development Program (UNCTAD)
claims that, with greater access to the markets of the affluent
countries, exports from the developing world would grow by
about $700 billion annually. That is 14 times the development
assistance they receive.9
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The case of Latin America
One traditional fear concerning trade between North and South
is that it would make the Third World dependent on selling raw
materials to affluent countries in the North. If the developing
countries were to practice free trade, on this view, they would
never succeed in getting industrialized and selling other products.
Many have therefore taken the position that they should go in
for ‘‘import substitution,’’ with the government building up native
industry behind high tariff walls and expanding it by starting to
manufacture goods that would otherwise have to be imported.
The aim was a kind of self-sufficiency—being able to fend for
oneself instead of specializing and making oneself dependent on
world trade. This ‘‘dependency theory’’ rapidly gained ground
after World War II, and it had plenty of adherents in the West.
That is why Western observers in the 1960s expected North
Korea, a closed economy, to outdistance export-oriented South
Korea, and Mao’s China to have far better prospects than protrade
Taiwan. Import substitution was practiced by India and
Africa, but the whole idea was modeled on post-war Latin
America.10
It was not surprising that politicians in Chile, Brazil, and
Argentina, among others, fell for the dependency school. Since
the mid-19th century, the region had experienced an economic
upturn through the export of a few central raw materials, such
as coffee, bananas, sugar, cotton, and copper. But that still did
not bring any broad-based national development, because the
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countries in question were typical societies of privilege. A small,
protected landlord class owned enormous tracts of land, which
were worked by legions of destitute unskilled workers, who were
often paid in kind with goods from the estates. This tiny elite
reaped huge profits, but did not invest them. They had no need
of labor saving machinery, because there was a superabundance
of labor, and they did not need to improve crop yields, because
they had vast acreages at their disposal. If new lands were needed,
they were simply stolen from the native population. Agriculture
did not develop, and no demand was created for manufactured
goods, because incomes did not grow. Among the elite, both
technology and organizing ability were conspicuously absent. Low
education, discrimination, and trade regulations made it impossible
for those in the labor force to start up small businesses. The
Latin American economies remained dependent on exports of a
few raw materials. When, in about 1930, the international economy
collapsed and the affluent countries reintroduced protectionism,
it came as a deathblow to the states of Latin America. Suddenly
everything that had built up their economies had vanished.
What this example shows is that trade alone does not necessarily
create dynamic development in an oppressive society. If a country
is static and characterized by enormous privileges and discrimination,
there is little chance of trade solving all these problems. For
that to happen, the population must acquire liberty and the
opportunity of economic participation. Land reforms to put an
end to centuries of feudalism would have been needed, coupled
with a commitment to education and free markets. But those
were not the conclusions drawn by the rulers of Latin America and
the Marxist academics who developed the theory of dependence.
History, they argued, showed that trade was pernicious and that
countries should aim for self-sufficiency and internal industrialization.
They pointed to the wrong villain. The Latin American
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countries retained privileges and national intervention, but tried
to abolish trade.
The policy the Latin American countries then proceeded to
apply was a textbook example of protectionism—and of economic
suicide. The government paid heavy grants to a native industry
protected by sky-high tariff walls. During the 1950s, strict import
prohibitions and quotas were introduced, and tariffs averaged
between 100 and 200 percent. Because consumers were unable
to buy goods from other countries, native industries were able to
raise their output quickly and generate high growth. However,
because they were under no pressure from competition, they did
not develop technically or organizationally. Instead, an already
outmoded and inefficient industry was heavily expanded. Home
market prices being higher than those on the world market, the
companies became less interested in exporting. The economy
became more and more politicized as the government attempted
to direct manpower, prices, and production to encourage industrialization.
Government power over the economy grew steadily—
in Argentina even the circuses were nationalized. Firms therefore
began devoting more resources and energy to currying favor with
those in power than to streamlining production. Strong interest
groups were formed, which campaigned to obtain benefits or to
obtain compensation for benefits granted to others. Distribution
was governed more and more by the political struggle and less
and less by market transactions.
Those who did not occupy a strong position and were not
members of powerful coalitions—Indians, rural workers, small
entrepreneurs, and the shanty town populations—lagged further
and further behind. Tariffs took the bread out of their mouths, and
when inflation was accelerated to finance ballooning government
spending, they found their small savings obliterated as the value
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of the currency plummeted. The countries of Latin America
remained societies of privilege, and already-large inequalities escalated
to appalling levels. Luxury palaces were built even as slums
sprawled. Some people were born with silver spoons in their
mouths, others as starving street children. Rio de Janeiro has been
described as a bit of Paris surrounded by a bit of Ethiopia. The
wealthiest 10 percent in Brazil cornered more than half the country’s
GDP (as compared with roughly a quarter in the United
States and a fifth in Sweden). At the same time, the ruling classes
diverted discontent by pointing to outside enemies. To protect
themselves, they insisted that absolutely nothing was wrong with
their own policies—that the fault lay entirely with foreigners and
the United States.
Poor consumers were forced to pay exorbitant prices in shops,
while big industrialists grew richer and richer behind the tariff
walls. A car in the 1960s cost more than three times as much in
Chile as it did on the world market, with the result that only the
rich could buy one. Price increases also afflicted industry, which
needed things like trucks for transporting goods. Because products
made on the wrong side of the tariff barriers were not allowed
to be sold in the protected market, the governments managed to
attract some foreign firms. But Western companies did not bring
new methods; instead, they quickly adjusted to the national policy.
Instead of specializing and improving efficiency, they became
jacks-of-all-trades, manufacturing every conceivable thing that
people could not buy from abroad. Whole corporate departments
concentrated on bureaucracy in order to obtain start-up permits,
cheap credits, special prices, and public contracts. Keeping cozy
with the establishment became the path to profit for companies,
making them an unsavory political power factor. This internal
focus prevented them from achieving economies of scale by
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expanding their markets, and the lack of competition meant that
they never developed their technology and organization.
Latin American industry became more and more antiquated
in relation to the rest of the world. Unable to face international
competition after long years of protection, Latin America became
more and more dependent on privileges and tariffs, which in turn
caused it to lag still further behind. Paradoxically, exports of the
old raw materials became more and more important as a means
of financing the growing imports of machinery and semi-manufactured
goods that industry needed. Because the government
diverted resources away from agriculture and exports, however,
those sectors were hampered more and more. The possibility of
developing the only industries capable of withstanding international
competition dried up. Millions of people left the land for
the city slums. In the end, the exploitative economy could not
sustain the antiquated industrial sector. Massive loans during the
1970s merely postponed the inevitable, and the backlash was all
the stronger in 1982 when Mexico suspended loan payments and
set off a debt crisis of unique proportions. In three years, Latin
America’s per capita income plunged by 15 percent, and the 1980s
brought a long succession of financial crises and hyperinflation. It
was only after liberalization and free trade reforms, inaugurated
toward the end of the decade, that certain of these countries got
back on their feet and were able to raise their growth. The problem
is that the huge burden of debt and lack of foreign trade are still
making these countries crisis-prone. We saw this in connection
with Argentina’s 2001 economic crisis. If a country has very
few exports with which to pay heavy interest charges and debt
installments, even small imbalances in its budget are enough to
rock the entire economy. The people of Latin America are still
footing the bill for the society of privilege and protectionism.
167
The Chilean example demonstrates the possibility of development,
even in this region. When dictator Augusto Pinochet’s
continuation of the old policy of inflation and central control
failed to lift the plunging economy, he began listening to market
economists instead. Unlike other authoritarian regimes in the
region, Chile replaced its authoritarian economic policy with
liberalization and free trade about 1975. Tremendous growth
ensued, with real earnings more than doubling by 1995, at the
same time as infant mortality fell from 6 percent to just over 1
percent, and average life expectancy rose from 64 to 73 years.
Chileans today have almost a southern European standard of
living, in stark contrast to their neighbors. Most important of all,
the bloodstained dictatorship has been peacefully superseded by
a stable democratic regime—just as the liberal advisers advocated
and prophesied.11
168
On the trade route
The possibility of breaking free of dependence on raw materials
lies in free trade rather than protectionism. Instead of a shield
behind which industry could grow strong, the tariff walls became
a shield from competition that made them less efficient and
innovative. The developing countries that have switched fastest
from exporting raw materials to exporting upgraded products are
those that have themselves had the most open economies, above
all the Asian countries. Sachs and Warner’s major survey of the
effects of trade shows that protectionist countries have transformed
their economic structure very slowly, whereas free trade countries
have moved more in the direction of industrial production.12 This
is directly contrary to what the advocates of the dependency theory
contended. Some of them have learned from their mistakes. The
sociologist Fernando Henrique Cardoso, whose own work had
included important contributions to dependency theory, was elected
president of Brazil in 1994, and tried to introduce measures
to liberalize trade! Now developing countries are demanding in
trade negotiations that the affluent markets be opened to their
exports.
Free trade has greater possibilities than ever of bringing dynamic
growth in developing countries. A hundred years ago, globalization
primarily meant the West collecting raw materials from
developing countries and bringing them home for processing.
This process did little to disseminate new technology and new
opportunities. Production and processing could not be established
169
in the developing world, because sending a spare part or important
personnel there could take months. Today, a factory almost anywhere
on earth can dispatch and receive deliveries to or from any
destination within a week and a half, and be reached instantly
by phone, fax, or e-mail. That means it is now possible to base
activities on what used to be the periphery of the world economy,
while still keeping in permanent touch with the rest of the world.
Even the very core of production can be relocated to poor countries
if they have comparative advantages in the sector concerned,
which means fantastic opportunities for those who have not had
the good fortune to be born in an affluent country.
The above applies not only to manufacturing but also to the
service sector. Thanks to satellite communication and the Internet,
many foreign companies can place parts of their administrative
routines in countries like India, where local inhabitants can be
hired for the remote management of things like payroll, invoicing,
ticket reservations, and customer services for European and American
corporations. This is especially convenient to American business,
with India waking up at roughly the same time as Americans
go to bed. Even the surveillance of office blocks can be managed
from halfway around the world with the aid of satellite imaging. In
these labor-intensive services, developing countries have obvious
comparative advantages. They get employment and higher wages,
at the same time as the services are made cheaper to their customers
in the industrialized countries.
Exports of industrial goods from the developing countries have
risen rapidly in the past 30 years, thanks to improved communications
and global free trade reforms. The dependency theory has
been proved wrong by history. Today, manufactured products
account for roughly three-quarters of exports from the developing
countries, compared with only a quarter in 1965. The economic
170
centrality of raw material exports is diminishing all the time.
Whereas at the beginning of the 1970s the developing countries
accounted for only 7 percent of global exports of manufactured
goods, today they provide more than a quarter.
The developing countries export more manufactured goods
0
5
10
15
20
25
30
1970 1981 1983 1985 1987 1989 1991 1993 1995 1999
Developing countries' share of world exports
of manufactured goods, percentages
Years
Source: Ajit K. Ghose, Trade Liberalization and Manufacturing Employment. Employment
Paper 2000/3 (Geneva: International Labour Office, 2000), and Overseas Development
Institute, Developing Countries in the WTO. Briefing Paper 3 (London: Overseas Development
Institute, 1995).
Mexico is a case in point. Long regarded as dependent on rudimentary
exports to the United States, Mexico’s position has changed
rapidly, parallel to its conversion to a policy of free trade. As
recently as 1980, only 0.7 percent of its exports were processed.
By 1990 this figure had risen to 3.7 percent, and in 1995, after
NAFTA had abolished tariffs between Mexico and the United
171
States, it had risen to 19.3 percent. The country’s having advanced,
in six short years, from the world’s 26th to the 8th largest exporter
can be termed a bonus in this connection, and helps to account
for the country’s growth running at nearly 5 percent annually
since 1996.13
Critics sometimes complain that labor-intensive industries once
emigrated to Japan because wages there were low and, when wages
rose, moved on to South Korea and Taiwan. When production
costs rose in those countries, the industries moved to Malaysia
and Thailand, for example, and today they are beginning to
relocate in China and Vietnam. That, the critics believe, is an
example of the ruthlessness of capital—leaving countries in the
lurch for paying higher wages. As soon as a country’s growth and
prosperity get started, that country is deserted by companies and
investors. But this process is more a case of constantly raising the
level of upgrading in production. When a country is poor, it is
best at the simplest and least skilled jobs. But when it grows
richer, its production more efficient and its population more
skilled, it does better out of more qualified, technology-intensive
production, and eventually out of knowledge-intensive production.
Step by step the economy goes on developing, while poorer
countries, relatively speaking, become better performers in more
labor-intensive industry. Mexicans are exporting fewer raw materials
and more manufactured goods, while Americans are moving
more and more from manufactured goods to computer programming
and consulting services. In this way the world economy is
growing more and more efficient, and at the same time making
room for more and more regions and countries. That is why East
Asian economies have been likened to a flock of geese. From their
different positions in the flock, they have all moved forward to
better positions, step by step.
172
‘‘Let them keep their tariffs’’
There are critics of free trade, especially in the churches and
in development assistance organizations, whose position stands
traditional protectionism on its head. They perceive the absurdity
of the affluent world preventing developing countries, by means
of tariffs, from exporting to its markets. At the same time, however,
they feel that the developing countries should be wary of buying
things from us and should therefore protect their markets with
tariffs until they have become affluent enough. Often, those critics
make it sound as if we do people in developing countries a service
by not arguing against their politicians’ protectionism. We must
‘‘let them keep their tariffs.’’
This argument may seem reasonable at first blush—if people
are poor, they must be allowed to derive earnings from exports,
but not made to lose them through imports that might put their
own industries out of business. Their industries need ‘‘infant
industry tariffs’’ and cannot be exposed to competition until they
are competitive. But as we have now seen, it is open countries
whose industry develops fastest. Tariffs forced consumers to buy
from companies in their own countries, with the result that the
companies grew richer. But, not being exposed to competition,
they were under no pressure to improve efficiency and realign
their production, or to lower the prices of their goods. This policy,
accordingly, enabled the elite to enrich themselves while the great
mass of the people were forced to pay more for their everyday
necessities, being unable to get them anywhere else. To say that
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the poor gain by just exporting and not importing is to forget that
they are consumers as well as producers. ‘‘Letting the developing
countries keep their tariffs,’’ then, is tantamount to ‘‘letting the
developing countries forbid their citizens to choose from a wide
variety of goods.’’
The belief that politicians know better than the market and
investors which enterprises can become competitive in the long
run is sheer superstition. On the contrary, this protective policy
is a way of dismantling market mechanisms that separate failed
projects from successful ones. There are few good examples of
successful governmental industrial initiatives, and any number of
examples of expensive flops: India’s failed industrial sector, Brazil’s
attempt to create an information technology industry, the automotive
industries of the South American countries, and Suharto’s
protection of the Indonesian motor industry (headed, coincidentally,
by his son). Japan’s department of industry, MITI, is sometimes
referred to as a planning success, and it did do relatively
well, but mainly by responding to signals from the market. By
contrast, its efforts to create new industries independently of the
market were less successful. MITI invested billions, for example,
in fast breeder reactors, a fifth generation computer, and a remotecontrolled
oil rig, all of which were expensive failures. Happily—
for the Japanese—MITI also failed to throttle certain sectors, as
it might have in the early 1950s when it attempted to phase out the
small car producers and prevent Sony from importing transistor
technology.14 In the West, there are expensive failures like the
Anglo-French Concorde and Swedish digital television.
The grim fact is that in many cases political leaders have not
even tried to make an objective assessment of what can be profitable,
but have based their decisions on lobbying and corruption,
or a desire for prestige. Tariff walls, which were supposed to
174
afford temporary protection for viable enterprises, instead gave
permanent protection to inefficient corporations. What was
intended as a crucible of development became a lush greenhouse
for backroom politics and slush money. Even if, in theory, that
might occasionally be a successful policy, how do we know that
it will be implemented in the right field once the political battle
is joined? We ought to ask why poor states should devote their
few resources to reckless, mammoth industrial projects when there
are other things they could enact that are certain to bring distinct
benefits: economic reforms, a liberal regulatory structure, investment
in education and health.
The argument for Third World tariffs also rests on ignorance
of a very important fact: much developing-country trade is with
other developing countries. About 40 percent of exports from the
developing countries go to other developing countries. If poor
consumers are forced to pay high prices for products from companies
in their own countries, they will generally be prevented from
buying from companies in neighboring countries, in which case
the producers will also lose out. The producers may get a monopoly
in their own market, but they are forbidden to sell to other
markets. Developing countries’ tariffs against other developing
countries today are more than two and a half times higher than
the industrialized countries’ tariffs against developing countries.
Tariffs in the industrialized countries average about 8 percent,
those of the developing countries 21 percent. Thus, more than
70 percent of the customs dues people in developing countries
are forced to pay are levied by other developing countries.15
That is the main reason why the developing countries, which
constitute only a quarter of the global economy, are forced to
bear no less than 40 percent of the global cost of tariffs. One of
the greatest benefits the developing countries can derive from free
175
trade is the abolition of the import tariffs, which sometimes
multiply commodity prices several times over. Those who believe
that supporting tariffs makes them friends of the developing countries
fail to realize that they are actually helping a small clique of
companies and rulers in the developing countries, to the detriment
of the consumers and broader economies of those societies.
If we in the affluent countries truly believe in free trade, we
must abolish our tariffs and quotas without demanding concessions
from others. Forbidding the poor of the world to develop
is immoral. Besides, we ourselves stand to benefit from freer
imports, even if others do not want to import from us. But that
does not mean that it is wise of the Third World to protect its
own industries with trade barriers. On the contrary, the best thing
for their populations is for their tariffs also to be abolished. Those
who want them to preserve their tariffs may constitute an inverted,
mirror image of traditional protectionists, but the face in the
mirror is no more attractive than the original.
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The debt trap
In the debate on globalization, severe criticism has been leveled
at global economic institutions. Most often singled out are the
World Bank (WB), which leads multilateral work for long-term
development in the Third World, and the International Monetary
Fund (IMF), which exists to guide and assist national financial
systems, especially in times of crisis. Critics maintain that those
institutions serve as collectors of debts from developing countries
to the affluent world, and that they force developing countries
to implement heavy-handed liberal policies that lead to greater
poverty. Left-wing groups and churches the world over say that
the WB and the IMF should be democratized and Third World
debts should be written off.
‘‘Democratized’’ means that all countries should have equal
voting rights in these institutions, as opposed to power commensurate
with the financial contributions they make. That may sound
right, but these are basically development aid organizations, and
countries choosing to channel their development assistance
through them expect to have a say in how the money they give
is going to be used. All countries could be given equal power
over the funds, but that would only result in countries like the
United States withdrawing and sending their money through
other channels. That would mean the end of the IMF and the
WB, which in its way, of course, would effectively settle the
dispute over them, but hardly in the way most of the critics
had envisaged.
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The IMF and the WB have a great deal on their consciences,
mistakes that a liberal should criticize them for. Criticism ought,
for example, to be leveled against their many decades of argument
in favor of planned economies in the developing countries and
against the WB’s involvement in sterilization programs—programs
that have involved serious abuses against the persons
affected by them. The same goes for large-scale projects, such as
dam construction projects, which have involved the compulsory
relocation of thousands of people. But the opponents of globalization
do not often criticize activities of this kind. Instead, they
direct their ire at recommendations of low inflation and balanced
budgets. But demands of this kind on developing countries are
not just orders from above. They are conditions that the institutions
place on loans to countries that have acute financial deficits
and are on the verge of bankruptcy. Like all credit providers, they
would prefer to be paid back, and so they insist on reforms that
would allow the country to emerge from its crisis and eventually
be capable of repaying what it has borrowed. There is nothing
fundamentally wrong with this attitude, and the recommendations
(termed structural adjustment programs) have often been healthy:
a balanced budget, a lower rate of inflation, greater competition,
open markets, less corruption and more rule of law, and a reduction
of military spending in favor of things like education and
health care. Much work has also been devoted to establishing
greater transparency and to cleaning up shady dealings and nepotism
between rulers and economic players.
But there are a number of contentious cases where recommendations
from these institutions have been destructive—for example,
their actions during the Asian crisis. Sharp criticism can be
leveled against the demand for contraction in countries that were
already entering a profound depression. In September 1997, for
178
instance, tax increases forced on Thailand by the IMF deepened
the economic crisis to an alarming degree. In certain cases, the
IMF has recommended that governments retain excessively high
exchange rates, thereby triggering speculation. Constant crisis
packages can also prompt investors and governments to take bigger
risks than they otherwise would, because they know that if they
get out of their depth, as Russia did in 1998, the IMF will jump
in to save them. From a liberal perspective, it is bizarre that
taxpayers are forced to pay for the mistakes of speculators. A
central canon of the capitalistic system, after all, is that unsuccessful
investors must themselves bear the cost of their failure. Other
critics say that the IMF has generally been too micromanaging,
instead of simply issuing general recommendations. Using promises
of multimillion dollar payments, IMF bureaucrats have tried
to exercise an almost colonial degree of remote control over other
countries’ policies. We are perfectly right to insist that Third
World rulers extend basic democratic rights and liberties to their
peoples, but we must not attempt to control the details of their
policymaking.
The foremost lesson to learn from a couple of decades of IMF
and WB recommendations is how insignificant is their actual
impact on the countries receiving the funds. To many governments
in real crisis, IMF and WB loans have provided a last
chance to avoid real and drastic economic reforms. Countries
have only needed to promise reforms in order for huge sums of
money to be placed at their disposal. Rulers then play a perilous
two-sided game, implementing just enough minor reforms to
keep the IMF envoys happy. With the wisdom of hindsight,
Russia’s finance minister Boris Fyodorov maintains that the IMF’s
grants to Russia have delayed the liberal reforms that the country
would otherwise have been obliged to introduce. Instead of pursuing
a good policy, his colleagues decided that it would be more
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patriotic to raise the biggest possible loans and then start negotiating
about the writing off of debts.
[The $25 billion that the IMF and the WB lent Russia during the 1990s]
substantially helped to postpone the implementation of a coherent economic
strategy and reduced the willingness of national authorities to make painful
but necessary changes in economic policies. . . . The Russian political elite
is now firmly convinced that Russia will regularly receive international
financing regardless of its economic policies.
Andrei Illarionov, Russian liberal economist, today adviser to President
Vladimir Putin.16
It is very dangerous to suppose that reforms can be brought about
from outside by means of economic inducements. In the majority
of cases, resource transfers of this kind have had the effect of
propping up a failed system. Assistance, if it is to have any positive
effects, must come after reforms begin. When, in 1994, the WB
reviewed 26 different structural adjustment programs, it found
that only 6 of them had led to a serious change of policy. Above
all, those in power could not, or would not, reduce and streamline
bureaucracy and their own control of the economy. Countries
have sometimes tried to meet certain important stipulations, such
as budgetary balance, by destructive policies such as increasing
taxes and tariffs, printing more money, or slashing the most
important public spending—on education and health—instead
of subsidies, bureaucracy, and the military.
Another problem is that readjustment programs are often too
complicated for inefficient governments to implement. When a
corrupt government has to take account of perhaps a hundred
different stipulations and guidelines at once, things get difficult,
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especially as it must simultaneously keep track of any number
of other aid programs from individual countries. Because these
structural adjustment programs are often quite vaguely written,
it is easy for governments to delay and undermine them. Breaches
of the programs have led to a cancellation of payments, but,
bizarrely, the funding tap has been turned full on again as soon
as the politicians have verbally promised renewed compliance.
That, it seems, can be repeated indefinitely. One analyst maintained
that 15 years of structural adjustment programs in Africa
had meant only ‘‘minimally more openness to the global
economy.’’17
The unwillingness of the recipient countries to follow the advice
given makes it wrong to point to the IMF’s liberalizing recommendations
as the cause of those countries’ profound crises, as many
left-wing movements do. Countries that actually followed the
recommendations have apparently done better than countries that
have not. Those complying with them—Uganda and Ghana, for
example—have on average had higher growth and thus reduced
poverty. States that eschewed such liberalization programs—Nigeria,
Kenya, and Zambia, for example—remain economically
unimpressive, having become bogged down in poverty and
inequality of fearful dimensions.18
So what about debt cancellation? I believe there are good reasons
for it, butalso risks involved if we do not go about it in the right
way. We should note at the outset, though, that the debate is
exaggerated. Critics of the IMF and the WB claim that something
like 20,000 people die in the developing countries every day
because of debt. That figure is reached by adding up the interest
payments that developing countries are forced to make to these
institutions and then working out how many human lives could
be saved for the same amount of money. Even if we grant the
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fanciful supposition that all the money would otherwise go to
medicines and food instead of munitions, which is not at all
credible, the claim overlooks another important fact. These debtridden
countries receive more credits, grants, and development
assistance from the industrialized countries and global institutions
every year than they pay in interest. The 41 most highly indebted
poor countries (HIPCs) receive about twice as much from the
Western world as they pay every year. So to accuse the Western
world of causing the deaths of tens of thousands of people in the
developing countries every day by collecting interest payments is
a grotesque statistical trick.19
Even so, debt cancellation is right in principle. Opponents of
debt relief say that one should pay one’s debts, which of course
is true. The only question is why one should be forced to pay
other people’s debts. Suppose a dictator borrows masses of money
to build up his country’s military machine and his own fortune,
but then, after political upheavals, a democratic regime takes over
and finds itself clutching an armful of IOUs. Why should taxpayers
be liable for a debt they never chose to take on? Is it not more
reasonable for the borrowers to bear the risk of the country not
being able to pay the money back? Ordinary market institutions
have learned from experience and have long since given up advancing
money to deeply indebted countries, while political institutions
like the IMF and the WB have gone on sending money at
every economic crisis. Through a combination of generosity and
irrationality, they lured many developing countries into the debt
trap during the 1980s. Most of those countries have absolutely
no chance of paying off their debt, and perpetuation of the debt
trap will do no one any good. A country like Tanzania has a
foreign debt that is twice as large as its annual export revenues,
and debt service does displace things like the funding of education
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for the young. Because challenging privilege, slashing subsidies,
and laying off civil servants are politically hazardous, the longterm
investments often suffer when cutbacks are needed.
That is not to say that unconditional debt cancellation for all
countries, the sort of thing advocated by such popular movements
as the Jubilee 2000 campaign, is an entirely good idea. On the
contrary, cancellation can mean the Western world financing
corrupt regimes that use the money to buy arms and consolidate
oppression. In that case we have helped to perpetuate unsavory
regimes, which again is not a very moral thing to do. To avoid
doing so, certain demands should be made for democracy and
reforms, parallel to debts being canceled. One of the problems
of debt cancellation is that it distorts the flows of development
assistance, in favor, not of the poorest or of democracies, but of
those who are most deeply in debt. In 1997, those countries
received four times more development assistance per capita than
equally poor but nonindebted countries. The Ivory Coast, for
example, received 1,276 times more development assistance per
capita than India.
Debt cancellation has been going on, to a greater or lesser
extent, since 1979, when, following an UNCTAD meeting, the
creditors canceled debts of 45 countries totaling $6 billion. The
problem is that this policy has encouraged the contracting of
further debts. Countries that have gotten rid of their debts have
quickly replaced them with new loans. One study has shown that
an increase in a country’s debt cancellation equaling one percent
of GDP between 1979 and 1997 entailed, on average, a 0.34
percent increase in its burden of debt. Moreover, the money has
not been spent on good investments, and the respites have not
been used to improve policy. On the contrary, one finds that
debtor countries pursue worse policies and implement fewer longterm
reforms than other poor countries. One grim guess is that
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these countries often borrow more instead of prioritizing their
expenditure because they count on a future cancellation of debts,
and that they put off liberal reforms until they can ‘‘sell’’ them
to the IMF and WB for the greatest possible cancellation of
debts. In September 1996, when the WB and IMF launched their
initiative aimed at eventually writing off the debts of 41 countries
rated ‘‘highly indebted,’’ there had already been two decades of
debt cancellation.20
These repeated cancellations are a sign of the policy’s ineffectiveness.
What would actually help is a ‘‘once and for all’’ strategy,
whereby the debts of the poor, reform-oriented governments are
written off at the same time that it is convincingly indicated that
no more debts will be written off in the future. One way of doing
this would be to cancel all debts now, then refrain from lending
any more money. Instead, any loans would have to be contracted
on the international capital market from investors who are willing
to take the risk and who personally believe that they will get their
money back. That, however, does not appear to have been the
strategy when the WB and IMF signaled the exemption of 22
countries from two-thirds of their debts. True, the exemption
measure was accompanied by various conditions, such as measures
to combat corruption and heavier investment in education and
health. But new loans may well be considered after the cancellations,
in which case there is a serious risk of debts growing again,
making a similar cancellation initiative necessary in 10 years’ time.
Since the beginning of the 1960s, Africa has received development assistance
equaling six times the aid sent by the United States under the
Marshall Plan following World War II. If the money had gone to investments,
African countries would have had a Western standard of living by now.
Studies of development assistance show discouraging results. In many
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cases, assistance has been purely destructive and actually reduced national
growth. In the words of the great international development economist Peter
T. Bauer, development assistance is often tantamount to transferring money
‘‘from poor people in rich countries to rich people in poor countries.’’ The
problem is that the money sets up the wrong incentives. Trade encourages
poor countries to boost their production and develop new ideas. Development
assistance has instead given money to leaders who run their countries into
poverty instead of developing them, with additional resources going to those
who can display the least development. Because aid goes to the state and
the politicians, it has become more lucrative in the countries concerned to
try to seize government power than to produce and export. This has strengthened
the central state, enabling it to exploit the countryside and destroy
agriculture and potential industries. Development assistance has in many
cases helped corrupt dictators cling to power. (Rulers such as Mobutu,
Mugabe, Marcos, and Suharto have amassed fortunes in the billions while
their countries’ economies deteriorated.) Giving assistance without demanding
democracy and reforms is tantamount to subsidizing dictatorships and
stagnation. But there is some evidence that development assistance can
strengthen economies—if they are already pursuing a successful policy,
with property rights, open markets, and a stable budgetary and monetary
policy. In those cases, of course, the aid is not really needed. And the
likelihood of aid bureaucrats correctly identifying good policies, and then
acting wisely, seems slim.21
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The right medicine
One common objection to the market economy is that it causes
people and enterprises to produce for profit, not for needs. This
means, for example, pharmaceutical companies devoting huge
resources to research and medicines to do with obesity, baldness,
and depression, things that westerners can afford to worry about
and pay for, whereas only a fraction is devoted to attempting to
cure tropical diseases afflicting the poorest of the world’s inhabitants,
such as malaria and tuberculosis. This criticism is understandable.
The unfairness exists, but capitalism is not to blame
for it. Without capitalism and the lure of profit, we shouldn’t
imagine that everyone would have obtained cures for their illnesses.
In fact, far fewer would do so than is now the case. If
wealthy people in the West demand help for their problems,
their resources can be used to research and eventually solve those
problems, which are not necessarily trivial to the people afflicted
with them. Capitalism gives companies economic incentives to
help us by developing medicines and vaccines. That westerners
spend money this way does not make things worse for anyone.
This is not money that would otherwise have gone to researching
tropical diseases—the pharmaceutical companies simply would
not have had these resources otherwise. And, as free trade and
the market economy promote greater prosperity in poorer countries,
their needs and desires will play a larger role in dictating
the purposes of research and production.
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It is not a problem for the Third World that more and more
diseases have been made curable in the Western world. On the
contrary, that is something that has proved to be a benefit, and
not just because a wealthier world can devote more resources to
helping the poor. In many fields, the Third World can inexpensively
share in the research financed by wealthy Western customers,
sometimes paying nothing for it. The Merck Corporation
gave free medicine to a project to combat onchocerciasis (river
blindness) in 11 African states. As a result those states have now rid
themselves almost completely of a parasite that formerly affected
something like a million people, blinding thousands every year.22
The Monsanto Corporation allows researchers and companies
free use of their technique for developing ‘‘golden rice,’’ a strain
of rice enriched with iron and beta carotene (pro-vitamin A),
which could save a million people annually in the Third World
who are dying of vitamin A deficiency diseases. A number of
pharmaceutical companies are lowering the prices of inhibitors
for HIV/AIDS in poor countries by up to 95 percent, on condition
that the patents are preserved so that they can maintain full prices
in wealthier countries.
Companies can do these things because there are affluent markets
with customers who can pay well. Those companies can
only do what they have resources for; they cannot simply accept
expenditure with no earnings. But that is what many people
complaining about efforts by pharmaceutical companies to preserve
their patents feel they should do. If patents for HIV/AIDS
drugs were abolished altogether, far more poor people in the
world would be able to afford them, because they could then be
reproduced at very low cost. That might give people greater access
to a medicine today, but it would drastically reduce availability
in the future, because pharmaceutical companies spend huge
187
amounts developing medicines. For every successful drug, there
are on average 20 or 30 unsuccessful ones, and producing a new,
marketable medicine can cost hundreds of millions of dollars.
The high prices of the few medicines that can be sold are necessary
in order to finance all this research. If patents disappeared, hardly
any company would be able to afford the research and development
of medicines. If we had not had patents before, there would
be no controversy over the price of drugs to treat HIV/AIDS,
because then those drugs would never have been invented.
It is not the pharmaceutical companies we have to blame for
doing too little to cure diseases in developing countries. The
industrialized countries could, for example, resolve to pay a certain
amount for every child in the world vaccinated for malaria or for
everyone receiving inhibitors for HIV/AIDS, as Jeffrey Sachs has
proposed. If entrepreneurs and NGOs were to do that, businesses
would have an incentive to research cures and vaccines. If curing
disease in the Third World is a political goal, then surely it would
be more reasonable to divide the costs among us all instead of
putting costly demands solely on the pharmaceutical companies.
Unfortunately, the allocation of political resources is subject
to—what else?—politics. Nowhere is this more obvious than in
the World Health Organization (WHO), which as a specialist
UN agency is financed out of tax revenue. Its aim is to assure
the world’s people the best possible health. There is an easy way
of doing this. According to the WHO, six diseases—malaria,
tuberculosis, and so on—together account for 90 percent of all
deaths from infectious diseases among people under 44. Every
year 11 million people die unnecessarily of these diseases. So one
might expect the WHO to venture forth and begin vaccinating
children and fighting diseases. They could solve one of the world’s
biggest problems tomorrow if they decided to. But no, the organization
has actually moved this idea down on its list of priorities
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in recent years. Because of lack of resources? Hardly. According
to the WHO, it would cost between $4 million and $220 million
to prevent these deaths. That is just 0.4–20 percent of the WHO’s
annual budget! While children die unnecessarily, the WHO is
devoting more and more of its annual $1 billion or more to
exclusive conferences and to campaigning for the use of seat belts
and against smoking. Problems of this kind are considered urgent
in the rich countries, so bureaucrats must attend to them in order
to preserve their funding.23
Personally, I believe we have more to expect from philanthropic
capitalists than from politics. Capitalism does not force people
to maximize their profit at every turn; it enables them to use their
property as they see fit, free of political considerations. Microsoft’s
Bill Gates, the very personification of modern capitalism, himself
devotes more to the campaign against disease in the developing
countries than the American government does. Between November
1999 and 2000, through the $23 billion Bill and Melinda
Gates Health Fund, $1.44 billion went to vaccinate children in
developing countries for common diseases and to fund research
into HIV/AIDS, malaria, and TB, for example, in developing
countries. That is a quarter of what all industrialized nations
combined devote to combating disease in the developing countries.
So the fact that Bill Gates is worth more than $50 billion
should give the poor and the sick of the world reason to rejoice.
Clearly they would stand to gain more from a handful of Gateses
than from the whole of Europe and another couple of WHOs.
189

V
Race to the top
I’m all for free trade, but . . .
The affluent countries take a highly protectionist stance against
the developing countries as a result of vigorous lobbying by vested
interests. Rarely, though, is this stance defended in public debate.
Wanting to get rich at the Third World’s expense is not, after
all, a very attractive position. There is, however, a closely related
type of protectionism that is considered far more presentable,
namely the idea of making trade subject to certain conditions.
‘‘We’re all for free trade,’’ proponents of this approach say, and
go on to add something like ‘‘but not on any terms whatsoever’’
or ‘‘but it needs a different set of rules.’’ If someone starts off by
saying ‘‘I’m all for free trade, but . . . ,’’ you should listen very
carefully to what follows, because if the ‘‘but’’ is strong enough,
it means the person is not for free trade at all.
That is the way the discussion often goes in countries where
free trade is a very positive concept.1 In some countries, though,
free trade is a term of abuse. Shout your love of global markets
out loud on a Parisian street and you risk being pursued by an
angry crowd. Certain globalization skeptics go so far as to assert
that the discussion has nothing to do with ‘‘being for or against
free trade,’’ because everyone is in favor of some form of free
trade. But the rules of genuine free trade, complete with rights
of ownership and freedom of enterprise, are intended to facilitate
free exchange and cannot in any way be equated with rules,
prohibitions, and quotas aimed at restricting free exchange. The
globalization discussion is necessarily concerned with being for
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or against free trade, and you are for it if you want more liberal
rules of trade; otherwise, you are against it.
A commonly held protectionist view today is that we should
not permit trade with countries with unacceptably bad working
conditions or those that condone child labor or do not do enough
to protect the environment. Otherwise, we permit other countries
to put our firms out of business by dint of their inferior social
conditions (‘‘social dumping’’) or disregard for the environment
(‘‘eco-dumping’’). When drawing up trade agreements with poor
countries, some argue, we must always insist on provisions stipulating
environmental or labor standards, and require our trading
partners to improve their environmental policies or working conditions
if they wish to remain trading partners. Not only unions
and companies join in this chorus, but social movements as well.
But to the developing countries, this approach is little more than
the same old protection coupled with a neo-colonialist bid to
control their policymaking.
The skeptical attitude of many in the developing world was
given voice by Youssef Boutros-Ghali, Egypt’s minister for trade:
‘‘The question is why all of a sudden, when third world labor
has proved to be competitive, why do industrial countries start
feeling concerned about our workers? . . . It is suspicious.’’2
It was after President Bill Clinton proposed this kind of boycott
of countries not meeting certain requirements that the WTO
talks in Seattle deadlocked at the end of 1999. Swedish trade
minister Leif Pagrotsky spoke of ‘‘Clinton’s great blunder,’’ and
the developing countries refused to negotiate under such threats.
Whatever well-heeled demonstrators and presidents in economically
powerful countries may believe, low wages and poor environmental
conditions in developing countries are not due to stinginess.
There are, of course, exceptions, but generally the problem
193
is that employers cannot afford to pay higher wages and have
better working conditions, because worker productivity is so low
at low levels of national development. Wages can be raised as
labor becomes more valuable, that is, in step with productivity,
and that can be achieved only through increased investment,
better infrastructure, more education, new machinery, and better
organization. If we force these countries to raise wages before
productivity has been improved, firms and consumers will have
to pay more for their manpower than it is currently worth, in
which case they will be put out of the running by more productive,
better-paid workers in the Western world. Unemployment among
the world’s poor would swiftly rise. Economist Paul Krugman
has dubbed this a policy for good jobs in theory and no jobs in
practice. Jesus Reyes-Heroles, Mexican ambassador to the United
States, has explained:
In a poor country like ours the alternative to low-paying jobs isn’t
high-paying jobs—it’s no jobs at all.3
In effect, labor and environmental provisions tell the developing
countries: You are too poor to trade with us, and we are not going
to trade with you until you have grown rich. The problem is that
only through trade can they grow richer and thereby, step by
step, improve their living standards and their social conditions.
This is a catch-22: they cannot trade until their working conditions
and environmental protection are of a high standard, but they
cannot raise the level of their working conditions and environmental
protection if they are not allowed to trade with us. It is
reminiscent of that chilling oxymoron from the Vietnam War:
‘‘We had to burn the village in order to save it.’’
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Suppose this idea had been current at the end of the 19th
century. In that case Britain and France would have noted that
Swedish wages were only a fraction of theirs, that Sweden had a
12- or 13-hour working day and a six-day week, and that Swedes
were chronically undernourished. Child labor was widespread in
spinning mills, glassworks, and match and tobacco factories: one
factory worker in 20 was under 14 years old. Britain and France,
accordingly, would have refused to trade with Sweden and closed
their frontiers to Swedish cereals, timber, and iron ore. Would
Sweden have gained by this? Hardly. On the contrary, it would
have robbed the Swedes of earnings and blocked their industrial
development. They would have been left with intolerable living
conditions, the children would have stayed in the factories, and
perhaps to this day they would be eating tree-bark bread when
the harvest failed. But that didn’t happen. Sweden’s trade was
allowed to grow uninterruptedly, industrialization got under way,
and the economy was revolutionized. In step with growth, slowly
but surely, they were able to tackle the abuses. Wages rose, the
working day was shortened, and children began going to school
in the mornings, not to the factory.
If today, as a condition for trading with the developing countries,
we require their mining industries to be as safe as the West’s
now are, we are making demands that we ourselves did not have
to meet when our own mining industries were developing. It was
only after raising our incomes that we were able to develop the
technology and afford the safety equipment we use today. If we
require the developing countries to adopt those things right away,
before they can afford them, then their industry will be knocked
out. If we prevent poor countries from exporting to us because
their working conditions are not good enough, their export industry
will be eliminated and their workers will instead have to look
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for jobs in native industry, with even lower wages and poorer
working conditions. That will not help the world’s poor, but it
will protect our industry. This, one suspects, is the motive of
certain groups in affluent countries for proposing such clauses.
What the adherents of labor and environmental provisions in
trade agreements want to do is deny developing countries the
chance that the affluent countries were once given. Those who
sincerely desire to help the developing countries surely should
campaign for the West to help developing countries get rid of
their problems by sharing our technology and know-how with
them instead of ceasing to trade with them. Instead, some labor
organizations, such as the AFL-CIO, are trying to stop the transfer
of modern technology to the Third World! There already exist
other venues for tackling the specific issues and helping developing
countries to improve their labor and environmental standards,
such as the United Nations Environmental Program (UNEP) and
the International Labor Organization (ILO).
What about the requirement that our trading partners respect
patent and intellectual property (IP) rights, which developing
countries have to accept in order to be admitted to cooperation
within the WTO? Why should we require them to accept patents
for a 20-year period, as stipulated in the WTO’s TRIPS (Trade-
Related Aspects of Intellectual Property Rights) agreement, if we
do not require them to maintain even a minimum level of social
conditions? There is a simple reason often given: infringements
of intellectual property rights act as a trade barrier. Few companies
would avoid investing in or selling to a country because it is too
poor or its wages are too low, but they might well shun a country
where they risked having their product ideas stolen.
Patents are important, both as a recognition of the creator’s
right to be compensated for a creation and as a means of promoting
196
a climate of innovation and research. Without intellectual property
protection, inventors in poor countries would have to sell
their ideas abroad in order to protect them.
These are reasonable arguments, but I don’t find them strong
enough to support the idea that IP rights must be included—as
they are today with the TRIPS treaty—in the rules of the WTO.
Here again, we should permit trade with everyone, irrespective
of the policy they follow. The commercial liberty of Americans
should not be infringed just because other countries are pursuing
a bad policy, and the citizens of other countries already living
under a foolish policy do not need to be punished again by our
government. If the policies of these countries turn businesses away
and fail to spur innovation at home, then so much the worse for
them, but that is no reason why we should forbid citizens of our
country to trade freely with them. It is trade that provides the
level of economic development that will eventually enable the
developing countries to acquire the wealth and technology that
make protection of IP rights increasingly vital to the economy.
We must not use trade barriers as a weapon for pushing through
the policy we want to see. Instead we should keep our frontiers
open and at the same time urge the countries in question to start
respecting patents and copyrights.
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Child labor
But are there really no exceptions? No economic conditions so
disgusting that we must prohibit trade because of them? One
example often cited in the course of debate is the employment
of children. There are today something like 250 million child
workers between the ages of 5 and 14. No one can be anything
but dismayed at the thought of millions of young people being
robbed of their childhood and, in many cases, their health and
happiness as well. But are these children helped by the United
States or the EU ceasing to trade with the countries in which
they live? No, and the absurdity of such a proposition becomes
clear as soon as we realize that the great majority of children are
employed in sectors having nothing whatsoever to do with trade.
About 70 percent of child workers are employed in agriculture.
Only 5 percent, about 10 million or 15 million children, are
employed in export industries doing things like making footballs
and athletic shoes, sewing garments, or knotting carpets. All available
sources indicate that children working in export industries
are better off than those in other trades, with the least dangerous
working conditions. So the alternatives are worse.
The problem, once again, is that we judge the Third World
according to our own material standard of living. The fact is
that child employment was widespread in the West just a few
generations ago. It has existed in all societies. In preindustrial
France, parents were forbidden not to send their children to work.
Children in a poor country do not become workers because their
198
parents are cruel but because the family needs their earnings to
survive. So we cannot prohibit child labor in these countries just
like that, and still less can we forbid the countries concerned to
export things to us. If we did, then pending an improvement in
material conditions, the children would be forced into even worse
occupations—at the very worst, into crime and prostitution. In
1992 it was revealed that Wal-Mart was buying garments that
had been manufactured by child workers in Bangladesh. Congress
then threatened to prohibit imports from countries with child
labor. As a result of that threat, many thousands of children
were fired by the Bangladeshi textile industry. A follow-up by
international organizations showed that many of the children had
moved to more dangerous, less well-paid jobs, and in several cases
had become prostitutes.4 A similar boycott of the Nepalese carpet
industry, according to UNICEF, resulted in more than 5,000
girls being forced into prostitution.
The Swedish NGO Save the Children (Ra¨dda Barnen) is one
of the organizations that have tried to instill a degree of moderation
and sense into the debate on child labor:
In most cases the Swedish Save the Children says no to boycotts,
sanctions, and other trade-related measures against the employment
of children. Experience has shown that the children who have to
leave their jobs as a consequence of such measures risk finding
themselves in more difficult situations and more harmful occupations.
Half of child workers work part time, and many do so to finance
their schooling. If they were to lose their jobs, as a result of
prohibitions or boycotts, a difficult situation would be made even
worse. To tackle the problems, we have to distinguish which
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problems—prostitution and the enslavement of children, for
example—must be fought by every available means, and which
can only be counteracted through economic improvements and
rising living standards. Save the Children, Sweden, continues:
General assertions that child labor is a good or bad thing serve
little purpose. . . . To regard all occupations as equally unacceptable
is to simplify a complicated issue and makes it more difficult to
concentrate forces against the worst forms of exploitation.5
Child labor in Sweden was primarily eliminated not by prohibitions
but by the economy growing to such an extent that parents
were able to give their children education instead—thereby maximizing
the children’s incomes in the longer term. In addition,
mechanization made the simplest manual labor less profitable.
That development eventually enabled Sweden to legally prohibit
such child labor as remained, not the other way around. The
same recipe can reduce child labor in developing countries today.
The ILO has noted that the number of workers aged 10–14 is
declining substantially with the growth of the Asian economies.
In India, the proportion of child workers has fallen from 35
percent fifty years ago to 12 percent today. In East and Southeast
Asia, child labor is expected to have vanished completely by 2010.
In the poorest developing countries, the proportion of children
in the workforce has fallen in the past 40 years from 32 to 19
percent, and in the medium income group it has fallen from 28
to 7 percent.6
Everyone must have access to education, and that education
must yield a return. It must be capable of leading to a better
paying job than could have been obtained without schooling.
Only then will it become possible, and remunerative, for parents
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to save their children from work. It is not enough for education
to be universally available. Schools also have to be of good quality.
In many countries the schools are appalling, and children attending
them are badly treated, even subjected to physical violence.
This is in part a function of the schools’ status as public institutions
whose teachers are almost impossible to fire. Part of the solution
lies in freedom of choice, enabling families to take control of
schools from staff and national authorities, perhaps through a
voucher system, as in Sweden.
It is always open to discussion whether, in a particular situation,
temporary trade sanctions are a feasible way of bringing down an
exceptionally cruel dictatorship, for example one that practices
apartheid or slavery, makes war, or massacres civilians. But even
in cases like these, it is important to bear in mind that sanctions
will quite probably harm the country’s population and may even,
if prolonged, strengthen the position of the rulers. Trade generally
tends to make the maintenance of centralized power difficult,
because it gives rise to more international contacts and to power
centers other than the sovereign. If all countries participate in
sanctions against a dictatorship, perhaps some useful purpose can
be served in certain cases. Symbolic sanctions, such as the freezing
of diplomatic relations or boycotts on sporting events, can be
particularly useful against dictatorships, because they do not harm
the population in the same way as a suspension of trade. But the
important thing here is that sanctions of this kind should not in
any way be mixed up with sanctions imposed on countries merely
because they are still poor.
The best policy is to bring pressure to bear in other contexts
and in political forums, instead of proceeding to dismantle what
is perhaps the most effective solution—trade. Our politicians and
organizations should never cease criticizing other countries if they
201
violate human rights, practice censorship, persecute dissidents, or
prohibit associations—trade unions, for example. The desire to
give the populations of other countries a chance to develop by
trading freely must never be confused with a benevolent attitude
towards their governments. Western politicians who cozy up to
dictatorial regimes for the purpose of ensuring that their export
enterprises are able to sell to those countries are in practice legitimizing
their oppression. If governments are anti-liberal, their
oppression should never be passed over in silence. ‘‘Injustice anywhere
is a threat to justice everywhere,’’ as Martin Luther King
Jr. put it.
202
But what about us?
‘‘All right then,’’ certain critics of globalization reply, ‘‘it may
be good for the developing countries, our trading with them in
spite of their being poor, but it’s bad for us.’’ For if the developing
countries pay lower wages, do not protect their environment, and
have insufferably long working hours, then won’t their cheap
output eliminate our higher paying jobs, forcing us to lower our
standards and our wages? We will have to keep working harder
and longer to keep up. Firms and capital quickly migrate to where
the lowest wages and the worst working conditions exist. It will
be a ‘‘race to the bottom.’’ The one with the lowest social standard
will win and will corner the investments and export revenues.
Theoretically this seems a tough case to answer. The only
trouble is that it has no foundation in reality. The world has not
witnessed a deterioration of working conditions or wages in the
past few decades, but precisely the opposite. And the explanation
is simple. Consumers aren’t looking to buy goods from people
who are poorly paid; they just want products that are good and
as inexpensive as possible, whoever makes them. The reason wages
are lower in developing countries is that firms there are less
productive, that is, they produce less per employee.
If wages rise because productivity does so, there is no problem,
and consumers have no reason to seek out whatever has been
produced by the cheapest labor. In 30 years, Japanese wages rose
from one-tenth of the American level to a level higher than
203
America’s. But that did not make Japanese workers less competitive,
because their productivity rose at the same rate. Firms are
not primarily looking for cheap labor either. If they were, the
world’s aggregate production would be concentrated in Nigeria.
Firms are more interested in getting as much as possible out of
the capital they have committed. Wages in poor countries are
low because, relatively speaking, manpower there provides less of
a return to businesses—a result of workers there being less skilled
and having access to less efficient machinery. As investments,
educational standards, and prosperity rise in the developing countries,
wages also go up. This means that we can expect to see
progress in the developing countries rather than deterioration in
the industrialized world. Indeed, that is exactly what the facts
demonstrate. In 1960, the average Third World worker had about
10 percent of an American industrial worker’s wage. Today this
has risen to 30 percent, in spite of the American wage level also
having risen. If competition had kept wages down in affluent
countries, the proportion of national income going to wages ought
to diminish, but it is not doing so.7
The populist presidential candidate Ross Perot argued skillfully
against the NAFTA agreement with Mexico and Canada. If it
came into force, ran one of his more memorable pieces of rhetoric,
the people would hear a ‘‘giant sucking sound’’ as all U.S. jobs
were vacuumed up by Mexico. In fact, since this particular free
trade agreement came into force in 1995, employment in the
United States has risen by 10 million jobs. The U.S. labor force
is the world’s best paid. If U.S. firms were solely intent on paying
low wages, they would leave en masse for various African countries.
And yet 80 percent of American investments go to high-wage
countries like the United Kingdom, Canada, the Netherlands,
and Germany, all of which have equivalent or higher social standards
and regulatory levels. What firms are mainly looking for,
204
Third World wages are rising
0
5
10
15
20
25
30
1960 1975 1992
Average wage of a worker in the developing countries,
as a percentage of American factory worker wages
Years
Source: Gary Burtless, Robert Lawrence, and Robert Shapiro, Globaphobia: Confronting Fears
about Open Trade (Washington: Brookings Institution, 1998).
then, is social and political stability, the rule of law, secure property
rights, free markets, good infrastructure, and skilled manpower.
When countries compete to offer those things, there is a race to
the top, rather than to the bottom.
It is commonly supposed that we in the United States and
Western Europe are having to work harder and harder and put
in progressively longer hours to cope with competition from the
Third World and from increasingly efficient machinery. Some
people do indeed work more than is healthy, and there is a
widespread feeling of higher demands and faster tempo at work.
205
But this does not stem from Third World competition. Historically,
it has always been the case that the poor worked far longer
hours than the affluent. Yet researchers for the Bureau of Labor
Statistics found that now people in higher income brackets are
actually working several hours longer on average than low-income
workers in the United States.8
The time we all spend working has diminished with rising
prosperity, for the simple reason that growth enables us to do
less work for the same pay—if we want to. Compared with our
parents’ generation, most of today’s workers go to work later, go
home earlier, have longer lunch and coffee breaks, longer vacations,
and more public holidays. In the United States, working
hours today are only about half of what they were a hundred
years ago, having diminished by about 10 percent since as recently
as 1973—a reduction equaling 23 days per year. On average,
American workers have acquired five extra years of waking leisure
time since 1973. This is also because we have begun working
progressively later in life, are retiring earlier, and are living longer.
A Western worker in 1870 had only two hours off for each hour
worked, spread out over a lifetime. By 1950 that figure had
doubled to four hours off, doubling again to the present figure
of about eight hours off for each hour worked. Economic development,
thanks partly to trade enabling us to specialize, makes it
possible for us to reduce our working hours considerably and also
to raise our material living standard. We have never needed less
time to earn our living.
Even so, it is natural for us in the affluent Western world today
to talk a lot about stress. This is partly caused by something
basically positive, the fantastic growth of options available to us.
Pre-industrial citizens, spending all their lives in one place and
perhaps meeting a hundred people in a lifetime, were unlikely to
feel that they did not have time for everything they wanted to
206
Americans are working less and less in the course of a lifetime
0
100,000
200,000
300,000
400,000
500,000
600,000
Leisure hours
Working hours
1870 1950 1973 1990 1996
Number of hours Americans devote to work
and leisure in an average lifetime
Years
Source: Michael W. Cox and Richard Alm, Myths of Rich and Poor: Why We’re Better Off
Than We Think (New York: Basic Books, 1999), chap 3.
do. People spent a lot of their nonworking time sleeping. Today,
we can travel the world, read newspapers, see films from every
corner of the globe, and meet a hundred people every day. We
used to go to the mailbox and wait for the postman. Now the
mail is in our inbox, waiting for us. We have a huge entertainment
industry that offers an almost infinite number of ways to pass
the time if we get bored. No wonder that the result is a certain
frustration over not finding time for everything. Compared with
the problems people have had in all ages, and most people in
developing countries still have today, this kind of worry should
be recognized for what it is—a luxury.
207
Working hours are diminishing
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1870 1890 1913 1929 1938 1950 1960 1973 1990 1996
Actual number of hours worked
per American per annum
Years
Source: Michael W. Cox and Richard Alm, Myths of Rich and Poor: Why We’re Better Off
Than We Think (New York: Basic Books, 1999), chap 3.
Stress and burnout at work are real problems, but in many ways
those are new words for old phenomena. At the same rate as more
and more people are experiencing burnout, fewer seem to be
getting diagnosed with neck disorders and mental problems. This
matter also has to be viewed in perspective. Every age and place
tends to think that its own particular problems are worst. Often
this is due to ignorance or to a tendency to romanticize the past.
It can be a problem, being so ardent about one’s work as to
overdo things, but isn’t it no less of a problem that so many
people are bored to death by their work? We must not forget
that the big problem still is that so many people have jobs that
offer them neither challenges nor development.
The essential point when discussing burnout and capitalism
concerns the possibility of getting a hold on one’s situation—
and which system gives one the best opportunity of doing so.
208
There are problems with employees who work too hard and
employers who demand too much or are too vague about what
they expect from workers. But capitalism enables people to give
priority to what they consider important. They can choose to
take things easier if they feel that they are working too much;
they can pressure their employers for better conditions through
such means as unions, and the employer can review the work
situation. Each individual can opt out of certain things so as not
to feel permanently at the beck and call of others. You don’t have
to check your e-mail over the weekend, and there is no law against
turning on the answering machine.
209
Big is beautiful
In the anti-globalists’ worldview, multinational corporations
are leading the race to the bottom. By moving to developing
countries and taking advantage of poor people and lax regulations,
they are making money hand over fist and forcing other governments
to adopt ever less restrictive policies. On this view, tariffs
and barriers to foreign investment become a kind of national
defense, a protection against a ruthless entrepreneurial power
seeking to profiteer at people’s expense. The alternative is an
empire of enormous multinationals ruling the world, regardless
of what people think or want. The fact that 51 out of the world’s
100 biggest economies are corporations is repeated like an ominous
mantra. The problem, though, is not that corporations are
growing, but that more national economies are not doing the
same. Big corporations are no problem—they can achieve important
economies of scale—as long as they are exposed to the threat
of competition should they turn out products inferior to or more
expensive than those of other firms. What we have to fear is not
size but monopoly.
Free trade is often said to give businesses more power. But
enterprises in a liberal society have no coercive power. State power
is based on the right of coercion, backed up as a last resort by
the police. The only ‘‘power’’ corporations have to get people to
work for them or to pay for their products is based solely on
offering something that people want—jobs or products. Even if
you have to accept a job from someone or other to survive, no
210
employer has coerced you or made your situation worse. On the
contrary, the employer has given you a better alternative to a bad
situation. Corporations can, of course, do a great deal of harm—
for example, by moving out of a small community—but only
because they had previously offered some benefit that they later
retract. Offices and factories, however, might not have opened
up in the first place if companies knew that they would be required
to keep them running whether or not they were profitable.
What has happened in the age of globalization is not that
corporations have acquired more power through free trade. They
used to be far more powerful—and still are—in dictatorships and
controlled economies. Large, powerful corporations have always
been able to corrupt public institutions by colluding with rulers
and hobnobbing with them on luncheons and dinners. They have
been able to obtain protection through monopolies, tariffs, and
subsidies just by placing a phone call to political leaders. Free
trade has exposed corporations to competition. Above all, consumers
have been made freer, so that now they can ruthlessly pick
and choose even across national borders, rejecting those firms
that don’t measure up.
Historical horror stories of companies governing a society de
facto have always come from regions where there has been no
competition. People living in isolation in a small village or a
closed country are dependent on the enterprises existing there,
and are forced to buy what they offer at the price they demand,
enriching a tiny clique at consumers’ expense. Sometimes capitalism
is accused of having created monopolies and trusts, enormous
associations of businesses that flourish, not by being best, but by
being biggest and squelching competition. But this is not brought
about by capitalism. On the contrary, free trade and competition
are the best guarantees of a competitor penetrating the market if
211
the dominant firm misbehaves. It says much that the first monopolies
appeared, not in 19th century Britain, whose policy was almost
one of laissez faire, but in the United States and Germany, which
became industrialized later and protected their markets with tariffs.
Sugar monopolies in European countries live on today because
of the EU’s sugar tariffs, as a result of which a lump of sugar
costs two or three times as much in the EU as in the rest of
the world.
Capitalists are seldom great adherents of capitalism: often, they
have the biggest interest of all in legally protected monopolies
and exclusive privileges. Introducing a market economy and free
trade is one way of taking these things away from them, of forcing
them to offer the best possible goods and services in return for
a share of our resources. Free trade gives enterprises the freedom
to offer more consumers what they want, but it does not confer
privilege of coercive power on anyone. The freedom of a business
in a free market economy is like a waiter’s freedom to offer the
menu to a restaurant patron. And it entitles other waiters—foreign
ones, even!—to come running up with rival menus. The loser in
this process, if anyone, is the waiter who once had a monopoly.
The things that many critics of the market call for—firms that
are less intent on profit, markets that are less free, restructuring
that is less hectic, and so on—could be seen in post-communist
Russia, where government-owned enterprises were in practice
given away, instead of being privatized through an open auction.
In many cases, that giveaway resulted in the management and
employees taking over the old firm free of charge, without having
to raise money for the venture through a modernization of production
to yield future profits. Because that would require major
structural changes and heavy job losses, which would be troublesome
for everyone working there, the whole modernization of
212
the private sector is being stalled, and growth is not accelerating.
Instead, many of the owners are simply helping themselves to
corporate resources. Many of these firms were snapped up by
people with strong political contacts. They have been more concerned
with expanding their own spheres of influence and plundering
the businesses than with developing them for future profit,
as people investing their own money in a project would have an
interest in doing. In addition, it is more difficult for outsiders to
compete with these old firms, because Russian business is subject
to a battery of tariffs, licensing requirements, arbitrary regulations,
feeble legal safeguards, and rampant corruption. After initial liberalization
measures in 1992, the Russian process moved in the
opposite direction. Paradoxically, lack of freedom for Russian
business as a whole leads to enormous freedom for a handful of
big businesses with political protection.9
Nothing forces people to accept new products. If they gain
market share, it is because people want them. Even the biggest
companies survive at the whim of customers and would have to
close down tomorrow if they ceased thinking about those customers.
Mega-corporation Coca-Cola has to adapt the recipe for its
drinks to different regions in deference to varying local tastes.
McDonald’s sells mutton burgers in India, teriyaki burgers in
Japan, and salmon burgers in Norway. TV mogul Rupert Murdoch
has failed to create a pan-Asian channel and, instead, is
having to build different channels to suit the local audiences.
Companies in free competition can grow large and increase
their sales only by being better than others, and they can operate in
international markets only by maintaining superior productivity.
Companies that fail to do so quickly go bust or get taken over
by others who can make better use of their capital, buildings,
machinery, and employees. Capitalism is very tough—on firms
213
offering old-fashioned, poor-quality, or expensive goods and services.
Fear of old companies growing progressively larger and
eventually becoming independent of the markets has absolutely no
foundation in reality. Experience from one of the most capitalistic
countries in the world, the United States, indicates exactly the
opposite. Ever since the 1930s, critics of the market have been
warning of the risk of domination by big corporations. Meanwhile,
the market share of the 25 biggest corporations has steadily dwindled.
The critic of globalization asks why corporations grow even
larger than nation states, backing up the question with one of
the most widespread figures in the whole globalization debate: of
the world’s 100 largest economies, 51 are business corporations.
This objection loses much of its credibility once we realize that
the impressive figure of 51 out of a hundred is incorrect. It
is based on a comparison of corporate sales with the aggregate
production, or GDP, of nation states—but these are not comparable
entities. GDP counts only the value a given nation has added
to a product, whereas sales figures include the entire value of the
product, from whatever source. A firm selling a house did not
create the whole thing from scratch. To achieve the end product,
it has outsourced any number of services and purchased components
and materials. To estimate the firm’s sales without deducting
purchases and expenditures inevitably overestimates their size. If,
instead, we try to calculate the value that the firm adds to the
goods, we arrive at something like 25–35 percent of sales, and it
suddenly becomes clear that only 37 of the world’s 100 largest
economies are business corporations. Those mostly come at the
bottom of the list: of the 50 largest economies, only 2 are corporations.
The impression that corporations in general are larger than
countries fades when we discover that a small country like Sweden
214
is more than twice as large as the world’s biggest corporation,
Wal-Mart. France is more than 15 times bigger, the United States
more than a hundred times. Practically all industrialized countries
are bigger than all corporations. The 50 largest corporations in
the world have a GDP equaling only 4.5 percent of that of the
50 biggest countries.10
It is true that corporations generally have grown in absolute
size over the past two decades, but so too has the world economy—
in fact, slightly faster. So these figures do not in any way show
corporations to have grown bigger and more powerful than governments.
In fact, corporations have grown smaller as compared
with, for example, the countries in North America and East
Asia, the very regions that have opened up markets and admitted
business competition. By doing so, they have grown faster than
the corporations themselves. Meanwhile countries that have had
closed markets and have not received investment—most African
countries, for example—have diminished relative to corporations.
Trade and investment, then, do not make corporations bigger
and more powerful than governments, but the absence of such
globalization appears to do just that.
Freer, more efficient financial markets, which allow capital
to spread to new entrepreneurs with fresh ideas, have made it
progressively easier for small firms to compete with the big corporations.
And things have been made easier still by advances in
information technology. Between 1980 and 1993, the 500 biggest
American firms saw their share of the country’s total employment
diminish from 16 to 11.3 percent. Even if we use the problematic
measure of globalization’s critics to determine the relative size of
the 500 biggest firms—sales in relation to aggregate GDP—the
myth is refuted, because that figure fell dramatically, from 59.3
to 36.1 percent. That’s a drop of almost half in just 13 years.
215
During the same period, the average personnel strength of American
firms fell from 16.5 to 14.8 persons, and the proportion of
the population working in firms with more than 250 employees
fell from 37 to 29 percent.11
By most standards, then, the dominance of the largest corporations
diminishes in a free market, in favor of a host of more
flexible undertakings. Half the firms operating internationally in
the world today have fewer than 250 employees. Many of the
biggest are being knocked out by competitors. Of the companies
on the 1980 list of the 500 biggest enterprises in the United
States, one-third had disappeared by 1990 and another 40 percent
had gone five years later. In certain capital-intensive industries,
such as pharmaceuticals, motor manufacturing, and aerospace,
size matters more, owing to the cost of developing new products.
But big mergers among those companies are a sign, not of their
power over consumers, but of their inability to survive otherwise.
True, the biggest brand logos are always being flashed before our
eyes, but we forget that they are constantly being joined by new
ones and are losing old rivals. How many people recall that Nokia,
just a few years ago, was a small Finnish firm manufacturing
motor tires and boots?
Companies starting up in foreign countries would not have a
market if no one wanted to do business with them, and they
would not get any workers if they failed to offer good terms.
When a company is more productive than others, it produces
cheaper goods. Because, consequently, its workers are worth more
to it, the company can afford to pay them more and have better
working conditions than other firms do. This becomes extraordinarily
clear if we compare the conditions of people employed in
American-owned factories and offices in developing countries with
those of people employed elsewhere in the same country. Critics
216
Big corporations are becoming less dominant
65
60
55
50
45
40
35
30
1980 1982 1984 1986 1988 1990 1992
Percentage of American GDP accounted for
by the 500 largest corporations
Source: Sebastian Edwards, Openness, Productivity and Growth. NBER Working Paper 5978
(Cambridge, Mass.: National Bureau of Economic Research, 1997).
observe, quite rightly, that employees in developing countries
have far worse conditions than we have in the affluent world, but
that is an unfair comparison, because workers in the developed
world have far higher productivity. The interesting comparison,
the one that decides whether foreign firms in a developing country
are a good thing, is how well off those employees are compared
with other workers in the same country. In the poorest developing
countries, the average employee of an American-affiliated company
makes eight times the average national wage! In middle
income countries, American employers pay three times the
national average. Even compared with corresponding modern jobs
in the same country, the multinationals pay about 30 percent
217
higher wages. Foreign firms in the least developed countries pay
their employees, on average, twice as much as the corresponding
native firms. Marxists maintain that the multinationals exploit
poor workers. But if ‘‘exploitation’’ means many times greater
wages, then is that such a bad alternative?
The same marked difference can be seen in working conditions.
The International Labor Organization (ILO) has shown that the
multinationals, especially in the footwear and garment industries,
are leading the trend toward better workplace and working conditions.
Because of the low standards of suppliers’ factories in the
Third World, Nike has long been vilified by anti-globalists. But
the truth is that Nike is one of the companies offering employees
the best of conditions, not out of generosity, but with an eye to
profit. These companies can pay more because their productivity
is higher, and they are more responsive to popular opinion. Nike,
consequently, has demanded a higher standard of its suppliers,
and native firms have to follow suit.
Zhou Litai, one of China’s foremost labor attorneys, has
pointed out that it is Western consumers who are the principal
driving force behind the improvement of working conditions,
because they are making Nike, Reebok, and others raise standards:
‘‘If Nike and Reebok go,’’ Zhou points out, ‘‘this pressure evaporates.
This is obvious.’’12
When multinational corporations accustom workers to better
wages and better-lit, cleaner factories without dangerous machinery,
they raise the general standard. Native firms then also have
to offer better conditions, otherwise no one will work for them.
This trend is easiest to quantify in terms of Third World wages,
which, as we have already seen, have risen from 10 percent to 30
percent of American wages over the past 40 years.
Nike has seen to it that its subcontractors also open up their
factories to impartial inspection. Systematic interviews of anonymous
employees by the Global Alliance for Workers and Commu-
218
nities show, of course, that there are complaints, but above all
that employees are glad to have gotten jobs in the first place, and
they consider them to be good jobs. At Indonesian factories, 70
percent of employees had traveled long distances to get their jobs.
Three-quarters were satisfied with relations with their superiors
and felt that they were free to put forward ideas and suggestions.
The latter group roughly equals the proportion of Swedish
national government employees who feel free to communicate
viewpoints to their employer, which puts the answers into perspective,
even though the situations, of course, are not comparable.
At Vietnamese factories, 85 percent wanted to go on working for
at least another three years, and the same number felt secure with
their working conditions and the machinery. At the Thai factories
only 3 percent felt that they were on poor terms with their
superiors, and 72 percent considered themselves well paid. The
provision by companies of free medicines, health care, clothing,
food, and transport for their workers was particularly appreciated.
One of the few Western participants in the globalization debate
to have actually visited Nike’s Asian subcontractors to find out
about conditions there is Linda Lim of the University of Michigan.
She found that in Vietnam, where the annual minimum wage
was $134, Nike workers were getting $670. In Indonesia, where
the minimum wage was $241, Nike’s suppliers were paying
$720.13 Once again, it is vital to remember that these conditions
should not be compared with those found in the affluent countries,
but with the alternatives open to these people. If Nike were to
withdraw, on account of boycotts and tariff walls from the Western
world, the suppliers would have to shut down, and the employees
would be put out of work or would move to more dangerous
jobs with lower, less steady wages in native industry or agriculture.
Many developing countries have what are called economic ‘‘free
zones,’’ also known as export-processing zones, mainly for export
219
industries. There, firms are allowed to start up with especially
advantageous tax conditions and trade regulations. Anti-globalists
characterize the free zones as havens for slave-driving and inhuman
working conditions. There are indeed abuses and scandals in some
quarters, and resolute action is needed to prohibit them. Mostly,
abuse and scandal happen in poor dictatorships, and so, instead
of freedom having ‘‘gone too far,’’ it has not gained a foothold.
In her book No Logo, which quickly became popular in anticapitalist
circles, Canadian activist Naomi Klein claims that Western
companies have created terrible working conditions in such
zones. But she does not offer any proof. She has only heard a
few rumors of bad conditions in one Philippine export-processing
zone, which she admits having traveled to only because it was
one of the worst. When the OECD tried to obtain an overall
picture of these zones, it found that they had multiplied job
opportunities for the poor, and that wages there were higher than
in the rest of the country. In the great majority of the thousand
or so small zones, the same labor legislation applied as elsewhere
in the country. In addition, more and more free zones are observing
that cheap labor is not the full recipe for successful competition,
and are encouraging firms to invest in and educate their
work forces. In the same study, the OECD pointed out that
there was a positive relation between fundamental rights for the
employees (prohibition of slavery and abuses, freedom to negotiate
and to form trade unions) and more investment and higher
growth.14
Multinationals, by virtue of their size, are able to finance
research and long-term projects. According to the OECD, these
corporations reinvest some 90 percent of their profits in the
country where they operate. Operating as they do in several countries,
they serve as channels for know-how, more-efficient organizational
structures, and new technology. Complaining about the
220
existence of multinationals means complaining about better wages,
lower prices, and greater prosperity. It is such enterprises that are
leading the international race to the top. And it is not only in the
developing countries that multinationals offer better conditions.
Foreign firms in the United States pay about 6 percent higher
wages than native American firms, and they are expanding their
personnel strength twice as fast. Foreign businesses account for
12 percent of R&D investment in the United States and for no
less than 40 percent in the United Kingdom.15
Of course, that is not to say that all firms behave well, any
more than all people do. There are rogues among entrepreneurs,
just as there are in politics. We can find plenty of instances
of companies treating their employees, the population, or the
environment badly. In the raw materials industry especially, there
is a tendency to cozy up to the regime of the country where the
business operates, no matter how dictatorial and oppressive it
may be. Otherwise, the firms might not be allowed to operate
there. But bad behavior by some is no reason for banning large
corporations or preventing them from investing, any more than
we should disband the police because we find instances of police
brutality, or eject all immigrants because some of them are criminals.
Instead, bad behavior is a reason to prosecute firms if they
break the law and to criticize and boycott those firms that conduct
themselves badly.
The big problems generally concern states permitting or even
inducing firms to behave irresponsibly. There has to be a strict
distinction between the public and private sectors. Governments
must establish firm regulatory codes, and corporations must produce
and trade in the best possible way within those codes. If
firms comply with bad regulatory codes, then the remedy should
be to reform the codes and criticize the corporation, not to impede
business as such. The solution lies in democratizing governments
221
and creating fair laws establishing that one party’s freedom ends
where the other party’s begins.
The presence of multinational corporations in oppressive governments
can very often be an aid to the pursuit of democracy,
because those corporations are sensitive to pressure from Western
consumers, which has a direct impact on sales. It can be easier
to influence Nigerian politics by boycotting Shell than by trying
to bring pressure to bear on the Nigerian government. This is
hinted at in the subtitle of Naomi Klein’s book No Logo: Taking
Aim at the Brand Bullies. Klein points out that the big corporations
have tried to create a special positive aura for their trademarks
through many decades of advertising and goodwill. But by doing
so they have also shot themselves in the foot. The trademarks,
being their biggest asset, are hugely sensitive to adverse publicity.
It can take a company decades to build up a trademark but only
a few weeks for activists to demolish it. Really, though, Klein
ought to see this as an argument for capitalism, because the
corporate giants can be pressured if they behave badly in any
respect. A street vendor can cheat you because you will never see
him again, but the big trademarks, as a matter of survival, have
to behave respectably. They have to turn out good, safe products
and treat employees, customers, and the environment well so as
not to lose their goodwill. Negative attention spells huge losses.16
The magazine The Economist has also observed that corporate
morality is often superior to that of the average government.
Most companies formulate guidelines and define requirements
for dealing with environmental problems and sexual harassment,
even in countries where such expressions do not exist in the local
vocabulary. Most companies would feel compelled to fire a board
chairman publicly implicated in corruption scandals, as Germany’s
former federal chancellor Helmut Kohl was, or in sexual
harassment and dubious financial dealings, like former president
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Bill Clinton. And yet these were heads of state in two of the most
democratic and stable of Western countries.17
The Bangladeshi garment industry provides a prime example of foreign
enterprises channeling knowledge and new ideas that can revolutionize an
economy. During the 1970s local entrepreneur Noorul Quader established
cooperation with the South Korean company Daewoo. Daewoo sold sewing
machines to Quader and trained his workers. When his firm started up in
Bangladesh, Daewoo assisted him for just over a year longer with marketing
and advice on new methods of production, in return for 8 percent of earnings.
One hundred thirty skilled workers and two engineers from South Korea
inaugurated production in Bangladesh in 1980, and garment exports were
accepted by the authorities as an island of free trade in an otherwise
protectionist economy. Output almost doubled every year, and by 1987 the
company was already selling 2.3 million sweaters, worth $5.3 million. By
then, 114 of the 130 original workers had already started up garment firms
of their own, and all of a sudden, Bangladesh, which until now had not
had a single garment-export enterprise, had 700 of them. Today there
are more than three times that number, making garment manufacturing
Bangladesh’s biggest industry, accounting for some 60 percent of the
country’s exports. The factories have more than 1.2 million employees, about
90 percent of them women, who have moved in from the impoverished
countryside in search of more secure, better-paying jobs. Another five million
are employed in industry as a whole. Although working conditions are bad,
the new jobs have often meant new opportunities of choice and higher
wages, even in the traditional occupations, which are now having to exert
themselves to attract workers.18
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‘‘Gold and green forests’’*
Although multinational corporations and free trade are proving
good for development and human rights in the Third World,
there still remains the objection that globalization harms the
environment. Factories in the Western world, the argument runs,
will relocate to poorer countries with no environmental legislation,
where they can pollute with impunity. The West has to follow
suit and lower its own environmental standards in order to stay
in business. That is a dismal thesis, with the implication that
when people obtain better opportunities, resources, and technology,
they use them to abuse nature. Does there really have to be
a conflict between development and the environment?
The notion that there has to be a conflict runs into the same
problem as the whole idea of a race to the bottom: it doesn’t tally
with reality. There is no exodus of industry to countries with
poor environmental standards, and there is no downward pressure
on the level of global environmental protection. Instead, the bulk
of American and European investments goes to countries with
environmental regulations similar to their own. There has been
much talk of American factories moving to Mexico since NAFTA
was signed. Less well known, however, is that since free trade was
introduced Mexico has tightened up its environmental regulations,
following a long history of complete nonchalance about
* ‘‘Gold and green forests’’ is a Scandinavian figure of speech. It means to promise
that you will produce whatever someone wants, even if it is practically impossible.
224
environmental issues. This tightening up is part of a global trend.
All over the world, economic progress and growth are moving
hand in hand with intensified environmental protection. Four
researchers who studied these connections found ‘‘a very strong,
positive association between our [environmental] indicators and
the level of economic development.’’ A country that is very poor
is too preoccupied with lifting itself out of poverty to bother
Prosperity brings more environmental regulations
2.6
2.4
2.2
2.0
1.8
1.6
1.4
1.2
1.0
2.0 2.5 3.0 3.5 4.0 4.5
Per capita income
Index of air pollution controls
(Correlation between prosperity and environmental regulation in
31 studied countries)
Source: Sumita Dasgputa, Ashoka Mody, Subhendu Roy, and David Wheeler, Enviromental
Regulation and Development: A Cross-Country Empirical Analysis. World Bank Working Paper
(Washington, D.C.: World Bank, March 1995).
225
about the environment at all. Countries usually begin protecting
their natural resources when they can afford to do so. When they
grow richer, they start to regulate effluent emissions, and when
they have still more resources they also begin regulating air
quality.19
A number of factors cause environment protection to increase
with wealth and development. Environmental quality is unlikely
to be a top priority for people who barely know where their next
meal is coming from. Abating misery and subduing the pangs of
hunger takes precedence over conservation. When our standard
of living rises we start attaching importance to the environment
and obtaining resources to improve it. Such was the case earlier
in western Europe, and so it is in the developing countries today.
Progress of this kind, however, requires that people live in democracies
where they are able and allowed to mobilize opinion; otherwise,
their preferences will have no impact. Environmental
destruction is worst in dictatorships. But it is the fact of prosperity
no less than a sense of responsibility that makes environmental
protection easier in a wealthy society. A wealthier country can
afford to tackle environmental problems; it can develop environmentally
friendly technologies—wastewater and exhaust emission
control, for example—and begin to rectify past mistakes.
Global environmental development resembles not so much a
race for the bottom as a race to the top, what we might call a
‘‘California effect.’’ The state of California’s Clean Air Acts, first
introduced in the 1970s and tightened since, were stringent emissions
regulations that made rigorous demands on car manufacturers.
Many prophets of doom predicted that firms and factories
would move to other states, and California would soon be obliged
to repeal its regulations. But instead the opposite happened: other
states gradually tightened up their environmental stipulations.
226
Because car companies needed the wealthy California market,
manufacturers all over the United States were forced to develop
new techniques for reducing emissions. Having done so, they
could more easily comply with the exacting requirements of other
states, whereupon those states again ratcheted up their requirements.
Anti-globalists usually claim that the profit motive and
free trade together cause businesses to entrap politicians in a race
for the bottom. The California effect implies the opposite: free
trade enables politicians to pull profit-hungry corporations along
with them in a race to the top.
This phenomenon occurs because compliance with environmental
rules accounts for a very small proportion of most companies’
expenditures. What firms are primarily after is a good business
environment—a liberal economy and a skilled workforce—
not a bad natural environment. A review of research in this field
shows that there are no clear indications of national environmental
rules leading to a diminution of exports or to fewer companies
locating in the countries that pass the rules.20 This finding undermines
both the arguments put forward by companies against
environmental regulations and those advanced by environmentalists
maintaining that globalization has to be restrained for environmental
reasons.
Incipient signs of the California effect’s race to the top are
present all over the world, because globalization has caused different
countries to absorb new techniques more rapidly, and the
new techniques are generally far gentler on the environment.
Researchers have investigated steel manufacturing in 50 different
countries and concluded that countries with more open economies
took the lead in introducing cleaner technology. Production in
those countries generated almost 20 percent less emissions than
the same production in closed countries. This process is being
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driven by multinational corporations because they have a lot to
gain from uniform production with uniform technology. Because
they are restructured more rapidly, they have more modern
machinery. And they prefer assimilating the latest, most environmentally
friendly technology immediately to retrofitting it, at
great expense, when environmental regulations are tightened up.
Brazil, Mexico, and China—the three biggest recipients of
foreign investment—have followed a very clear pattern: the more
investments they get, the better control they gain over air pollution.
The worst forms of air pollution have diminished in their
cities during the period of globalization. When Western companies
start up in developing countries, their production is considerably
more environment-friendly than the native production, and
they are more willing to comply with environmental legislation,
not least because they have brand images and reputations to
protect. Only 30 percent of Indonesian companies comply with
the country’s environmental regulations, whereas no fewer than
80 percent of the multinationals do so. One out of every 10
foreign companies maintained a standard clearly superior to that
of the regulations. This development would go faster if economies
were more open and, in particular, if the governments of the world
were to phase out the incomprehensible tariffs on environmentally
friendly technology.21
Sometimes one hears it said that, for environmental reasons,
the poor countries of the South must not be allowed to grow as
affluent as our countries in the North. For example, in a compilation
of essays on Environmentally Significant Consumption published
by the National Academy of Sciences, we find anthropologist
Richard Wilk fretting that:
If everyone develops a desire for the Western high-consumption
lifestyle, the relentless growth in consumption, energy use, waste,
and emissions may be disastrous.22
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But studies show this to be colossal misapprehension. On the
contrary, it is in the developing countries that we find the gravest,
most harmful environmental problems. In our affluent part of
the world, more and more people are mindful of environmental
problems such as endangered green areas. Every day in the developing
countries, more than 6,000 people die from air pollution
when using wood, dung, and agricultural waste in their homes
as heating and cooking fuel. UNDP estimates that no fewer than
2.2 million people die every year from polluted indoor air. This
result is already ‘‘disastrous’’ and far more destructive than atmospheric
pollution and industrial emissions. Tying people down
to that level of development means condemning millions to premature
death every year.
It is not true that pollution in the modern sense increases with
growth. Instead, pollution follows an inverted U-curve. When
growth in a very poor country gathers speed and the chimneys
begin belching smoke, the environment suffers. But when prosperity
has risen high enough, the environmental indicators show an
improvement instead: emissions are reduced, and air and water
show progressively lower concentrations of pollutants. The cities
with the worst problems are not Stockholm, New York, and
Zu¨rich, but rather Beijing, Mexico City, and New Delhi. In
addition to the factors already mentioned, this is also due to
the economic structure changing from raw-material-intensive to
knowledge-intensive production. In a modern economy, heavy,
dirty industry is to a great extent superseded by service enterprises.
Banks, consulting firms, and information technology corporations
do not have the same environmental impact as old factories.
According to one survey of available environmental data, the
turning point generally comes before a country’s per capita GDP
has reached $8,000. At $10,000, the researchers found a positive
229
connection between increased growth and better air and water
quality.23 That is roughly the level of prosperity of Argentina,
South Korea, or Slovenia. In the United States, per capita GDP
is about $36,300. Here as well, the environment has consistently
improved since the 1970s, quite contrary to the picture one gets
from the media. In the 1970s there was constant reference to
smog in American cities, and rightly so: the air was judged to be
unhealthy for 100–300 days a year. Today it is unhealthy for
fewer than 10 days a year, with the exception of Los Angeles.
There, the figure is roughly 80 days, but even that represents a
50 percent reduction in 10 years.24 The same trend is noticeable
in the rest of the affluent world—for example, in Tokyo, where,
a few decades ago, doomsayers believed that oxygen masks would
in the future have to be worn all around the city because of the
bad air.
Apart from its other positive effects on the developing countries,
such as ameliorating hunger and sparing people the horror of
watching their children die, prosperity beyond a certain critical
point can improve the environment. What is more, this turning
point is now occurring progressively earlier in the developing
countries, because they can learn from more affluent countries’
mistakes and use their superior technology. For example, air quality
in the enormous cities of China, which are the most heavily
polluted in the world, has steadied since the mid-1980s and in
several cases has slowly improved. This improvement has coincided
with uniquely rapid growth.
Some years ago, the Danish statistician and Greenpeace member
Bjørn Lomborg, with about 10 of his students, compiled
statistics and facts about the world’s environmental problems. To
his astonishment, he found that what he himself had regarded as
self-evident, the steady deterioration of the global environment,
230
Prosperity goes easier on the environment
A
B
Environmental damage per unit of GDP
Per capita GDP
A = Cross-sectional data for countries, 1960
B = Cross-sectional data for countries, 2000
$2,000 $4,000 $6,000 $8,000 $10,000
Note: As can be seen, wear and tear on the environment diminishes not only
with increased prosperity but at all income levels over time.
Source: World Bank, World Development Report 1992: Development and the Environment
(Washington: World Bank, 1992).
did not agree at all with official empirical data. He found instead
that air pollution is diminishing, refuse problems are diminishing,
resources are not running out, more people are eating their fill,
and people are living longer. Lomborg gathered publicly available
data from as many fields as he could find and published them in
the book The Skeptical Environmentalist: Measuring the Real State
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of the World. The picture that emerges there is an important
corrective to the general prophesies of doom that can so easily
be imbibed from newspaper headlines.
Lomborg shows that air pollution and emissions have been
declining in the developed world during recent decades. Heavy
metal emissions have been heavily reduced; nitrogen oxides have
diminished by almost 30 percent and sulfur emissions by about
80 percent. Pollution and emission problems are still growing in
the poor developing countries, but at every level of growth annual
particle density has diminished by 2 percent in only 14 years. In
the developed world, phosphorus emissions into the seas have
declined drastically, and E. coli bacteria concentrations in coastal
waters have plummeted, enabling closed swimming areas to
reopen.
Lomborg shows that, instead of large-scale deforestation, the
world’s forest acreage increased from 40.24 million to 43.04
million square kilometers between 1950 and 1994. He finds that
there has never been any large-scale tree death caused by acid
rain. The oft-quoted, but erroneous statement about 40,000 species
going extinct every year is traced by Lomborg to its source—a
20-year-old estimate that has been circulating in environmentalist
circles ever since. Lomborg thinks it is closer to 1,500 species a
year, and possibly a bit more than that. The documented cases
of extinction during the past 400 years total just over a thousand
species, of which about 95 percent are insects, bacteria, and viruses.
As for the problem of garbage, the next hundred years worth of
Danish refuse could be accommodated in a 33-meter-deep pit
with an area of three square kilometers, even without recycling.
In addition, Lomborg illustrates how increased prosperity and
improved technology can solve the problems that lie ahead of us.
All the fresh water consumed in the world today could be produced
232
by a single desalination plant, powered by solar cells and occupying
0.4 percent of the Sahara Desert.
It is a mistake, then, to believe that growth automatically ruins
the environment. And claims that we would need this or that
number of planets for the whole world to attain a Western standard
of consumption—those ‘‘ecological footprint’’ calculations—
are equally untruthful. Such a claim is usually made by
environmentalists, and it is concerned, not so much with emissions
and pollution, as with resources running out if everyone were to
live as we do in the affluent world.
Clearly, certain of the raw materials we use today, in presentday
quantities, would not suffice for the whole world if everyone
consumed the same things. But that information is just about as
interesting as if a prosperous Stone Age man were to say that, if
everyone attained his level of consumption, there would not be
enough stone, salt, and furs to go around. Raw material consumption
is not static. With more and more people achieving a high
level of prosperity, we start looking for ways of using other raw
materials. Humanity is constantly improving technology so as to
get at raw materials that were previously inaccessible, and we
are attaining a level of prosperity that makes this possible. New
innovations make it possible for old raw materials to be put to
better use and for garbage to be turned into new raw materials.
A century and a half ago, oil was just something black and sticky
that people preferred not to step in and definitely did not want
to find beneath their land. But our interest in finding better
energy sources led to methods being devised for using oil, and
today it is one of our prime resources. Sand has never been all
that exciting or precious, but today it is a vital raw material in
the most powerful technology of our age, the computer. In the
form of silicon—which makes up a quarter of the earth’s crust—
it is a key component in computer chips.
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There is a simple market mechanism that averts shortages. If
a certain raw material comes to be in short supply, its price goes
up. This makes everyone more interested in economizing on that
resource, in finding more of it, in reusing it, and in trying to
find substitutes for it. The trend over the last few decades of
falling raw material prices is clear. Metals have never been as
cheap as they are today. Prices are falling, which suggests that
demand does not exceed supply. In relation to wages, that is, in
terms of how long we must work to earn the price of a raw
material, natural resources today are half as expensive as they were
50 years ago and one-fifth as expensive as they were a hundred
years ago. In 1900 the price of electricity was eight times higher,
the price of coal seven times higher, and the price of oil five times
higher than today.25 The risk of shortage is declining all the time,
because new finds and more efficient use keep augmenting the
available reserves.
In a world where technology never stops developing, static
calculations are uninteresting, and wrong. By simple mathematics,
Lomborg establishes that if we have a raw material with a hundred
years’ use remaining, a 1 percent annual increase in demand, and
a 2 percent increase in recycling and/or efficiency, that resource
will never be exhausted.
If shortages do occur, then with the right technology most
substances can be recycled. One-third of the world’s steel production,
for example, is being reused already. Technological advance
can outstrip the depletion of resources. Not many years ago,
everyone was convinced of the impossibility of the whole Chinese
population having telephones, because that would require several
hundred million telephone operators. But the supply of manpower
did not run out; technology developed instead. Then it was
declared that nationwide telephony for China was physically
234
impossible because all the world’s copper wouldn’t suffice for
installing heavy gauge telephone lines all over the country. Before
that had time to become a problem, fiber optics and satellites
began to supersede copper wire. The price of copper, a commodity
that people believed would run out, has fallen continuously and
is now only about a tenth of what it was 200 years ago.
People in most ages have worried about important raw materials
becoming exhausted. But on the few occasions when this has
happened, it has generally affected isolated, poor places, not open,
affluent ones. To claim that people in Africa, who are dying by
the thousand every day from supremely real shortages, must not
be allowed to become as prosperous as we in the West because
we can find theoretical risks of shortages occurring is both stupid
and unjust.
The environmental question will not resolve itself. Proper rules
are needed for the protection of water, soil, and air from destruction.
Systems of emissions fees are needed to give polluters an
interest in not damaging the environment for others. Many environmental
issues also require international regulations and agreements,
which confront us with entirely new challenges. Carbon
dioxide emissions, for example, tend to increase rather than diminish
when a country grows more affluent. When talking about the
market and the environment, it is important to realize that efforts
in this quarter will be facilitated by a freer, growing economy
capable of using the best solutions, from both a natural and a
human viewpoint. In order to meet those challenges, it is better
to have resources and advanced science than not to have them.
Very often, environmental improvements are due to the very
capitalism so often blamed for the problems. The introduction
of private property creates owners with long-term interests. Landowners
must see to it that there is good soil or forest there
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tomorrow as well, because otherwise they will have no income
later on, whether they continue using the land or intend to sell
it. If the property is collective or government-owned, no one has
any such long-term interest. On the contrary, everyone then has
an interest in using up the resources quickly before someone else
does. It was because they were common lands that the rain forests
of the Amazon began to be rapidly exploited in the 1960s and
1970s and are still being rapidly exploited today. Only about a
10th of forests are recognized by the governments as privately
owned, even though in practice Indians possess and inhabit large
parts of them. It is the absence of definite fishing rights that
causes (heavily subsidized) fishing fleets to try to vacuum the
oceans of fish before someone else does. No wonder, then, that
the most large-scale destruction of environment in history has
occurred in the communist dictatorships, where all ownership
was collective.
A few years ago, a satellite image was taken of the borders of
the Sahara, where the desert was spreading. Everywhere, the land
was parched yellow, after nomads had overexploited the common
lands and then moved on. But in the midst of this desert environment
could be seen a small patch of green. This proved to be an
area of privately owned land where the owners of the farm prevented
overexploitation and engaged in cattle farming that was
profitable in the long term.26
Trade and freight are sometimes criticized for destroying the
environment, but the problem can be rectified with more efficient
transport and purification techniques, as well as emissions fees to
make the cost of pollution visible through pricing. The biggest
environmental problems are associated with production and consumption,
and there trade can make a positive contribution, even
aside from the general effect it has on growth. Trade leads to a
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country’s resources being used as efficiently as possible. Goods
are produced in the places where production entails least expense
and least wear and tear on the environment. That is why the
amount of raw materials needed to make a given product keeps
diminishing as productive efficiency improves. With modern production
processes, 97 percent less metal is needed for a soft
drink can than 30 years ago, partly because of the use of lighter
aluminum. A car today contains only half as much metal as a car
of 30 years ago. Therefore, it is better for production to take
place where the technology exists, instead of each country trying
to have production of its own, with all the consumption of
resources that would entail. It is more environmentally friendly
for a cold northern country to import meat from temperate countries
than to waste resources on concentrated feed and the construction
and heating of cattle pens for the purpose of native
meat production.
If governments really believed in the market economy, they
would stop subsidizing energy, industry, road construction, fisheries,
agriculture, devastation of forests, and many other things.
Those subsidies have the effect of keeping alive activities that
otherwise would not exist, or else would have been performed by
better methods or in other places. The Worldwatch Institute
maintains that taxpayers the world over are forced to pay about
$650 billion every year toward environmentally destructive activities.
Cessation of those subsidies, the institute claims, would allow
a global tax reduction of 8 percent. In the United States alone that
would mean every family paying $2,000 less in taxes each year.27
The example of EU meat production shows that not only the
environment but animals as well are made to suffer by unproductive
industries. Subsidies for inefficient livestock management in
the EU have meant cruel conditions for animals with severely
237
cramped transport conditions and, at times, the feeding of carcass
meal to livestock. A better idea would be to abolish agricultural
tariffs and import meat from South America, where the animals
can roam great tracts of land, grazing freely, until they have to
be rounded up. But that solution is prevented today by skyhigh
tariffs. During the mad cow disease crisis, for example,
McDonald’s wanted to avoid the hazards of using EU meat for
its hamburgers in some of its European franchises, but was not
permitted to import from South America. The forequarter meat
from which the hamburger is ground is excluded by tariffs of
several hundred percent.
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VI
Irrational, international capital?
The leaderless collective
Opponents of capitalism argue that the market machinery may,
after prolonged effort, elevate a country to the heights of prosperity,
only to see everything blown to pieces a month later. They
paint a picture of irrational speculators investing wildly and then
making off with their capital when the herd changes direction.
Nearly $1.5 trillion cross national boundaries every day, they
complain, as if this fact were a problem in itself. Globalization
critic Bjo¨rn Elmbrant describes the financial market as ‘‘a leaderless
collective staggering about and tripping over its own feet.’’1
Anxiety about financial markets is easily created. They seem
abstract because so few people have any direct contact with them.
We only feel their effects, and so it is easy to make a mystery of
them. The force involved prompted President Clinton’s campaign
manager, James Carville, to say: ‘‘[In the next life] I would like
to come back as the bond market. You can intimidate everybody.’’
People who are hostile to markets love pointing to patterns of
stock market behavior that seem odd if one cannot understand
the reasons for them. In this way suspicion is cast on the market.
A firm’s shareholders, for example, are pleased when the firm
axes jobs. But this does not mean that they love the sight of
unemployment. What appeals to them is the greater productivity
and reduced expenditure that can result.
But the American stock market generally takes an upward turn
when unemployment does so. Is not this reaction a sign of rejoicing
in the misfortune of others? No, it is a sign of investors
240
knowing that the Federal Reserve takes rising unemployment as
a sign of a downturn and a reduced risk of inflation and that,
therefore, the Federal Reserve is likely to lower the interest rate.
What the stock market loves is not unemployment but the economic
lubricant of lower interest rates. This phenomenon is no
stranger than that of the stock market sometimes leaping upward
when the trade cycle indicators point downward and growth
decelerates. ‘‘Great,’’ investors say to themselves, ‘‘that must mean
another interest rate cut on the way at last.’’
But stock market fluctuations are increasing; no one can deny
that. Do these fluctuations at least mean that investors have
become less long term in their thinking and are just following
the crowd? There may be a grain of truth in this. Of course, the
market is not perfectly rational in every situation, whatever that
would mean. The roller-coaster movement in recent years, especially
of dot-com share prices, shows exaggerated hopes and mistaken
pricing to be a natural part of a market that is about the
future. But it also shows that the exaggerations will not survive
indefinitely. Exaggerated hopes cannot make up for lack of real
substance in an enterprise.
Part of the reason for the fluctuations is not short-term thinking,
but rather the stock market’s having become even more
focused on the long term. With the old type of industrial enterprise,
future performance can be easily judged from historical data
concerning investments and sales. So the market’s valuation of
the enterprise was fairly stable. But in new, more research-intensive
sectors with less certain sales prospects, long-term sales can be
harder to predict. It is less easy now to tell whether the firm is
going to boom or bust. How are we to know that firms developing
new mobile phones today will also be front-runners in 10 years’
time? When we do not know, every little indication regarding a
241
company’s future prospects gives rise to rapid changes. The same
applies to the entire stock market when it is unclear which way
the economy is going to move. Every hint of future upturns or
downturns will be felt swiftly.
Imagine, then, what it is like with companies focusing entirely
on the future—those engaging in pharmaceutical research, for
example. Possibly they will no longer exist in 10 years’ time, but
perhaps they will find that vaccine for HIV, in which case their
shareholders will become millionaires. ‘‘Bubbles’’ can then occur
for perfectly rational reasons. Even if a horse is unlikely to win
the race, given high enough odds there may be cause to put some
money on it. If we look at the market’s behavior as a whole,
though, share price fluctuations do not appear to have increased
where traditional firms are concerned.
Now, many critics of the market say that they have nothing
against national financial markets. ‘‘Hypercapitalism’’ is the problem—
capital without boundaries ravaging all over the world without
even having to present a passport at the border. This, we are
told, is impatient capital that cares more about the next quarter’s
profits than about long-term development and technical renewal.
The defense of the mobility of capital is a question of freedom.
This is not a matter of ‘‘the freedom of capital,’’ as the critics
complain, because capital is not a person capable of being free
or unfree. It is a matter of people’s freedom to decide what to do
with their own resources—the freedom, for example, to invest
their pension savings wherever they believe it is best to do so.
Pension funds are in fact the most important investors in the
international market. More than half of all American households
now own stock shares, either directly or through retirement funds.
They are the market.
There is also a question of businesses being at liberty to seek
financing from other countries. Factories and offices do not build
242
themselves—it takes capital. The notion that speculators throttle
long-term development is contradicted by the facts: development
has proceeded hand in hand with more and more investment in
research and innovation. This growing freedom has been important
for global development in recent years, making it possible
for capital to be invested where it yields the biggest return and,
accordingly, where it is used as efficiently as possible.2
This is easy to understand if we think of narrower boundaries
than national ones. Suppose you have a thousand dollars you
want to lend out, and you can do this only within your own
town. You might have a choice between investing the money
with a used book dealer or with the owner of a small cafe´. Maybe
you believe in the cafe´ owner, and so decide to give the loan to
her. With it, she can buy a new espresso machine and replace a
few old tables, but because demand for mochaccinos in a small
town is still relatively limited, she will make only a small profit
on this investment, so she can pay you only 2 percent interest
on the money. But since the book dealer would pay only 1
percent, the cafe´ owner need have no fear that you’ll take your
money elsewhere.
If instead you have the whole state to choose from, there will
be more people competing for your capital. A factory enabled by
your money to purchase some new machinery could raise its
earnings considerably and is therefore able to pay twice as much
interest as the cafe´ proprietor. You earn more this way, but so
does the whole economy, because the resources are used more
efficiently than they would be by the other alternatives. This is
even more true, of course, if you are allowed to invest your money
nationwide or worldwide. In that case, all potential investments
are compared with each other. Still more firms will then be after
your money, and those capable of using it best are prepared to
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pay most for it. Money, loans, and share capital are generally
invested where they are expected to yield the biggest return. In
this way capital is used efficiently and boosts productivity, which
develops the economy in which it is invested and gives the biggest
return to the investor.
Because each entrepreneur has to compete with everyone else,
it may sound as if the wealthiest firms will attract all the capital,
because they can offer the highest returns. But capital is also
obtainable from all the different countries, and so the supply
increases. And it is not the wealthiest who bid most, but those
who can make most out of the money. Why, after all, would an
established firm pay an especially high rate of interest for money
it doesn’t really need? The biggest profits, as a rule, are not made
in industries where there has already been ample investment, but
in new enterprises that are unable to finance exciting projects.
Capital markets are most important of all to those with good
ideas but no capital. As we saw earlier, free capital markets appear
to augment a society’s economic equality. These markets cause
people and businesses with a lot of capital to profit by placing
the capital in the hands of those who have none but seem capable
of using it more efficiently. And so they enable small firms to set
up in competition with established ones. The more flexible the
market and the fewer the impediments, the more easily capital
flows to those who can make best use of it.
The affluent countries have large quantities of capital, while
the poor countries of the South are short of it. So free movement
of capital means investments moving toward more capital-starved
countries with better investment opportunities. The developing
countries receive more than a quarter of the world’s combined
investments in businesses, projects, and land. Thus, there is an
enormous private transfer of capital from industrialized to developing
countries. The flow of direct investments to the developing
244
countries is now running at about $200 billion, on net, each year.
This amount is more than 4 times the figure a decade ago and
15 times the figure 20 years ago, thanks to freer capital markets
and improved information technology. This development is something
fantastic for countries that have always been held back by
shortage of capital. As mentioned earlier, in 10 years the poor
countries of the world have obtained a trillion dollars in foreign
direct investments—slightly more than all the development assistance
they have received, worldwide, in the past 50 years. So the
leaderless collective, allegedly staggering about and tripping over
its own feet, has been more than five times cleverer than the
governments and development aid establishments of the affluent
countries at channeling capital to the developing countries.
Progressively larger share of investments goes to the developing
countries
0
5
10
15
20
25
30
35
40
1970 1977 1981 1985 1991 1995 1997
Percentage of total foreign direct investments
going to developing countries
Years
Source: Ajit K. Ghose, Trade Liberalization and Manufacturing Employment. Employment
Paper 2000/3 (Geneva: International Labour Office, 2000).
245
The developing countries get increasingly more capital
–25
–5
15
35
55
75
95
115
135
155
175
1973–78 1979–82 1983–88 1989–92 1993–96
Annual net inflow of foreign direct investments
to developing countries, US billion
Years (spans)
Source: Barry Eichengreen, Michael Mussa, et al., Capital Account Liberalization: Theoretical
and Practical Aspects (Washington: IMF, 1998).
As critics of globalization point out, only about 5 percent of all
economic transfers comprise real trade in goods and services. The
remaining financial trade is concerned with ‘‘making money out
of money,’’ which some of the critics seem to think adds nothing
of value to the economy. But there is nothing so productive
as financing improvements in production. Doing so provides
resources for production and spurs technical progress.
An international financial market enlarges the volume of investments.
When there are large and efficient financial markets with
the ability to buy and sell risks through derivatives, it becomes
possible to finance bigger projects and take bigger risks than were
previously viable. This is what accounts for the bulk of the turnover
in the financial market. With billions of dollars circling the
globe every day, a very small portion of the money actually changes
246
hands: most of the transactions are due to firms and investors
reallocating their investments, so as to guard against risks. It is
only since this reallocation became possible that the developing
countries have gained proper access to international flows of capital.
Through access to international finance we can spread our
risks, simply by investing in different places. If one country’s
economy did badly, then in the past this would have meant that
not enough money was available for things like old age pensions.
If the same thing happened today, there would be enough money
to go around as long as the country’s people had been allowed
to spread their savings between different countries. Sweden’s new
pension system has enabled me personally—and before this I had
neither stock shares nor trust funds—to invest part of my future
pension in new markets in Latin America and Asia, instead of
tying the money up in Sweden. The financial markets also make
it possible for households, businesses, and even governments to
borrow when their incomes are low and to repay when their
incomes are higher. This becomes a way of alleviating downturns
without being forced to cut down on one’s consumption as drastically
as would otherwise be necessary.
In its Capital Access Index, the Milken Institute has shown
that economies develop best when capital is readily available and
cheap and is distributed openly and honestly. They manage least
well when capital is in short supply, expensive, and arbitrarily
distributed. Broad, free financial markets with many players create
development, while a system of ‘‘state-directed capital flows concentrated
in a small number of financial institutions and corporations
hampers growth.’’ Studies have generally shown that the
functional development of financial markets in a certain country
provides a good indication of that country’s growth for coming
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years. There are studies showing no connection between freedom
from capital regulations and growth, but in those studies no
attempt has been made to measure the intensity of the regulations
in different countries. One survey tried to take account of that
intensity, looking at 64 industrialized and developing countries
and eliminating (to the extent possible) the effect of other factors.
That survey pointed to a clear aggregate connection between
freedom of capital movements and economic growth, as well as
suggesting that countries with freedom for capital receive far more
tax revenue from businesses. Freedom causes resources to go where
they can be used most productively, which makes it easier for
businesses to start up and facilitates international trade.3
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Regulate more?
The problems associated with the mobility of capital are that
it can suddenly flee countries that get into economic difficulties
or that a currency can be subjected to destabilizing speculation.
Many lenders and investors have no specific knowledge of a
particular country’s economy, so if large numbers begin to leave
it, others may take this trend as an indication that something is
wrong and follow the tide. Panic and a herd mentality set in.
Credit vanishes, projects have to be discontinued, firms lose all
their resources, and the economy slams on all the brakes.
One of the reasons that short-term capital transactions grow
faster than long-term investments or commodity trade is that the
latter are very severely regulated in all states of the world. If these
markets were to be properly liberalized, we would get different
proportions. Some feel that the level of regulation must be equalized,
but in the wrong direction, by also regulating the financial
market by means of controls of different kinds. Malaysia, for
example, introduced strict exchange controls as a temporary measure
during the ‘‘Asian crisis’’ of the late 1990s. Even if such
measures could alleviate the immediate problem, they have the
long-term effect of causing investors to avoid the country in the
future. If investors might be prevented from leaving the country
when they want to, they will demand a higher return for coming
there in the first place, and the country will risk a capital shortage.
All empirical data show that allowing capital to flow freely out
of a country freely increases the amount flowing in. The immediate
249
result of imposing controls in this instance was that Malaysia’s
neighbors—Indonesia, for example—suffered a swifter exodus
of capital, because of widespread fears that it would follow the
Malaysian example of controls. In the long term, this effect
recoiled against the Malaysia itself by lowering investor confidence.
One investor in Asian funds recently said of Malaysia:
A market that used to have up to 18 percent of weighting in most
funds is now totally ignored.4
That economic isolation has coincided with the country’s movement
toward political isolation.
One alternative is a more permanent regulation of short-term
capital flows. If quick capital does not enter in the first place, it
reduces the risk of the country suffering an exodus of capital later
on. Chilean rules have often been looked on as exemplary in this
respect, since that country has avoided major crises. Chile has
insisted that capital entering the country remain there for a certain
length of time and that a certain portion of it be deposited at
very low interest with the central bank. This type of regulation
seems to work better than alternative controls, but Chile’s reason
for introducing such rules was that savings were so high that it
did not want to have more capital in the country. This situation
is hardly the same as the one afflicting developing countries starved
for capital and investments. Even in capital-rich Chile, the policy
led to financial problems. Big companies operating internationally
circumvented the controls and got hold of capital anyway, while
small businesses coped less well and had to pay interest rates many
times higher.
The perspective of these rules is excessively short term. Chile
was hit by a real economic crisis in 1981–82, with bank failures
250
and a 90 percent devaluation. That crisis happened at the same
time as its capital controls were at their most rigorous, when
inflows of capital were prohibited unless the capital remained in
the country for at least five and a half years. Wise from the crisis,
Chile decided to reform and consolidated its chaotic banking
sector, which is probably the main reason why it has avoided
further crises. (Incidentally, Chile’s decision to cancel its capital
regulations came at the height of the Asian crisis.)5
Capital controls often serve as a means of lulling investors and
politicians into a false sense of security. A looming crisis covered
up by market-distorting regulations only hits harder once the
underlying problems are finally exposed. Only months before the
Asian crisis hit South Korea, local politicians and international
investors believed the country’s restrictions on capital mobility
would save it from an exchange crisis. In 1997, Goldman-Sachs
judged South Korea’s banks and central bank to be in bad shape,
but since the country had capital regulations, they declared that
investors could disregard the risks this implied. The investors took
the advice and ignored the risks. The Asian crisis then struck
hardest against Indonesia, South Korea, and eventually Russia,
which had the stiffest capital regulations in any growth market.
Those with the lightest regulations—Hong Kong, Singapore, and
Taiwan—fared far better.6 Brazil too was hard hit; politicians there
had thought that restrictions against short-term capital would steer
them clear of the crisis.
Sooner or later, mismanaged policy leads to crisis. And if capital
controls make politicians believe that they are free to pursue any
policy they like, the odds are that they will aggravate the crisis.
In theory, temporary capital controls in a crisis could give the
country breathing room to modernize its banking and finance
sector, iron out problems in the budget, and liberalize the economy.
Often, though, regulations are put to the opposite use, as
251
a means of avoiding painful reforms. One sign of this avoidance
is that countries with capital regulations have, on average, bigger
budget deficits and higher inflation than those without. This is
also why liberal economies with freer financial markets emerge
from their crises more quickly. We can compare the rapid recovery
of many Asian states after the Asian crisis with Latin America’s
crisis of the early 1980s, after which Latin American countries
imposed controls on capital outflows and refrained from liberal
reforms. The result was a lost decade of inflation, prolonged
unemployment, and low growth. Compare Mexico’s rapid recovery
after the ‘‘Tequila crisis’’ of 1995 with the same country’s
prolonged depression after the debt crisis of 1982.
Another problem with capital controls is that they are hard to
maintain in a world of ever-improving, ever-faster communication.
They are in practice an invitation to crime, and a great deal
of investors’ time is devoted to circumventing the regulations.
The longer a regulation has been in force, the less effective it
becomes, because investors then have time to find ways around
it. Besides, most regulations have their exceptions for particularly
important or vulnerable enterprises. So in most countries controls
become an incentive for corruption, and different people are
treated differently by the law.
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Tobin tax
One proposed capital regulation that has achieved popularity in
recent years is the so-called Tobin tax, named after Nobel laureate
economist James Tobin, who first suggested it. The Tobin tax is
a low tax of 0.05–0.25 percent on all currency exchange, which
is advocated by the ATTAC movement among others. The idea
is to slow down capital movements and make investors think twice
before allowing capital to cross currency exchange boundaries. It’s
argued that in this way harmful speculation and major exchange
crises could be avoided. Criticism of the Tobin tax has focused
on the impossibility of introducing it. In practice, all countries
would have to agree on it; otherwise transactions would go through
nonsignatory countries. And if it could be introduced, more and
more trade would go to the major currencies in order to avoid
transaction costs. Perhaps nearly the entire world economy would
end up using U.S. dollars. But there is a more serious objection
to the Tobin tax: even if it were possible to introduce, it would
be harmful.
This tax would actually be more harmful to the financial market
than regulations by individual countries. The only effect of the
latter is to reduce inflow in the country opting for them, whereas
a Tobin tax would reduce turnover and the possibility of external
financing all over the world, even for countries in great need of
such financing. Obstacles to the movement of capital fence it in
where it is already—in the affluent countries—and the Third
World is the loser. The Tobin tax, therefore, is not really a tax
253
on capital but a tariff that makes trade and investment more
expensive. Advocates of the Tobin tax claim that it need not have
this effect, because it is so low. For long-term investments the
cost will be negligible. But the problem is that an investment is
not just one transaction. An investor may perhaps partially finance
a project, recoup some of the money in profits, increase the
investment if it is successful, transfer earnings to other parts of
the operation, add capital, buy components from abroad, and so
on. With every little transaction taxed, the total cost of the Tobin
tax will be many times greater than the low cost suggested by the
percentage figure on paper, and so doing business in one’s own
currency and in one’s own region will be more profitable. This
will lead to a general reduction of the return on capital, and it
will cause capital-starved countries to have less access to capital
and, consequently, fewer investments. Interest rates will rise, and
borrowers will have to pay more for their loans.
The adherents of the Tobin tax say that what they really want
to get at is sheer currency speculation, not productive investment.
But the idea that there is some hard and fast boundary between
useful investments and ‘‘useless speculation’’ is completely wrong.
Derivatives, which the critics usually regard as sheer speculation,
are necessary in order for investments to work. In a world of
changing prices and exchange rates, a firm’s forecasting can be
completely overturned if it does not have the type of insurance
that derivatives afford. Suppose a company extracts a metal and
the price of that metal suddenly falls dramatically; earnings fail
to materialize and bankruptcy threatens. Instead of devoting a
large part of its activity to wondering how markets are going to
develop, the firm can buy a right to sell the raw material at a
predetermined price later on—a sale option. The purchaser of
this option takes over the risk and the responsibility of predicting
254
market developments. The metal company can quietly concentrate
on extracting the metal, and the risk is willingly taken over instead
by people who specialize in observing developments and apportioning
the risks—in a word, speculators.
Because exchange rates are rapidly changeable, firms encounter
the same risk if, for example, the currency in which they are paid
quickly depreciates. If a metal company has trouble predicting
the future course of its own market, it is far more difficult for it
to keep track of economic developments in the currency and
exchange risks over a period of several months or years. This
uncertainty makes it still more important to be able to trade in
currency derivatives of different kinds, so that a company can,
for example, purchase the right to sell the currency it will be
receiving at a predetermined price. But it is this very ‘‘speculation’’
that a Tobin tax would prevent. And, just like an ordinary investment,
it involves more than one single transaction. If a speculator
took over only complete risks, he would be very vulnerable. The
speculator must always be able to reapportion his risks according
to developments in order to balance his total portfolio of risk.
This ability is guaranteed by a large secondhand market that
enables one to trade in these derivatives almost immediately. This
‘‘speculation’’ is how the insurance is made as cheap as possible
for the company, allowing it to invest in spite of risks. And it is
essentially the same way the secondhand market for shares, the
stock market, gives people the courage to finance new businesses
by participating as shareholders.
The structure of the Tobin tax is aimed at this very market.
It would result in fewer speculators being ready to take on risks
and in their demanding much more payment for doing so. The
insurance, then, would be much more expensive for companies
and investors, with the result that they would not invest in countries
and currencies with a greater element of risk. Once again,
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it is the more capital-starved and risk-laden regions—poor developing
countries—that would be the losers. Investors would place
their capital only where it seemed secure and where they knew
the market. During the past decade, the developing countries
have received over a quarter of all foreign direct investment. This
figure would fall dramatically if a Tobin tax were introduced. It
would be more difficult for people and businesses in poor countries
to obtain loans, and they would be forced to pay higher rates
of interest.
There is a serious risk, then, that financial markets would be
disrupted by a Tobin tax. But that tax would not be capable of
preventing exchange crises. In practice, the tax would establish
only a low barrier to impede everyday trading. If exchange transactions
above that threshold suddenly became profitable, there would
be drastic fluctuations. The problems of currency speculation and
capital exodus would not be averted. When speculators realize
that they have a chance of breaking a fixed exchange rate (for
example, sterling and the Swedish krona in 1992), they stand to
make such enormous amounts of money that a tax of a fraction
of the gain would not deter them. If they can make 20 or 50
percent on an exchange rate, they will not be put off by a tax of
0.05 percent. The same applies when confidence in a country
fails and gigantic losses can be avoided by getting out fast, as in
the Asian crisis of 1997. The small tax that is sufficient to disrupt
the everyday, healthy functioning of the financial market would
not be sufficient to prevent these crises.
High turnover in the exchange market reduces the risk of
temporary shortages and distorted pricing. A bigger market also
reduces the risk of individual players and transactions decisively
affecting prices. In this way free exchange markets prevent the
occurrence of violent exchange rate fluctuations, something that,
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paradoxically, the Tobin tax could augment by reducing the
liquidity of the exchange market. Constant equalizations and
adjustments would be replaced by big periodic jolts. Currency,
market shocks, and volatility have not increased since the 1970s,
despite the widespread liberalization of markets and a quadrupling
of volume. The fact is that countries with severe capital regulations
have far more erratic exchange rates than those with fewer restrictions.
7
But for all these shortcomings, the Tobin tax still has one
advantage: it would yield tremendous revenues. The ATTAC
movement counts on $100 billion a year—some say $10 billion
to $50 billion a year. However, the question is whether this money
could ever be collected. Collection would require an immense
bureaucracy keeping track of all transactions throughout the world
and empowered to collect the money. We are talking here about
transactions taking place in computers all over the globe, including
in countries that in practice have neither accounting systems nor
an effective administration. In other words, there would have to
be some kind of world government, the bureaucracy of which
would presumably eat up a large part of the revenues collected.
How is this bureaucracy to be governed? By the United Nations,
where dictatorships have the same power as democracies? Who
would stop this world government from swerving into an orgy
of corruption? Who would prevent abuses of its expansive power?
And who would get the money?
Nevertheless, the Tobin tax would in theory mean several
billion dollars that, for example, could be used to help the Third
World. But if we are convinced that a capital transfer of this kind
would be helpful, why can’t we achieve it by other means? Why
not abolish the tariffs against these countries or dismantle the
EU’s destructive agricultural policy, which is holding them back?
257
Why not augment development assistance or introduce a global
charge on polluting activity? Why should we necessarily procure
revenue by sabotaging the financial market? Unless that is the
true motive. . . .
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The Asian crisis
To find out how crises can be prevented, we ought to study earlier
crises and their causes. The Asian crisis of 1997–98 is often said
to have come like a bolt from the blue, with healthy economies
suddenly hit by speculative assaults and capital flight. It wasn’t
like that at all. The grain of truth in that version of events is that
these countries would not have suffered an exodus of capital if
they had not liberalized movements of capital, because then the
capital would never have come to them in the first place. What
created the crisis, though, was a combination of factors, among
which speculation was not the triggering factor but rather the
drop that made an already full glass run over.8
The economies affected by the Asian crisis had been showing
clear signs of trouble ahead for some time, and these signs grew
stronger during 1996 and early 1997. Those economies had
received enormous inflows of capital during the 1990s, especially
through short-term borrowing abroad, which was encouraged by
their governments. The proportion of the debts of Thai banks
and institutions borrowed from abroad rose from 5 to 28 percent
between 1990 and 1995. Thailand’s central bank, along with
various banking regulations, created high domestic interest rates,
making it lucrative to borrow abroad. Much of that borrowed
money was then re-lent at higher rates of interest at home. Governments
encouraged these loans with fixed exchange rates and tax
subsidies. At the same time they discriminated against long-term
capital. South Korea tried to exclude it completely by prohibiting
259
foreign direct investments and purchases of shares and securities.
Short-term loans were the only possible way of raising capital
from abroad.
A South Korean bank could borrow dollars or yen for a very
short term—money that it would soon have to pay back. Meanwhile,
it lent this money at a higher rate of interest for long-term
investments in South Korea. Banks counted on always being able
to renew the foreign loans, since otherwise they would suddenly
be left without money to meet their other obligations. Capital
was channeled through banks and finance companies that were
unprepared for such enormous inflows. They were not exposed
to competition, and they were often allied with the ruling regime
and with strong economic interests. Many of the resources in
South Korea, Malaysia, Thailand, and Indonesia went to favored
firms and prestige projects. Outsiders had no reason to be apprehensive,
because they knew that the ruling powers would never
allow their favorites to go under. This principle applied to the
national banks, but also to private firms like the chaebols—South
Korea’s super-corporations—or the business empire operated by
Suharto’s acquaintances in Indonesia. Besides, foreign creditors
knew for sure that the IMF would intervene and save them from
losses if the region as a whole ran into problems. And so the
foreigners lent unlimited amounts, resulting in overinvestment
in low-yield heavy industry and real estate, instead of in more
dynamic enterprises.
All the countries destined to be hit by the crisis had enormous
short-term debts relative to their reserves. At the same time, they
all had fixed or controlled exchange rates. This situation created
a number of eventually devastating problems. Usually, one does
not dare to borrow huge sums abroad and then lend them only
slightly more expensively at home if exchange rates are constantly
260
fluctuating. One can lose on even very small exchange rate movements
unless one is insured against the risk. But with the government
professing to guarantee a fixed exchange rate, this risk
appeared to vanish, and everyone was able to borrow like mad.
In addition, regulation meant that the local currency was overvalued
(by about 20 percent), not least because the dollar, to which
many of these currencies were pegged, rose. This overvaluation
helped make exporting more difficult. Thai exports, which had
risen by 25 percent in 1995, actually started to decline in the
following year. In 1996, the year before the crisis that allegedly
struck like a bolt from the blue, the Thai stock market index lost
one-third of its value.
Because exchange rates were higher than the market believed
they ought to be, the currencies became a prey to speculators, as
happened to several currencies that were part of the European
Monetary System (EMS) in 1992–93. If anyone is prepared to
pay more for something than it is worth, speculators are, of course,
eager to cash in on it. Speculators can borrow fantastic sums of
money in local currency and exchange them at the maximum
rate in the central bank. As a result, the countries affected by the
Asian crisis in 1997 were forced to use their currency reserves to
defend their excessive exchange rates.
The exodus of capital, then, was not just mindless panic, but
quite rational. Confidence in the countries’ economy and future
growth had begun to evaporate. What was worse, so had belief
in the ability of their economies to weather a crisis. It was known
that they did not have viable legal institutions, such as bankruptcy
legislation. Now they had also exhausted the reserves that guarantee
foreign loans and the whole of the financial system. If everyone
pulled out, the reserves would not be sufficient. Individual investors
realized that they would have to recover their capital quickly
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in order to get it out in time. Faith in the government’s ability
to save every business that got into trouble began to wobble. The
first ones to get rid of their local currency holdings were not
speculators but native enterprises that needed to pay off their
loans quickly. When the countries were forced to abandon their
exchange rates after huge losses, confidence in them declined still
further. Capital fled, loans were not renewed, and firms were
suddenly left without financing. The crisis was on.
Undoubtedly, investors influenced one another, and something
of a herd mentality ensued, but again, this reaction was not a
matter of blind panic. Countries with healthy economies and
solid institutions, such as Taiwan, Singapore, and Australia, coped
well when their neighbors were knocked sideways. And so the
term ‘‘Asian crisis’’ is not all that accurate. Upon reflection, it
becomes clear that national policy decided how greatly a country
was affected by the crisis. Two researchers who studied the course
of the crisis summed it up as follows:
We found no evidence of contagion, in which the currency difficulties
of one country were transferred to other countries. All of the
countries that suffered the most serious financial difficulties did so
because each had real economic difficulties, associated in large
part with an excessive growth of bank credit and bank loan and
insolvency issues.9
The effects of the crisis were felt all over the world, but in an
integrated world it is natural for events in one quarter to affect
others—and not because of an irrational herd mentality. Shortage
of liquidity—that is, having one’s money tied up in investments
when some ready cash is needed—means that investors have to
repatriate capital from other risk-laden countries. It should be
262
expected that U.S. companies and banks, and thus the U.S. economy,
would be affected by one of their most important markets
being plunged into a profound crisis. Asian banks in crisis have
to withdraw resources from Russia, which makes problems for
Brazilian banks and fund operators who have lent money in that
direction, and so on. But international effects run both ways.
Positive events in one country can produce positive effects elsewhere.
The previous upturn in Latin America and Asia contributed
to good times in Europe and the United States. And very possibly
it was the subsequently strong economy of the United States that
saved the world from depression in connection with the Asian
crisis and quickly pulled the Asian economies up again.
Claims by Naomi Klein and others that all the progress achieved in East
Asia was obliterated by the crisis are sheer nonsense. One country that
was very badly hit, South Korea, saw its per capita GDP, adjusted for
purchasing power, decline in 1998 to just over the 1995 level, which in
turn was more than twice the level 10 years earlier. And only a year later,
in 1999, South Korean GDP registered an all-time high. Certain aspects of
the crisis have also been hugely exaggerated by activists on the left. Some
went so far as to maintain that the crisis plunged 50 million Indonesians
into absolute poverty (earning less than a dollar a day). This figure is over
four times the number who were even temporarily reduced to absolute
poverty in the whole of Southeast Asia. Official WB figures show the increase
in Indonesia to have been less than a million up to 1999, a number that
has since declined.10
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Instead of crisis
There are various methods for avoiding financial and exchange
rate crises, but the most essential of them is simply for a country
to have a healthy economic policy. The very first people to move
their savings away from a country that subsequently experiences
a massive exodus of capital are usually its own citizens, who have
a front-row view and most often know best which economic
problems their rulers are attempting to conceal. This suggests that
lack of confidence is brought about by real problems, not by
ignorance and follow-the-leader behavior. The top priority for
crisis avoidance is for the government to have control of its
finances and inflation. Galloping budget deficits and high inflation
were not the problem during the Asian crisis, but they are
definitely the fastest and most common ways of ruining confidence
in an economy.
The most important long-term commitments for new economies
are reforms of legal and financial institutions. Countries
should liberalize their domestic financial markets and their trade
policy before opening up to foreign capital. Otherwise, capital
will not be channeled in harmony with the wider market, leading
to malinvestment. Supervision and regulation of the financial
sector have to be reformed, and competition must be permitted.
Corruption and nepotism must be weeded out and superseded
by the rule of law and capital yield requirements. Given the
tendency of ignorance to cause panic in critical situations, much
depends on reliable information and transparency in national and
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corporate dealings, something that many Asian governments had
deliberately obstructed. Credit valuation and bankruptcy laws,
which in reality have been lacking in many Asian countries, have
to be introduced. The global community could provide effective
counseling on the strengthening of national financial markets.
Accounting rules and capital coverage requirements can be coordinated,
and agreements can be introduced on the consistent management
of financial crises—management that until now has been
pretty arbitrary.
It is true that the liberalization of financial markets has sometimes
been followed by financial crises. The trouble, however, is
not liberalization as such but the absence of the necessary institutions
to go with it. Economist Jagdish Bhagwati is among those
who have pointed out that liberalization of capital flows can create
problems if it precedes other important reforms. He suggests as
a solution, not capital controls, but that countries first create
political stability, free trade, and domestic reforms, such as privatization,
before attempting to liberalize their financial markets.11
In practice, though, liberalization of financial markets comes easier,
and so it has often preceded domestic reforms, which can
take far longer to implement and must overcome opposition
from vested interests. The IMF bears much of the blame for
deregulations previously having occurred without the necessary
preconditions being in place. Two journalists for The Economist
have compared the IMF’s advocates of capital mobility to an
unscrupulous salesperson in a pet shop declaring that a dog is
wonderful company, while forgetting to explain that in order to
survive it must be fed and taken for walks.12
Nowadays the IMF devotes more effort to advising countries
on how to create good institutions in the long term, and governments
have become interested listeners. This task is an important
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one, but such reforms demand long-term work of a decidedly
unglamorous nature. Shouting for capital controls and a Tobin
tax, while misguided, can appear easier and more exciting than
the arduous process of institution building. The one rational,
quick-fix reform that could be implemented in this spirit is the
abolition of controlled exchange rates. James Tobin, the originator
of the tax that bears his name, has himself pointed to fixed
exchange rates as perhaps the principal cause of the Asian crisis.13
Fixed exchange rates are what give speculators something to
speculate against. As soon as economic problems, suspicion of a
looming devaluation, or indications of an inflationary policy
occur, the exchange rate is perceived as too high. The market
decides that the currency is not worth the price that the government
has put on it. With a fixed exchange rate, speculators can
earn vast amounts by borrowing in the currency and selling it to
the central bank. When the country has been forced to devalue
the currency by lowering its exchange rate, the speculator can
repay the loan, which by then has substantially depreciated. An
excessive exchange rate in relation to supply and demand, and to
what the currency will be worth after the likely devaluation,
amounts to a huge subsidy for speculation. The government is,
in effect, buying itself an exchange crisis. Inaccurate pricing is
incompatible with openness to movements of capital—the only
question is whether it’s the prices or the movements of capital
that are wrong. Speculators selling local currency when the central
bank pays an inflated price for it is no stranger than thousands
of Europeans growing sugar beets when the EU pays too much
for them.
When the fixed exchange rate is too high, it is already too late,
whatever governments may do next. They can defend the exchange
rate at colossal expense, emptying their reserves and raising interest
266
rates as a result, which will put a stranglehold on the economy.
Alternatively, they can let the value of their currency fall steeply
to the market level, in which case the country’s industries will be
unable to repay the big loans that they took on at the higher
exchange rate. Either way, crisis will follow. In one study, two
economists point out that practically all fixed exchange rate
arrangements, sooner or later, have run into exchange rate crises.
This was what happened to the EMS countries in 1992, to Mexico
in 1997, to Russia in 1998, to Brazil in 1999, and to Argentina
in 2001. Two other analysts point out the flip-side:
We are not aware of an example of a significant financial or currency
crisis in an emerging market with fully flexible exchange rates.14
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The dictatorship of the market?
There is one objection to free financial markets that transcends
economics. Critics of globalization see them as a threat to democracy.
With free markets, capital and businesses can quickly move
across national boundaries if they are dissatisfied with the policy
any one country pursues. If taxes climb too high, corporations
may flee to an offshore tax shelter. If a country, especially a small
one, begins having high budget deficits, it may be punished with
higher interest rates. New York Times columnist Thomas Friedman
coined the term ‘‘the golden straitjacket’’ to describe the way
globalization affects governments: policy flexibility is constrained
by the need to avoid scaring away increasingly mobile businesses.
All those things, the critics reason, imply that markets are beginning
to steer politics, and they go so far as to speak of ‘‘market
fascism’’ or a ‘‘dictatorship of the market.’’
The latter slogan is a grotesque distortion, one that trivializes
the crimes of real dictatorships and attempts to equate two phenomena
that are utter opposites, not variations on the same theme.
Probably the first country to introduce a nonconvertible currency—
that is, one its citizens were not allowed to exchange for
other currencies—was the extremely protectionist Nazi Germany.
The communist governments actually regarded dictatorship as a
precondition for the command economy. Shifts of power and
free debate would upset long-term government planning and were
compatible only with the liberal market, in which individuals
decide for themselves. In contrast, new democracies invariably
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choose, as one of their first actions, to open up their markets and
liberalize their economies.
The converse also applies. In the long run it is hard for dictatorships,
once they have accepted economic freedom, to avoid introducing
political liberty as well. In country after country in recent
decades, we have seen rulers who granted their citizens the right
to choose goods and invest freely soon thereafter forced to give
them a free choice of government. This is precisely what happened
to the Southeast Asian and Latin American dictatorships. Mexico’s
single-party state collapsed a few years after the country had opted
for free trade. Suharto’s Indonesian dictatorship fell like a house
of cards in the wake of the Asian crisis. Now we can see some
of the first democratic power shifts in Africa, in the very states
that have committed themselves to more open markets.
It is widely assumed that the Arab states, marked by gender
inequity and oil-focused planned economies, can never be democratized.
But a couple of Arab states—Qatar and Bahrain—have
embarked on liberal economic reforms, resulting in growth. This
growth has been accompanied by a process of political reforms.
Qatar has dismantled its press censorship, and the Al-Jazeera
satellite channel operates freely—too freely, in the opinion of the
Americans during the war with the Taliban in Afghanistan and
with Saddam Hussein’s regime in Iraq. The United States tried
to prevail on the government of Qatar to take control of the
channel, only to be told that this could not be done in a country
where there was freedom of expression. Qatar has also had democratic
local elections in which women have been allowed to both
vote and stand for office. Bahrain’s new leader has released political
prisoners, and dissidents have returned from exile to take part in
the political dialogue. In 2002, the country held both municipal
and national parliamentary elections that saw women and men
alike in the voting booth and on the ballot. People who grow
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richer, are better educated, and are accustomed to choice will not
acquiesce in others’ deciding matters on their behalf, and so the
market economy often leads to democracy just as democracy
consolidates the market economy. When groups that were previously
excluded acquire a political voice, it becomes less easy for
the elite to feather its nest at their expense. This leads to more
economic liberalization measures, which reduce poverty and, consequently,
strengthen democracy. A decentralized economic system
makes possible the establishment of groups independent of
the political power, which in turn provides a basis for political
pluralism. International surveys of economic freedom have shown
that citizens who are entitled to trade internationally are roughly
four times more likely to enjoy political democracy than those
who do not have this right. This is one reason that democratic
activists in China were so eager for their country to join the
World Trade Organization: with the benefits of membership come
pressure for transparency and decentralization. A dictatorship that
has always acted tyrannically and arbitrarily must now conform
to an impartial international code in at least one sphere. Shortly
before China’s accession, an imprisoned dissident said of the
prospect of greater openness: ‘‘Before the sky was black. Now
there is a light. This can be a new beginning.’’15
The 20th century clearly showed that no economic system but
capitalism is compatible with democracy. Any talk of a ‘‘dictatorship
of the market’’ is not only insulting but also abysmally ignorant.
It is true that a debtor is, in some sense, unfree. By contracting
a budget deficit and debts, a country incurs the market’s suspicion.
Reforms have to be introduced to restore confidence in the
national economy, otherwise the outside world will demand higher
rates of interest on additional loans or else simply stop lending.
A modern state can thus find itself ‘‘in the hands of the market,’’
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but the government is to blame for this outcome, not the market.
If the government mismanages its finances and will not finance
its expenditure out of its own funds, but with the market’s, then
it has decided to make itself dependent on the market.
The international financial markets were actually created by
welfare states wishing to borrow for their expenditures during the
crises of the 1970s. In this way they increased their scope for
maneuver. Without financial markets, the government would be
forced to live within its means, while with financial markets the
need to raise revenue can be put off until later. Hence, states
with a credible and stable policy have a much wider range of
options available than they would have before financial markets
existed. But lenders have good historical reasons for distrusting
states with a large national debt. Often those states have unilaterally
reduced the amounts lenders can claim by means of high
inflation or devaluation, which reduce the value of a currency.
So financial markets have cause to keep a watchful eye on the
doings of governments and not to grant such favorable terms to
those that don’t seem to be making ends meet. But creditors
lending money on their own terms cannot be likened to dictatorship.
Governments are still at liberty to mismanage their economies;
they are deprived only of the ability to force others to
finance their mismanagement.
‘‘When national debts have once been accumulated to a certain degree,
there is scarce, I believe, a single instance of their having been fairly and
completely paid. The liberation of the public revenue, if it has ever been
brought about at all, has always been brought about by a bankruptcy;
sometimes by an avowed one, but always by a real one, though frequently
by a pretended payment.’’
Adam Smith, 1776 16
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Capitalism and democracy go hand in hand
Economic freedom
Democratic rights
10
9
8
7
6
5
4
3
2
1
0
0 1 2 3 4 5 6 7 8 9 10
(Degree of economic freedom and democratic rights in 46 studied countries)
Bahrain
China
Rwanda
Burma
Vietnam
Cuba
North Korea
United Arab
Emirates
Oman
Kenya
Indonesia
Egypt
Ivory Coast
Algeria
Iran
Hong Kong, Singapore
Peru
Jordan
Tanzania
Haiti
Zimbabwe
Paraguay
Turkey
Uganda
Russia
Albania
Chile
Argentina
Mexico
Brazil
Ukraine
El Salvador
Taiwan
South Korea
Slovakia
Venezuela
India
Madagascar
New
Zealand
Luxembourg
Canada
Japan
Sweden
Israel
Lithuania
Source: Roger Donway, ‘‘Lands of Liberty,’’ Navigator, no. 4, 2000.
The market’s assessment is often progressive. The Latin American
dictatorships fell during the 1980s when the market abandoned
their deeply indebted, crisis-ridden economies. Post-crisis, most of
the Asian states are committed to openness and democratization.
Because they need information and the rule of law, investors hate
secretiveness and corruption like poison. There is no better way
of driving capital out of a country than to foster suspicions of
malfeasance among the political elite, and there are few attractions
so powerful as transparency and illumination in the public sphere.
To some people, the very idea of the market passing judgment
on politics is undemocratic. Lenders, as they see it, should keep
quiet and willingly make their money available, even if governments
look as though they may blow it all through inflation. By
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the same token, there is nothing undemocratic about taxpayers
placing their savings abroad. Reacting to politics in order to
protect one’s interests is only anti-democratic if one equates
democracy with total governmental control and implicit deference
to the rulers of the nation. If that is democracy, public dissent and
journalistic scrutiny are also undemocratic. Such a ‘‘democracy’’
sounds more like a dictatorship that insists on total submission.17
What critics really find threatened by the market is not democracy
but the policies they want democracies to introduce—policies
involving greater government power over people’s economic decisionmaking.
But saying that the market threatens government
control of our economic actions is less exciting than calling it a
threat to democracy. Why should it be ‘‘more democratic’’ for a
democratic government to have more powers of decisionmaking
over us? Would the United States, by this logic, be made more
democratic if the government were to decide whom we could
marry, what work we could do, or what we were entitled to write
in a newspaper? Of course not. A majority of the people should
elect their political representatives; that doesn’t mean they should
also decide by vote how individuals run their lives. Democracy
is a way to rule the state, not a way to rule society.
If policy has to be changed under pressure from the market,
such changes can sound like a threat to democracy. Suppose, for
example, that the U.S. government has to abolish double taxation
of capital gains because otherwise companies would leave the
United States. This view again presupposes that people must
always comply with political decisions and that the political process
must be influenced by nothing beyond the conscious decisionmaking
of Congress. But the normal state of affairs is that inspiration
and challenges to the status quo often come from outside,
not from the politicians themselves. Democracy exists partly in
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order to adapt a country’s policies to changing circumstances,
and this adaptation, when it happens, is not undemocratic. If it
were, then any factors increasing the tax burden and public spending
more than political parties had promised would also be undemocratic.
There are any number of such factors, including the
demands of pressure groups (Green protesters, for example); the
expansion by bureaucrats of their activities; and efforts by politicians
to keep their own party faithful happy. I have yet to hear
anyone speak on this account of ‘‘the dictatorship of public
spending.’’
The notion that the market forces countries to adopt certain
policies has, it seems to me, been created by craven politicians.
Lacking the energy or the ability to justify the choice to adopt a
policy of fiscal restraint or to liberalize, politicians declare such
measures necessary, forced upon them by globalization. This is a
handy cop-out, and a denigration of the market economy into
the bargain.
There is reason to challenge the very premise of the argument
that markets compel a market-liberal policy. The players in the
market do not demand a liberal ideology in order to ‘‘reward’’ a
country with their decisions about where to locate or send capital,
but they do require a well-ordered economy that is not on the
verge of collapse. The market’s reaction to policy is one reason
for the welcome proliferation of diminishing budget deficits, low
inflation, and low rates of interest in countries once characterized
by the opposite. You would hardly put your money into a pension
fund that invested according to an ideology rather than by economic
criteria. If the economy is equally well ordered, investors
will not treat a social democratic welfare state any differently
from a libertarian nightwatchman state. One of the world’s most
globalized countries is Sweden, which also happens to have the
world’s highest taxes.
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The past two decades of globalization have witnessed an expansion
of government machinery. Between 1980 and 1995, taxation
in all the countries of the world rose from 22.6 to 25.9 percent
of their GDP, and public spending rose from 25.7 to 29.1 percent
of GDP.18
The fact that people and businesses are able to move freely
does not necessarily entail that they will immediately relocate
where taxes are lowest. They will move to wherever they feel that
they get best value for their tax money. If citizens feel that they
are getting security and service that are worth the money they
pay in taxes, they will not leave a country. If businesses feel that
they are getting research, education, and infrastructure worth the
money they pay in taxes, they will not leave the country either.
It is only if taxes are used inefficiently or on things that people
do not value (something that has been known to happen from
time to time) that they will cause problems in a world where we
can move about more freely. It will be more difficult to maintain
taxes that people feel give nothing in return. Which isn’t exactly
undemocratic, is it?
It may even be that globalization makes it easier to maintain
the political system voters want, even if their choice is in favor
of high taxes and a large public sector. This is because globalization
and free trade make it easier for us to obtain the things our system
disfavors by exchange from countries with other systems. If the
government health care monopoly in Britain or Canada discourages
the development of new technology and science in the medical
sector, it remains possible to import these things from countries
where the medical sector is more dynamic. If high taxes impede the
emergence of domestic financial markets, companies can procure
capital in other countries. Globalization enables countries to afford
things they are not good at. Problems remain for certain policies,
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of course. If a country’s own citizens are denied opportunities or
incentives for education and production, it will have nothing to
trade with. But the main point is that the nature of our own
political system is still something we, the electorate, decide on
the basis of our own values.
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VII
Liberalize, don’t standardize
The right to choose a culture
If children were forced to discover everything for themselves,
they would develop very slowly. Happily, they have parents who
transmit their experience and knowledge. In this way, children
can rapidly acquire far more information than they could have
acquired on their own—what can be eaten, what is poisonous,
how to find the center of town, and how to swim. One of the
biggest advantages of globalization is that young economies can
learn from the older ones. Developing countries are not children,
and the industrialized countries are certainly not parents, but the
economies of the industrialized nations have passed through the
transformations that the developing countries have ahead of them.
The growth of those countries need not take as long as it did for
the Western world. Instead, they can take shortcuts and learn
from our mistakes. Development that took the West 80 or 100
years to accomplish has been successfully replicated by Taiwan
in 25 years.
The developing countries can skip intermediate stages of development
and benefit directly from the technology being produced,
for example, in Europe and the United States. Mobile phones
are a case in point. The developing countries need not incur the
cost of constructing permanent telephone lines; they can leap
directly to wireless technology. Mobile phones can now be used
even by the poor to find out about prices of their goods. Many
developing countries now have phone rental companies, and villagers
often pool their funds for a mobile phone. This advance
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has meant steadier prices across larger markets, as well as less
wasted food because of more exact delivery times.
Halima Khatuun is an illiterate woman in a Bangladeshi village. She sells
eggs to a dealer who comes by at regular intervals. She used to be compelled
to sell at the price he proposed, because she did not have access to other
buyers. But once, when he came and offered 12 taka for four eggs, she
kept him waiting while she used the mobile phone to find out the market
price in another village. Because the price there was 14 taka, she was
able to go back and get 13 from the dealer. Market information saved her
from being cheated.1
New information technology is now revolutionizing old economic
activities the world over. Hundreds of artisans—many of them
women—in Morocco, Tunisia, Lebanon, and Egypt who never
had access to international markets before can now sell their
products through an Internet network called Virtual Souk.2 Sales
are climbing, and they are now able to retain a larger share of
the earnings than was possible in the old markets.
People in poor countries can perform service tasks for Western
companies by being connected to the head office via satellite and
the Internet, and they can also obtain information. Thanks to
the Internet, reliable medical advice and advanced education are
no longer reserved for those living in the world’s metropolitan
cities. People may complain about the slowness of progress, with
only about 5 percent of the world’s population, mostly in the
affluent Western countries, having access to the Internet, but such
complaints ignore the historical perspective. The Internet as we
know it is about 3,500 days old and has already reached nearly
one out of every 10 people on earth. This is the fastest spread of
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technology in world history. The telephone has existed for 125
years, but until only a few years ago, half the world’s inhabitants
had never made a phone call. This time things are moving with
infinitely greater rapidity, and globalization is the reason. One
out of every 10 families in Beijing and Shanghai has a computer,
and within a few years, Chinese will be the Web’s biggest language.
The ability of the developing countries to take shortcuts in
development leads some to imagine a common destination at the
end of the road, one that all societies will be converging on. That
picture troubles many people. They fear a ‘‘McDonaldization’’
or ‘‘Disneyfication’’ of the world, a creeping global homogeneity
that leaves everyone wearing the same clothes, eating the same
food, and seeing the same films. But this portrayal does not
accurately describe the globalization process. Anyone going out
in the capitals of Europe today will have no trouble finding
hamburgers and Coca-Cola, but they will just as easily find kebab,
sushi, Tex-Mex, Peking Duck, Thai, French cheeses, or cappuccino.
We know that Americans listen to Britney Spears and watch
Adam Sandler films, but it’s worth remembering that the United
States is also a country with 1,700 symphony orchestras, 7.5
million annual trips to the opera, and 500 million museum visits
a year.3 Globalization doesn’t just send the world shlocky reality
TV and overplayed music videos, but also classic films on numerous
movie channels; documentaries on Discovery and the History
Channel; and news on CNN, MSNBC, or any of their many
competitors. The masterpieces of music and literature are now
just a few clicks away on the Web, and the classics of cinema
history are available in the video store around the corner.
With many reservations, one can say that developments are
moving toward a common objective, but that objective is not
the predominance of a particular culture. Instead it is pluralism,
280
freedom to choose from a host of different paths and destinations.
People’s actual choices will then vary. Globalization and greater
exchange result, not in all the different countries choosing the
same thing, but in a far wider variety of options suddenly finding
room in one country. When markets broaden and become international,
this globalization increases the prospects of even very narrow
cultural manifestations surviving and flourishing. Perhaps
not all that many people in any given place are in the market
for experimental electronic music or film versions of novels by
Dostoevsky, and so the musicians and filmmakers concerned could
never produce anything if they had only a local audience to rely
on. But even very narrow customer segments acquire purchasing
power when combined with similar tastes in other countries.
Globalization can increase our chances of gaining access to exactly
what we want, no matter how isolated we may feel in our liking
for it. Moroccan folk art and French Roquefort cheese acquire
better survival prospects when demand for them is aggregated
from consumers across the world. The supply of goods and culture
grows larger, with demand coming from all around the globe.
This internationalization is, ironically, what makes people believe
that differences are vanishing. When you travel abroad, things
look much the same as in your own country: the people there
also have goods and chain stores from different parts of the globe.
This phenomenon is not due to uniformity and the elimination
of differences but, on the contrary, is caused by a growth of
pluralism everywhere. Americans are cultural leaders because they
have been accustomed to producing commercially for a very large
public, a function of having a large country with a common
language. Now other countries are being given the same chance.
This opportunity can be negative in certain situations, admittedly.
When traveling to another country, we want to see something
unique. Arriving in Rome and finding Hollywood films,
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Chinese food, Japanese Pokemon games, and Swedish Volvos,
we miss the local color. And national specialties like pizza, pasta,
and espresso are already familiar to us because we have them at
home, too. A few pizzerias in Rome even promise Chicago-style
pizza. What we gain by being free to choose everything at home
is that this opportunity makes it hard to find any place that feels
really authentic, at least on the main tourist routes. This is a
problem, but it’s another one of those luxury problems. A man
from Prague was sometimes visited by Czech friends who had
settled abroad. They deplored McDonald’s having come to
Prague, because it threatened the city’s distinctive charm. This
response made the man indignant. How could they regard his
home city as a museum, a place for them to visit now and then
in order to avoid fast food restaurants? He wanted a real city,
including the convenient and inexpensive food that these exile
Czechs themselves had access to. A real, living city cannot be a
‘‘Prague summer paradise’’ for tourists. Other countries and their
populations do not exist in order to give us picturesque holiday
experiences. They, like us, are entitled to choose what they think
suits them.4
Cultures change, and the greater the number of options, the
faster change will be. If one can read about other lifestyles and
values in the newspaper and see them on television, adopting
them may no longer seem like as big a step to take. Basically,
though, there’s nothing new about cultures changing, colliding
with each other, and cross-pollinating. They’ve always done these
things. Culture means cultivation, and change and renewal are
an inherent part of that. If we try to freeze certain cultural patterns
in time and highlight them as distinctively American or Thai or
French or Swedish or Brazilian or Nigerian, they cease to be
culture. They cease to be a living part of us and instead become
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museum relics and folklore. There is nothing wrong with museums—
they can be pleasant places to spend an afternoon—but
we can’t live in one.
In coming to terms with the idea of isolated and preserved
culture, the Norwegian social anthropologist Thomas Hylland
Eriksen has pointed out that culture is a process, not a static
object, and therefore essentially unlimited:
When the government is to be the guarantor of the population’s
cultural identity, culture has to be defined and codified in the
rigid administrative language of the bureaucracy. It ceases to be
living, dynamic, changeable and manifold and becomes a package,
a completed jigsaw puzzle from which none of the pieces can be
removed without spoiling the picture.5
Even the traditions we think of as most ‘‘authentic’’ have
generally resulted from cultural imports.6 Foreigners often find it
hard to believe, but one of the most sacred Swedish traditions is
watching Donald Duck on TV on Christmas Eve, while another,
11 days earlier, involves celebrating an Italian saint by adorning
the hair of blond girls with lighted candles. The Peruvian author
Mario Vargas Llosa claims to have learned one thing from his
lifelong studies of culture, French culture especially, which French
politicians wish to protect with tariffs and subsidies:
And the most admirable lesson that I received . . . was the knowledge
that cultures do not need to be protected by bureaucrats or
police, confined behind bars, or isolated by customs officials to be
kept alive, because that provincializes and stifles them. They need
to live in freedom, exposed to exchanges with different cultures,
thanks to which they renew and enrich themselves.
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It is not the dinosaurs of ‘‘Jurassic Park’’ that are threatening
the culture that gave the world Montaigne and Flaubert, Debussy
and Cezanne, Rodin and Marcel Carne, but the band of demagogues
who talk about culture as if it were a mummy that cannot
be taken out into the air of the world because freedom would
destroy it.7
The cultural encounters of globalization reduce the risk of people
being trapped in one culture. This may come as bad news to the
guardians of tradition, but many people can imagine no greater
triumph than escaping from the stereotypes and constraints of
their own cultures. Globalization may be necessary in order to
escape hidebound gender roles, to be allowed to live according
to one’s own values, or to break the family tradition and enter a
career of one’s own choosing. Having other cultural expressions
to refer to can help. How can the elite maintain that their own
way of life is the only possible one when television and the
Internet carry so much information about an infinite number of
alternatives? How can politicians pander to homophobia while
simultaneously negotiating trade agreements with openly gay officials
from other countries? Regularly meeting people who do not
think and live like oneself is an effective antidote to narrowmindedness,
parochialism, and smug complacency.
The British sociologist Anthony Giddens provides a striking
illustration from his own recollections of how oppressive the one
and only solution of tradition can be:
If ever I am tempted to think that the traditional family might
be best after all, I remember what my great aunt once said to me.
She must have had one of the longest marriages of anyone, having
been with her husband for over 60 years. She once confided that
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she had been deeply unhappy with him the whole of that time.
In her day there was no escape.8
There is no universal formula to show how much modernization
one must accept and how many traditions are to be preserved.
Every balance has to be struck by people choosing for themselves.
This can mean, but need not mean, that earlier forms of culture
fade away. Now that other people who weren’t born to the culture
can gain access to it, its survival prospects are augmented in a
different way—instead of being sustained by force of habit, it
can spread by deliberate choice. The author Salman Rushdie has
remarked that it is trees, not human beings, that have roots.
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The onward march of freedom
Openness to new influences makes it easy for the most tempting
and convincing ideas to spread. That is why the idea of freedom
and individualism has attained such tremendous force in the age
of globalization. There are few ideas as inspiring as that of selfdetermination.
When it is discovered that people in other countries
have that right, it becomes almost irresistible. A taste of the
freedom to receive new ideas, images, and sounds, the freedom
to choose, quickly leads people to demand more choice, more
power to decide for themselves. That is why people who are
allowed to enjoy economic freedom demand political democracy
as well, and why those attaining democracy demand individual
liberty. The idea of human rights is traveling around the globe.
If there is any elimination of differences in progress throughout
the world, it has been the convergence of societies on democracy,
on people being allowed to live as they please. The similarity
consists in more and more people being allowed to be dissimilar.
‘‘That contempt in which lower castes used to be held is almost disappearing
completely. Now it is obvious for me to know that everyone, untouchables
included, is a human being, with the same human dignity as myself. We
all have the same color blood.’’
Indian farmer Ram Vishal, himself of intermediate caste.9
So much for the racist idea that certain peoples cannot ‘‘cope’’
with freedom, that they need a period of strong leaders, or that
286
people in one country can have nothing to say about another
country’s policies. If other governments oppress or exterminate
their own citizens, we are entitled, perhaps even duty bound, to
combat such actions. The notion of human dignity meaning
different things on different sides of the border has been badly
dented. Even though it did not result in prosecution, a milestone
was reached when a Spanish prosecutor prevailed on the British
authorities to arrest former Chilean dictator Augusto Pinochet
while he was visiting the United Kingdom. It was also logical
that Cuban dictator Fidel Castro was furious over the decision,
even though he has a very different political complexion. He
appreciated that the world now held fewer hiding places for
dictators. Today, despots and mass murderers who as little as a
decade ago could freely travel the world now risk being hauled
in front of war crimes tribunals and international courts. This
development, in turn, has spurred the activity of national judicial
systems, which shows that the international measures supplement
rather than supersede local law. In the future, perhaps crimes
against humanity will not pay.
The future is not predetermined. There is no single path, and
there is nothing forcing us to accept globalization. The antiglobalists
are perfectly right about that. Capital can be locked up,
trade flows blocked, and borders barricaded. This happened at
least once before, following the globalization of the late 19th
century. The world had then experienced several decades of
democratization and greater openness. People could cross borders
without passports and find jobs without work permits. They could
easily become citizens wherever they settled. But after decades
of anti-liberal propaganda and nationalistic saber-rattling, this
openness was replaced at the beginning of the 20th century by
centralization and closed borders. Countries that had been partners
in trade and in the creation of new values began seeing one
287
another as enemies, to be fought in the name of old values. Markets
were to be conquered by force, not through free competition. The
outbreak of World War I in 1914 marks the end of that period’s
globalization. Protectionism and passport requirements were
introduced for the first time in several generations.
Globalization brings with it a number of effects upon which it
is easy to cast suspicion—old economic forms disrupted, interests
undermined, cultures challenged, and traditional power centers
eroded. When boundaries become less important, people, goods,
and capital move more freely—but so too can crime, fanaticism,
and disease. Advocates of globalization have to show that greater
freedom and greater opportunities counterbalance such problems.
They must point to possible ways of dealing with them, perhaps
more effectively than before. Otherwise, there is a serious risk
that anti-globalist ideas will take root in the Western world, in
which case a downturn or a trivial tariff war, for example, could
evoke a powerful protectionist reaction. After the Wall Street
Crash of 1929, the United States switched to a drastic policy
of protectionism; thereafter all it exported for many years was
depression. Other governments responded in kind, and world
trade collapsed, diminishing by two-thirds in just three years.
A national crisis led to worldwide depression. The return of
protectionism today would mean stagnation in the affluent world
and deeper poverty in the developing countries. At worst, it would
once again lead to conflict, to countries regarding each other as
enemies. When governments turn in upon themselves, regarding
what is foreign as a threat rather than an opportunity, the simplest
and coarsest forms of nationalism will gain ground.
There is less risk of globalization crashing and burning in the
same way today. Imperialist ambitions have been dashed, and
globalization has taken hold in an unprecedented number of
288
democratic countries. Ideas of democracy and human rights are
becoming more and more influential, and Asia and Latin America
are on the whole more closely integrated with the world economy
than ever, by their own choice. Most countries aim for regulated,
mutual trade agreements within, say, the WTO, so that powerful
governments will not be able to crush free trade on a whim. But
even if democracy and the market should continue to spread,
there is no single path for everyone. Countries like Burma and
North Korea show that it is possible to cut oneself off from the
global environment, as long as one is prepared to pay heavily for
doing so in terms of oppression and poverty. Nor is there anything
forcing the EU to liberalize our markets, if we are prepared
to take the losses of freedom and prosperity that liberalization
implies—and if we are prepared to let the poor of the developing
countries suffer through our decision to retain tariff walls. It is
not ‘‘necessary’’ to follow the globalization trend; it is merely
desirable. Globalization will not keep moving under its own steam
if no one stands up for it, if no one challenges isolationism.
All change arouses suspicion and anxiety, sometimes justifiably
so; even positive changes can have troublesome consequences in
the short term. Decisionmakers are unwilling to shoulder responsibility
for failures and problems. It is preferable to be able to
blame someone else. Globalization makes an excellent scapegoat.
It contains all the anonymous forces that have served this purpose
throughout history: other countries, other races and ethnic groups,
the uncaring market. Globalization does not speak up for itself
when politicians blame it for overturning economies, increasing
poverty, and enriching a tiny minority, or when entrepreneurs
say that globalization, rather than their own decisions, is forcing
them to pollute the environment, cut jobs, or raise their own
salaries. And globalization doesn’t usually get any credit when
289
good things happen—when the environment improves, the economy
runs at high speed and poverty diminishes. Then there are
plenty of people willing to accept full responsibility for the course
of events. Globalization does not defend itself. So if the trend
toward greater globalization is to continue, an ideological defense
will be needed for freedom from borders and controls.
In 25 years’ time there are likely to be 2 billion more of us on
this planet, and 97 percent of that population increase will occur
in the developing world. There are no automatic, predetermined
processes deciding what sort of a world they will experience and
what their opportunities will be. Most will depend on what people
like you and me believe, think, and fight for.
***
In the Chinese village of Tau Hua Lin, Lasse Berg and Stig
Karlsson meet people who describe the change that has occurred
in ways of thinking since they were last there: ‘‘The last time you
were here, people’s thoughts and minds were closed, bound up,’’
Yang Zhengming, one of the farmers, explains. But when they
acquired power over their own land, they became entitled, for
the first time, to decide something for themselves. Even a modest
freedom like that was revolutionary. They were forced to think
for themselves, to think along new lines. They were allowed to
start thinking more about themselves and their loved ones instead
of the leader’s dictates. Individuals are not means to a higher end;
they are the ends in themselves. Yang goes on to say that ‘‘a
farmer could then own himself. He did not need to submit. He
decided himself what he was going to do, how and when. The
proceeds of his work were his own. It was freedom that came to
us. We were allowed to think for ourselves.’’ Author Lasse Berg
sums up his impressions in a more universal observation:
290
It is not only inside the Chinese that a Chinese wall is now being
torn down. Something similar is happening all over the world, in
Bihar, East Timor, Ovamboland. Human beings are discovering
that the individual is entitled to be his own. This has by no means
been self-evident before. The discovery engenders a longing, not
only for freedom but also for the good things in life, for prosperity.10
This new mindset, all reservations notwithstanding, must inspire
optimism. We have not traveled the full distance: coercion and
poverty still cover large areas of our globe. Great setbacks can
and will occur. But people who know that living in a state of
oppression and ignorance is not natural or necessary will no longer
accept this as the only conceivable state of affairs. People who
realize that they are not merely the tools of society and the
collective but are ends in themselves will not be submissive. People
who have acquired a taste for freedom will not consent to be shut
in by walls or fences. They will work to create a better existence
for themselves and to improve the world we live in. They will
demand freedom and democracy. The aim of politics should be
to give them that freedom.
291

NOTES
Introduction
1. Benjamin R. Barber, ‘‘Globalizing Democracy,’’ The American Prospect 11, no. 20,
September 11, 2000, p. 16.
2. Anders Ehnmark, Minnets hemlighet: en bok om Erik Gustaf Geijer (Stockholm:
Norstedts, 1999), p. 60.
3. Lasse Berg and Stig T. Karlsson, I Asiens tid: Indien, Kina, Japan 1966–1999
(Stockholm: Ordfront, 2000), chap. 1.
4. John Gray, False Dawn: The Delusions of Global Capitalism (New York: The New
Press, 1998) pp. 39–43.
5. See, for example, Human Rights Watch, The Price of Oil: Corporate Responsibility
and Human Rights Violations in Nigeria’s Oil Producing Communities (New York:
Human Rights Watch, 1999), http://www.hrw.org/reports/1999/nigeria/index.htm.
Chapter 1
1. Wulfstan is quoted in Anthony Giddens, Runaway World: How Globalisation Is Reshaping
Our Lives (London: Profile Books, 1999), p. 1. The quotation from Pope John
Paul II is from his ‘‘Homily in the Jose´ Martı´ Square of Havana,’’ delivered January
25, 1998. An English transcript is online at http://www.vatican.va/holy_father/
john_paul_ii/travels/documents/hf_jp-ii_hom_25011998_lahavana_en.html.
2. Unless otherwise indicated, the facts and figures quoted in this chapter come from
the United Nations Development Program (UNDP) and the World Bank, especially
the respective annual publications of these two institutions, Human Development
Report and World Development Report, and the compilation World Development
Indicators 2000. Figures, it should be noted, sometimes vary from one source to
another, because of differences in the methods of measurement, and so care must
be taken to use the same method when studying a certain change over time.
In this book, when contrasting developing countries with industrialized countries,
I refer to the commonly accepted definition of developing (or underdeveloped)
countries as those suffering, for example, from a low standard of living, poor
293
public health and education, low productivity, shortage of capital, heavy economic
dependence on agriculture and raw materials, and instability and dependence on
the international arena. Compare Michael P. Todaro, Economic Development, 6th
ed., (Reading, Mass.: Addison Wesley Longman, 1997), p. 38. By this definition,
about 135 of the poorest states are counted as classic developing countries, with
another group of thirty-odd countries heading away from developing country status.
It is important to remember that the differences between these countries are so
great that it is hard to speak of them as one group. The concept lumps together
dictatorships and democracies; war zones and growth markets; abysmally poor,
famine-wracked countries and countries heading for the ranks of the industrialized
nations.
3. Published in Sweden as I Asiens tid: Indien, Kina, Japan 1966–1999.
4. Berg and Karlsson, p. 96.
5. Arne Melchior, Kjetil Telle, and Henrik Wiig, Globalisering och ulikhet: Verdens
inntektsfordeling og levestandard, 1960–1998 (Oslo: Royal Norwegian Ministry of
Foreign Affairs, 2000). Also available in an abridged English version: Globalization
and Inequality: World Income Distribution and Living Standards, 1960–1998, Studies
on Foreign Policy Issues, Report 6:B, 2000, chap. 2, http://xodin.dep.no/ud/engelsk/
publ/rapporter/032001-990349/index-dok000-b-n-a.html.
6. UNDP, Human Development Report 1997 (New York: Oxford University Press for the
United Nations Development Program, 1997), ‘‘Overview,’’ p. 12.
7. Surjit S. Bhalla, Imagine There’s No Country: Poverty, Inequality, and Growth in the
Era of Globalization (Washington: Institute for International Economics, 2002).
8. Berg and Karlsson, p. 300.
9. Indur M. Goklany, ‘‘The Globalization of Human Well-Being,’’ Cato Institute Policy
Analysis no. 447, 2002, p. 7, http://www.cato.org/pubs/pas/pa447.pdf.
10. Forbes, November 16, 1998, p. 36; World Bank, World Development Report 2000/
2001: Attacking Poverty (New York: Oxford University Press/World Bank, 2000), p.
184, http://www.worldbank.org/poverty/wdrpoverty/report/index.htm.
11. Amartya Sen, Development as Freedom (New York: Anchor Books, 1999), chap. 7.
12. Freedom House, Freedom in the World 2002 (New York: Freedom House, 2002), http://
www.freedomhouse.org/research/freeworld/2002/web.pdf.
13. Berg and Karlsson, p. 202.
14. ‘‘How Women Beat the Rules,’’ The Economist, October 2, 1999.
15. Deon Filmer, ‘‘The Structure of Social Disparities in Education: Gender and Wealth,’’
World Bank Policy Research Working Paper 2268 (Washington: World Bank, 1999),
http://econ.worldbank.org/docs/1021.pdf.
16. Oxfam. ‘‘The Clothes Trade in Bangladesh.’’ Oxford: Oxfam (http://www.oxfam.org.uk/
campaign/clothes/clobanfo.htm) accessed May 1, 2001.
17. Shuije Yao, ‘‘Economic Development and Poverty Reduction in China over 20 Years
of Reform,’’ Economic Development and Cultural Change 48, no. 3 (2000), pp.
447–74. World Bank, ‘‘Does More International Trade Openness Increase World
294
Poverty?’’ vol 2 of Assessing Globalization (Washington: World Bank/PREM Economic
Policy Group and Development Economics Group, 2000), http://www.worldbank.org/
economicpolicy/globalization/ag02.html.
18. Berg and Karlsson, chap. 4.
19. Nirupam Bajpai and Jeffrey Sachs, ‘‘The Progress of Policy Reform and Variations
in Performance at the Sub-National Level in India,’’ Development Discussion Paper
no. 730 (Cambridge, Mass.: Harvard Institute for International Development, 1999).
20. Central Intelligence Agency, CIA World Factbook 2002, http://www.cia.gov/cia/publications/
factbook.
21. Michael W. Cox and Richard Alm, Myths of Rich and Poor: Why We’re Better Off
than We Think (New York: Basic Books, 1999), pp. 14ff.
22. Melchior, Telle, and Wiig. This development toward greater equality will be even
faster in coming decades, with the world’s workforce growing older and thus earning
more equally; see Tomas Larsson, Falska mantran: globaliseringsdebatten efter
Seattle (Stockholm: Timbro, 2001), p. 11f, http://www.timbro.se/bokhandel/pejling/
pdf/75664801.pdf.
23. Xavier Sala-i-Martin, ‘‘The Disturbing ‘Rise’ of Global Income Inequality,’’ National
Bureau of Economic Research Working Paper no. 8904, http://www.nber.org/
papers/w8904.
24. Bhalla.
25. World Bank, Making Transition Work for Everyone: Poverty and Inequality in Europe
and Central Asia (Washington: World Bank, 2000).
26. Larsson, Falska mantran: globaliseringsdebatten efter Seattle, p. 11f.
27. UNICEF, ‘‘Children Orphaned by AIDS: Front-Line Responses From Eastern and Southern
Africa,’’ http://www.unicef.org/pubsgen/aids.
Chapter 2
1. Clyde Wayne Crews, Ten Thousand Commandments: An Annual Snapshot of the
Federal Regulatory State (Washington: Cato Institute, 2003).
2. Sen 1999, p. 276.
3. See, for example, Jonathan Kwitny, Endless Enemies: The Making of an Unfriendly
World (New York: Congdon and Weed, 1984), pp. 286–300, 380–81.
4. These charts, of course, do not distinguish between cause and effect. They are
compatible with countries first growing rich and then starting to liberalize the
economy. This is a material factor, but looking at the countries represented by these
figures, one finds that the relation mainly operates in the other direction: liberalization
measures are accompanied by growth. Nothing I say here should be taken to imply
that history, culture, and other factors are irrelevant to national development. On
the contrary, I believe that people’s ideas and convictions are of momentous import
for economic development, but I have concentrated here on the political factors,
which, of course, also affect people’s incentives.
295
5. Mabel C. Buer, Health, Wealth, and Population in the Early Days of the Industrial
Revolution, 1760–1815 (London: Routledge and Sons, 1926) p. 88.
6. Angus Maddison, Monitoring the World Economy 1820–1992 (Paris: Development
Center of the Organization for Economic Cooperation and Development, 1995).
7. The view of growth as an end in itself is absurd. If that were right, the important
thing would be just producing as much as possible. That kind of growth is easily
created by the state taking everyone’s money and starting up an enormous output
of things that people don’t want, as in the case of steel and munitions in the
former Soviet Union. Growth has to take place on people’s terms, by producing
things that people are demanding. That is why, fundamentally, it is only in a market
economy, where demand affects prices and production, that growth can really take
place in ways that benefit people.
8. Berg and Karlsson, p. 245.
9. David Dollar and Aart Kraay, Growth Is Good for the Poor (Washington: World Bank,
April 2001) http://econ.worldbank.org/files/1696wps2587.pdf. For a balanced review
of the debate on this report, see Jonas Vlachos, A¨ r ekonomisk tillva¨ xt bra fo¨r de
fattiga?: en o¨versikt o¨ver debatten (Stockholm: Globkom, 2000), http://www.globkom.
net/rapporter/vlachos.pdf. Reports corroborating these findings include John
Luke Gallup, Steven Radelet, and Andrew Warner, ‘‘Economic Growth and the Income
of the Poor,’’ CAER II Discussion Paper no. 36 (Cambridge, Mass.: Harvard Institute for
International Development, 1998), http://www.hiid.harvard.edu/caer2/htm/content/
papers/confpubs/paper36/paper36.htm. The authors suggest that, in proportional
terms, the poor actually benefit more than do other groups from growth.
10. John Stuart Mill, Principles of Political Economy: Books IV and V (London: Penguin,
1985), Book V, chap. 2.
11. See, for example, Eric Engen and Jonathan Skinner, ‘‘Taxation and Economic Growth,’’
National Tax Journal 49, no. 4 (1996): 617–642. Martin Feldstein, ‘‘Tax Incidence
in a Growing Economy with Variable Factor Supply,’’ Quarterly Journal of Economics,
no. 88 (November 1974): 551–73; ‘‘The Welfare Cost of Capital Income Taxation,’’
Journal of Political Economy 86, no. 10, pt. 2 (1978): S29–51. The digest of research
presented in Sofia Leufstedt and Fredrik Voltaire, Vad sa¨ ger empirin om skatter och
sysselsa¨ ttning? (Stockholm: Svensk Handel, September 1998), http://www.svenskhandel.
se/Filer/empiri.pdf, suggests that a 10 percent increase in the size of the
public sector reduces growth by about 1.5 percentage points.
12. Cox and Alm, chap. 4. Some have argued that this social mobility is greater in
more egalitarian countries, such as Sweden, despite heavier tax burdens, but this
is probably due to a confusion of concepts. It is easier to enter a new income
bracket in Sweden because pay differentials are so small there. On the other hand,
it is more difficult to raise the absolute amount of one’s earnings.
13. Concerning equality of assets versus equality of income, see Klaus Deininger and
P. Olinto, Asset Distribution, Inequality, and Growth, World Bank Policy Research
Paper no. 2375 (Washington: World Bank, 2000). For the connection with democracy,
296
see Klaus Deininger and Lyn Squire, ‘‘New Ways of Looking at the Old Issues: Asset
Inequality and Growth,’’ Journal of Development Economics 57 (1998): 259–87.
14. Simon Kuznets, ‘‘Economic Growth and Income Inequality,’’ American Economic
Review 45 (March 1955): 26.
15. World Bank, Income Poverty: Trends in Inequality (Washington: World Bank, 2000),
http://www.worldbank.org/poverty/data/trends/inequal.htm. The data refuting Kuznets
are presented in Deininger and Squire, pp. 259–287. For a review of the
research, see Arne Bigsten and Jo¨rgen Levin, Tillva¨ xt, inkomstfo¨rdelning och fattigdom
i u-la¨ nderna (Stockholm: Globkom, September 2000), http://www.globkom.net/
rapporter.phtml.
16. G. W. Scully, Constitutional Environments and Economic Growth (Princeton, N.J.:
Princeton University Press, 1992).
17. Niclas Berggren, ‘‘Economic Freedom and Equality: Friends or Foes?’’ Public Choice,
vol. 100 (September 1999): 203–23.
18. ‘‘Measuring Globalization,’’ Foreign Policy, January/February 2001. According to the
third edition of this index, the most globalized countries are Ireland and Switzerland.
The United States comes in 11th, but this is somewhat misleading because the
United States is so large that it accommodates far more long-distance travel, trade
and communication within its frontiers than can small countries.
19. Compare David Dollar and Aart Kraay, Property Rights, Political Rights, and the
Development of Poor Countries in the Post-Colonial Period (Washington: World Bank,
2000), http://www.worldbank.org/research/growth/pdfiles/dollarkraay2.pdf and
Growth Is Good for the Poor. Concerning the importance of property rights for
economic development, see Nathan Rosenberg and L. E. Birdzell, How the West
Grew Rich: The Economic Transformation of the Industrial World (New York: Basic
Books, 1986).
20. Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West
and Fails Everywhere Else (London: Bantam Press, 2000).
21. James Gwartney, Robert Lawson, Chris Edwards, Walter Park, Veronique de Rugy,
and Smita Wagh, Economic Freedom of the World 2002 (Vancouver: Fraser Institute,
2002), http://freetheworld.com; Gerald P. O’Driscoll, Edwin J. Feulner, and Mary
Anastasia O’Grady, The 2003 Index of Economic Freedom (Washington: Heritage
Foundation and Wall Street Journal, 2002), http://www.heritage.org/index/2003.
22. Christer Gunnarsson and Mauricio Rojas, Tillva¨ xt, stagnation, kaos: en institutionell
studie av underutvecklingens orsaker och utvecklingens mo¨jligheter (Stockholm:
Studiefo¨rbundet Na¨ ringsliv Samha¨ lle, 1997), pp. 50ff.
23. Berg and Karlsson, p. 93f. Quotation from World Bank World Development Report
2000/2001, p. 85.
24. World Bank, The East Asian Miracle: Economic Growth and Public Policy (New York:
Oxford University Press/World Bank, 1993), p. 6. See also Gunnarsson and Rojas.
25. Jeffrey Sachs and Andrew Warner, ‘‘Economic Reform and the Process of Global
Integration,’’ Brookings Papers on Economic Activity, no. 1, 1995, pp. 26–32, 72–95.
297
26. Jeffrey Sachs and Andrew Warner, ‘‘Sources of Slow Growth in African Economies,’’
Journal of African Economies 6, no. 3 (1997): 335–76; Arthur Goldsmith, ‘‘Institutions
and Economic Growth in Africa,’’ African Economic Policy Papers, Discussion paper
no. 7, (Cambridge, Mass.: Harvard Institute for International Development, July 1998),
http://www.eagerproject.com/discussion7.shtml. A confused interpretation considers
Africa more integrated than other continents with the world economy, because
exports from the African countries are unusually large in proportion to GDP. However
this is not due to their being unusually export heavy, but simply to the native
economies being so extraordinarily weak and small. See also George B. N. Ayittey,
Africa in Chaos (New York: St. Martin’s, 1999).
27. Gwartney et al.
28. ‘‘The Zimbabwean Model,’’ The Economist, November 30, 2002.
29. Sachs and Warner, ‘‘Sources of Slow Growth in African Economies.’’
Chapter 3
1. The most common criticism of free trade is that certain tariffs and quotas are
needed for the protection of particular industries. It is less common for anyone
today to believe in self-sufficiency as a policy, but the belief lives on in groups
more critical of modern civilization, such as the Green political parties. Advocates
also include the French anti-globalist ATTAC movement. Its chairman, Bernard
Cassen, makes self-sufficiency an argument against reducing tariffs for developing
countries: ‘‘I’m very surprised by the argument that poorer countries, undeveloped
countries, must have more market access to developed ones. What does that mean,
in reality? That means that you expect undeveloped countries to export. To export
what? To export commodities that they need for their own internal market . . . we
must return to self-centered economies, and not to export-led economies that have
proved a real failure.’’ Bernard Cassen, ‘‘Who Are the Winners, and Who Are the
Losers of Globalization?’’ speech presented at The Amis UK Conference ‘‘Globalization
in Whose Interest?’’ Conway Hall, London, June 17, 2000.
2. James Mill, Elements of Political Economy, 3d ed. (London: Baldwin, Cradock and
Joy, 1826), chap. V, sec. 3.
3. Adam Smith, An Inquiry Into the Nature and Causes of The Wealth of Nations
(Indianapolis: Liberty Classics, 1981), p. 488f.
4. Tomas Larsson predicted the collapse of the Seattle meeting for precisely this reason
in his excellent book The Race to the Top: The Real Story of Globalization (Washington:
Cato Institute, 2001) originally published in Swedish in 1999 as Va¨ rldens klassresa.
5. Brink Lindsey and Daniel Ikenson, ‘‘Antidumping 101: The Devilish Details of ‘Unfair
Trade’ Law,’’ Cato Trade Policy Analysis no. 20, 2002, http://www.freetrade.org/
pubs/pas/tpa-020es.html.
6. Daniel Ikenson, ‘‘Steel Trap: How Subsidies and Protectionism Weaken the U.S. Steel
Industry,’’ Cato Trade Briefing Paper no. 14, 2002, http://www.freetrade.org/pubs/
briefs/tbp-014es.html.
298
7. Sachs and Warner, ‘‘Economic Reform and the Process of Global Integration.’’
8. The critics include free traders T. N. Srinivasan and Jagdish Bhagwati, ‘‘Outward-
Orientation and Development: Are Revisionists Right?’’ (paper written for the Professor
Anne Krueger Festschrift, September 1999), http://www.columbia.edu/jb38/
Krueger.pdf. Francisco Rodriguez and Dani Rodrik, ‘‘Trade Policy and Economic
Growth: A Skeptic’s Guide to The Cross-National Evidence,’’ Working Paper Series
no. 7081 (Cambridge, Mass.: National Bureau of Economic Research, 1999) are
leading trade skeptics, but even they point out (p. 62): ‘‘We do not want to leave
the reader with the impression that we think trade protection is good for economic
growth. We know of no credible evidence—at least for the post-1945 period—that
suggests that trade restrictions are systematically associated with higher growth
rates. . . . The effects of trade liberalization may be on balance beneficial on standard
comparative advantage grounds; the evidence provides no strong reason to dispute
this.’’ One of Dani Rodrik’s arguments against free trade is that countries with
high tariffs, such as China and India, have faster growth than the EU and the
United States, which have low tariffs. But he forgets that China and India have
achieved these growth figures by liberalizing their economies. It is when countries
begin reducing their tariffs from high initial levels that they achieve the biggest
growth gains, because workers then switch to occupations in which they have the
biggest advantages. The United States and the EU acquired similar impetus when
their trade was liberalized. Besides, China and India have such large populations
that trade liberalization within the country means free trade on a far bigger scale
than is implied by the ordinary regional free trade agreements in the rest of the world.
9. Sebastian Edwards, ‘‘Openness, Productivity and Growth,’’ National Bureau of Economic
Research Working Paper 5978, (Cambridge, Mass.: National Bureau of Economic
Research, 1997); Haåkan Nordstro¨m, ‘‘The Trade and Development Debate:
An Introductory Note with Emphasis on WTO Issues,’’ (Stockholm: Kommitte´n om
Sveriges politik fo¨r global utveckling, Globkom, March 2000), http://www.globkom.
net/rapporter/nordstrom.pdf.
10. Jeffrey Frankel and David Romer, ‘‘Does Trade Growth Cause Growth?’’ American
Economic Review 89, no. 3 (June 1999): 379–399.
11. David Dollar and Aart Kraay, ‘‘Trade, Growth and Poverty,’’ World Bank Working
Paper 2615 (Washington: World Bank, 2001), pp. 5, 35.
12. Dollar and Kraay, ‘‘Trade, Growth and Poverty,’’ p. 26.
13. Percy Barnevik, Global Forces of Change, lecture presented at the 1997 International
Industrial Conference, San Francisco, September 29, 1997, p. 4.
14. This finding is generally confirmed by Daniel Ben-David and L. Alan Winters, ‘‘Trade,
Income Disparity and Poverty,’’ World Trade Organization Special Study No. 5
(Geneva: World Trade Organization, 1999), http://www.wto.org/english/res_e/booksp_
e/disparity_e.pdf. It is also supported by Alberto F. Ades, and Edward L. Glaeser,
‘‘Evidence on Growth, Increasing Returns, and the Extent of the Market,’’ Quarterly
Journal of Economics 114, no. 3 (August 1999). One argument against free trade
299
bringing growth is that growth was higher during the early postwar decades than
it is today, in the age of globalization. But this objection ignores the fact that
growth is quicker when huge tariffs begin to come down. Growth is also generally
fastest when the starting point is poverty, with any number of opportunities of
obtaining a big return on investments, owing to the shortage of capital and disastrous
political affairs formerly prevailing—as, for example, after a war. As countries
become more fully developed and invested, the economy reverts to a more normal
growth curve. Furthermore, the argument cannot in any way explain why, in this
case, it is the very countries that opt for free trade that have the fastest growth
today, whereas protectionist states are lagging further and further behind.
15. Mauricio Rojas, Millennium Doom: Fallacies about the End of Work (London: Social
Market Foundation, 1999).
16. Paul Krugman, ‘‘The Accidental Theorist: All Work and No Play Makes William Greider
a Dull Boy,’’ Slate, January 24, 1997, http://slate.msn.com/id/1916.
17. Susan George in an interview by Bim Clinell, ‘‘Dom kallar oss huliganer,’’ Ordfront
12 (2000).
18. Steven J. Matusz and David Tarr, ‘‘Adjusting to Trade Policy Reform,’’ World Bank
Working Paper 2142 (Washington: World Bank, 2000), http://www.worldbank.org/
html/dec/Publications/Workpapers/wps2000series/wps2142/wps2142.pdf.
19. Cox and Alm, p. 65ff and chap. 1.
20. Anders Åslund, ‘‘Da¨ rfo¨r har Estland lyckats,’’ Svenska Dagbladet, August 2, 2000;
Razeen Sally, ‘‘Free Trade in Practice: Estonia in the 1990s,’’ Central Europe Review
27 (2000), http://www.ce-review.org/00/27/sally27.html.
21. Cato Handbook for Congress: 108th Congress (Washington: Cato Institute, 2002),
pp. 631–641.
22. Julian Simon, The Economic Consequences of Immigration, 2nd ed. (Ann Arbor:
University of Michigan Press, 1999), p. 368, see also chaps. 5–6, 17.
Chapter 4
1. Patrick Low, Marcelo Olarrega, and Javier Suarez, ‘‘Does Globalization Cause a
Higher Concentration of International Trade and Investment Flows?’’ World Trade
Organization Staff Working Paper: Economic Research and Analysis Division (Geneva:
World Trade Organization, 1998). Many states are closed to some extent. Of 161
developing countries investigated, 131 still have regulations opposing foreign
direct investment.
2. Thomas W. Hertel and Will Martin, ‘‘Would Developing Countries Gain from Inclusion
of Manufactures in the WTO Negotiations?’’ presented at the World Trade Organization/
World Bank Conference on ‘‘Developing Countries in a Millennium Round,’’
September 20–21, 1999 in Geneva at the WTO’s Center William Rappard, p. 12,
http://www.itd.org/wb/hertel.doc.
300
3. Ronnie Horesh, ‘‘Trade and Agriculture: The Unimportance of Being Rational,’’
New Zealand Orchardist (April 2000), also available at http://www.geocities.com/
socialpbonds/orchard2.html.
4. ATTAC Chairman Bernard Cassen maintains that ‘‘every country or group of countries
has the absolute right to protect its agriculture,’’ in an interview with Lars Mogensen,
‘‘ATTAC lider af børnesygdomme,’’ Danish Information, February 23, 2001. In the
international platform defining its essential issues, ATTAC declares its intention of
combating the forces within the EU that are conducting a ‘‘free trade crusade’’
and, among other things, are seeking to ‘‘dismantle the common agricultural policy.’’
This fact, however, is apparently so embarrassing to Swedish ATTAC adherents that
they endeavor to conceal it. In the Swedish translation of this very section in
Bim Clinell’s adulatory book ATTAC: gra¨ sro¨tternas revolt mot marknaden, trans. by
Margareta Kruse (Stockholm: Agora, 2000), pp. 75–78, this is reduced to a mere
complaint about those who ‘‘are pushing development towards new fields of deregulation,’’
without any mention of the CAP.
5. Kym Anderson, Bernard Hoekman, and Anna Strut, ‘‘Agriculture and the WTO: Next
Steps,’’ (Washington: World Bank/Centre for Economic Policy Research, 1999), http://
wbweb4.worldbank.org/wbiep/trade/papers_2000/ag-rie-sept.pdf.
6. Joseph Franc¸ois, Hans H. Glismann, and Dean Spinange, The Cost of EU Trade
Protection in Textiles and Clothing (Stockholm: The Ministry for Foreign Affairs, March
2000); Leif Pagrotsky, ‘‘Varfo¨r en ny WTO-runda?’’ speech at the EU committee’s WTO
hearing, November 25, 1999.
7. Patrick Messerlin, Measuring the Costs of Protection in Europe (Washington: Institute
for International Economics, 2001).
8. Eli Heckscher, ‘‘Vaårt tullsystems framtid III. Industri- och agrartullar,’’ Svensk
Handelstidning, August 25, 1918.
9. ‘‘White Man’s Shame,’’ The Economist, September 25, 1999; Clare Short, Eliminating
World Poverty: Making Globalisation Work for the Poor, White Paper on International
Development (London: Her Majesty’s Stationery Office, December 2000), http://
www.globalisation.gov.uk.
10. The description of Latin American conditions is based on Gunnarsson and Rojas.
11. Milton Friedman and Rose Friedman, Two Lucky People: Memoirs (Chicago: University
of Chicago Press, 1998), chap. 24.
12. Sachs and Warner, ‘‘Economic Reform and the Process of Global Integration,’’
pp. 52–55.
13. Aaron Lukas, ‘‘WTO Report Card III: Globalization and Developing Countries,’’ Cato
Trade Briefing Paper no. 10, 2000, p. 11, http://www.freetrade.org/pubs/briefs/
tbp-010.pdf.
14. Bruce Bartlett, ‘‘The Truth about Trade in History,’’ in Freedom to Trade: Refuting the
New Protectionism, edited by Edward L. Hudgins (Washington: Cato Institute, 1997).
15. Hertel and Martin, pp. 4ff.
301
16. Andrei Illarionov, ‘‘Russia’s Potemkin Capitalism,’’ in Global Fortune: The Stumble
and Rise of World Capitalism, edited by Ian Va´ squez (Washington: Cato Institute,
2000), p. 209.
17. Goldsmith, p. 11.
18. Lionel Demery and Lyn Squire, ‘‘Macroeconomic Adjustment and Poverty in Africa:
An Emerging Picture,’’ The World Bank Research Observer 11, no. 1 (February 1996):
39–59; Jeffrey Sachs, ‘‘External Debt, Structural Adjustment, and Economic Growth,’’
paper addressed to the G-24 Research Group in Washington, September 18,
1996, Geneva.
19. World Bank, World Development Report 2000/2001, p. 202.
20. William Easterly, ‘‘How Did Highly Indebted Countries Become Highly Indebted?
Reviewing Two Decades of Debt Relief,’’ World Bank Working Paper no. 2225 (Washington:
World Bank, 1999), http://econ.worldbank.org/docs/952.pdf.
21. World Bank, Assessing Aid: What Works, What Doesn’t, and Why (New York: Oxford
University Press/World Bank, 1998), http://www.worldbank.org/research/aid/aidtoc.
htm; Craig Burnside and David Dollar, ‘‘Aid, Policies and Growth,’’ American
Economic Review 90, no. 4 (September 2000): 847–868.
22. World Bank World Development Report 2000/2001, pp. 182f.
23. Brian Doherty, ‘‘WHO Cares?’’ Reason Magazine, January 2002, http://reason.com/
0201/fe.bd.who.shtml.
Chapter 5
1. The same phenomenon is associated with the concept of ‘‘globalization.’’ When
international anti-globalists were staging a demonstration in Prague, it was organized
by the umbrella organization ‘‘Initiative Against Economic Globalization,’’ but
the Swedish variant, knowing globalization to have a positive connotation in Sweden,
styled itself ‘‘Globalization from Beneath’’ instead. Bernard Cassen, chairman of
French ATTAC, says that he has ‘‘tried to find a single advantage with globalization,
but in vain.’’ See Bernard Cassen, interview by John Einar Sandvand. ‘‘Globalizering
kun til besvær,’’ Norwegian Aftenposten, March 2, 2001. At the same time, the
Swedish ATTAC movement say that they are not at all opposed to globalization,
they just want different rules for it.
2. Cit. Steven Greenhouse and Joseph Kahn, ‘‘Workers’ Rights: U.S. Effort to Add Labor
Standards to Agenda Fails,’’ New York Times, December 3, 1999. Adherents eagerly
point out that the International Confederation of Free Trade Unions favors social
clauses, but it does so in spite of vociferous opposition from its members in the
South. The other international union organization, the World Federation of Trade
Unions, with 110 million members in 130 different countries, has argued against
the inclusion of social clauses in WTO trade agreements.
3. Lukas, p. 11.
302
4. Carol Bellamy, The State of the World’s Children 1997 (New York: UNICEF, 1997),
p. 23, http://www.unicef.org/sowc97.
5. Ra¨dda Barnen: ‘‘Faktablad om barnarbete,’’ http://www.rb.se, accessed May 1, 2001.
6. Concerning the ILO, see Berg and Karlsson, p. 64. Global figures can be found in
Goklany p. 8.
7. Gary Burtless, Robert Z. Lawrence, Robert E. Litan, and Robert Shapiro, Globaphobia:
Confronting Fears about Open Trade (Washington: Brookings Institution, 1998),
chap. 4.
8. Philip L. Rones, Jennifer Gardner, and Randy E. Ilg, ‘‘Trends in Hours of Work since
the Mid-1970s,’’ Monthly Labor Review (April 1997): 3–14.
9. Illarionov 2000.
10. Paul De Grauwe and Filip Camerman, ‘‘How Big Are the Multinational Companies?’’
Mimeo (January 2002), http://www.degrauwe.org/publicatie.php?pubglobalisering/
multinationals.htm.
11. James Rolph Edwards, ‘‘The Myth of Corporate Power,’’ Liberty (January 2001).
12. Lukas, p. 6.
13. The surveys can be accessed at http://www.theglobalalliance.org. Concerning Lim,
see Liza Featherstone and Doug Henwood, ‘‘Clothes Encounters: Activists and Economists
Clash over Sweatshops,’’ Lingua Franca 11, no. 2 (March 2001). For Swedish
national government employees, see Gunnar Aronsson and Klas Gustafsson, ‘‘Kritik
eller tystnad: en studie av arbetsmarknads-och ansta¨ llningsfo¨rhaållandens betydelse
fo¨r arbetsmiljo¨kritik,’’ Arbetsmarknad and Arbetsliv 5, no. 3 (1999): 189–206.
14. Organization for Economic Cooperation and Development, International Trade and
Core Labor Standards (Paris: Organization for Economic Cooperation and Development,
2000).
15. ‘‘Foreign Friends,’’ The Economist, January 8, 2000. Organization for Economic Cooperation
and Development, Survey of OECD Work on International Investment, Working
Paper on International Investment (Paris: Organization for Economic Cooperation and
Development, 1998), http://www.oecd.org/pdf/M000013000/M00013315.pdf.
16. Naomi Klein, No Logo: Taking Aim at the Brand Bullies (New York: Picador USA,
2000). Klein finds it repugnant that firms exploit people’s need to belong, to share
in a group identity. But if this is a basic need, then surely it is a good thing that
an identity should be freely chosen from among a range of options, rather than
merely inherited. I would rather see people arguing about whether a Mac or a PC
is best than about whether being black or white is best. Surely the very triviality
of the issue makes it preferable for people to feel superior for having Adidas trainers
rather than for being heterosexual.
17. ‘‘The World’s View of Multinationals,’’ The Economist, January 27, 2000. Even a
critic like Bjo¨rn Elmbrant maintains that the world’s enterprises are not growing
worse ‘‘but that continued exploitation is more and more becoming mingled with
responsible entrepreneurship.’’ Bjo¨rn Elmbrant, Hyperkapitalismen (Stockholm: Atlas
2000), p. 79.
303
18. Clive Crook, ‘‘Third World Economic Development,’’ in The Fortune Encyclopedia of
Economics, edited by David Henderson (New York: Warner Books, 1993).
19. Susmita Dasgupta, Ashoka Mody, Subhendu Roy, and David Wheeler, ‘‘Environmental
Regulation and Development: A Cross-Country Empirical Analysis,’’ World Bank Policy
Research Working Paper 1448 (Washington: World Bank, 1995).
20. Adam B. Jaffe, Steven R. Peterson, Paul R. Portney, and Robert Stavins, ‘‘Environmental
Regulation and the Competitiveness of U.S. Manufacturing: What Does the
Evidence Tell Us?’’ Journal of Economic Literature 33, no. 1 (March 1995): 132–163.
21. Investments and the environment: David Wheeler, ‘‘Racing to the Bottom? Foreign
Investment and Air Pollution in Developing Countries,’’ World Bank Policy Research
Working Paper 2524 (Washington: World Bank, 2000), http://econ.worldbank.org/
view.php?type5andid1340. Steel production: D. Wheeler, M. Huq, and P. Martin,
‘‘Process Change, Economic Policy and Industrial Pollution: Cross Country Evidence
from the Wood Pulp and Steel Industries,’’ (paper presented at the annual meeting
of the American Economic Association, Anaheim, Calif., 1993).
22. Richard R. Wilk, ‘‘Emulation and Global Consumerism,’’ in Environmentally Significant
Consumption, edited by Paul C. Stern, Thomas Dietz, Vernon W. Ruttan, Robert H.
Socolow, and James L. Sweeney (Washington: National Academy Press, 1997), p. 110.
23. Gene M. Grossman and Alan B. Krueger, ‘‘Economic Growth and the Environment,’’
National Bureau of Economic Research Working Paper 4634 (Cambridge, Mass.:
National Bureau of Economic Research, 1994); Marian Radetzki, Den gro¨na myten:
ekonomisk tillva¨ xt och miljo¨ns kvalitet (Stockholm: Studiefo¨rbundet Na¨ ringsliv Samha
¨ lle, 2001).
24. Stephen Moore and Julian L. Simon, It’s Getting Better All the Time: 100 Greatest
Trends of the Last 100 Years (Washington: Cato Institute, 2000), section XIV.
25. Ibid., section XV.
26. The example is cited in Ingemar Nordin, Etik, teknik och samha¨ lle (Stockholm:
Timbro, 1992), p. 154.
27. David Roodman, ‘‘Worldwatch Proposes $2,000 Tax Cut per Family to Save the
Planet,’’ Worldwatch Briefing (Washington: Worldwatch Institute, 1998), http://
www.worldwatch.org/alerts/pr980912.html.
Chapter 6
1. Elmbrant, pp. 89f.
2. A good introduction to the subject is Klas Eklund’s ‘‘Globala kapitalro¨relser,’’ in
Va¨ lfa¨ rd, politik och ekonomi i en ny va¨ rld (Stockholm: Arbetarro¨relsens Ekonomiska
Raåd, 1999). A rather more theoretical approach is provided by Barry Eichengreen
and Michael Mussa, et al., Capital Account Liberalization: Theoretical and Practical
Aspects (Washington: IMF, 1998).
3. This study, and those conflicting with it, are summarized in Eichengreen et al., p.
19. See also Glenn Yago and David Goldman, Capital Access Index Fall 1998:
Emerging and Submerging Markets (Santa Monica, Calif.: Milken Institute, 1998).
304
4. Sheila McNulty, ‘‘Investors Lose Faith in Malaysia’s Weak Reforms,’’ Financial Times,
January 17, 2001.
5. Sebastian Edwards, ‘‘A Capital Idea? Reconsidering a Financial Quick Fix,’’ Foreign
Affairs 78 (May/June 1999): 18–22.
6. John Micklethwait and Adrian Wooldridge, A Future Perfect (New York: Random
House, 2000), p. 55.
7. Eichengreen and Mussa, p. 18.
8. Steven Radelet and Jeffrey Sachs, ‘‘What Have We Learned, So Far, From the Asian
Financial Crisis,’’ CAER II Discussion Paper no. 37 (Cambridge, Mass.: Harvard
Institute for International Development, 1999), http://www.hiid.harvard.edu/caer2/
htm/content/papers/paper37/paper37.htm; Tomas Larsson, ‘‘Asia’s Crisis of Corporatism,’’
in Va´ squez.
9. Yago and Goldman.
10. Klein, chap. 9; Elmbrant, p. 85f; World Bank World Development Report 2000/2001,
p. 163.
11. Jagdish Bhagwati, ’’Why Free Capital Mobility May Be Hazardous to Your Health:
Lessons from the Latest Financial Crisis, paper presented at the NBER conference
on capital controls, Cambridge, Mass., November 7, 1998, http://www.columbia.edu/
jb38/papers/NBER_comments.pdf.
12. Micklethwait and Wooldridge, p. 178.
13. James Tobin in an interview with Radio Australia, November 17, 1998, http://
www.abc.gov.au/money/vault/extras/extra14.htm. For example: ‘‘My own feeling is
that it’s a great mistake for developing economies to try to have fixed exchange
rates. . . . The three big currencies—the dollar, the yen and the Deutsche Mark
(soon to be the Euro)—have floating rates, and we don’t have exchange rate crises
among them. I don’t know why we insist on having fixed exchange rates for Korea
and Thailand and so on. But that creates crises . . .’’ See also James Tobin, ‘‘Financial
Globalization: Can National Currencies Survive?’’ (paper presented at the Annual
World Bank Conference on Development Economics, April 20–21, 1998, Washington),
http://www.worldbank.org/html/rad/abcde/tobin.pdf.
14. Concerning variable exchange rates, see Radelet and Sachs, p. 13. Fixed exchange
rates: Maurice Obstfeld and Kenneth Rogoff, ‘‘The Mirage of Fixed Exchange Rates,’’
Journal of Economic Perpectives 9, no. 4 (Fall 1995): 73–96.
15. In China the advocates of WTO membership were critics of the regime, reformists
and liberals, while the opponents were to be found among the big corporations, the
security service, and the army. John Pomfret and Michael Laris, ‘‘Chinese Liberals
Welcome WTO Bid,’’ Washington Post, November 18, 1999. Concerning opposition
from old forces, see John Pomfret, ‘‘Chinese Are Split over WTO Entry,’’ Washington
Post, March 13, 2000.
16. Smith, p. 929f.
17. Mattias Svensson, Mer demokrati—mindre politik (Stockholm: Timbro, 2000), http://
www.timbro.se/bokhandel/pejling/pdf/75664666.pdf.
18. Larsson, Falska mantran: globaliseringsdebatten efter Seattle, p. 44.
305
Chapter 7
1. World Bank World Development Report 2000/2001, p. 73.
2. See http://www.peoplink.org/vsouk.
3. Moore and Simon, p. 218f.
4. Jonah Goldberg, ‘‘The Specter of McDonald’s: An Object of Bottomless Hatred,’’National
Review, June 5, 2000.
5. Thomas Hylland Eriksen, Kulturterrorismen: en uppgo¨relse med tanken om kulturell
renhet (Nora, Sweden: Nya Doxa, 1999), p. 46.
6. For numerous examples of ‘‘indigenous’’ cultural products made possible by cultural
contact and trade, see Tyler Cowen, Creative Destruction: How Globalization Is
Changing the World’s Cultures (Princeton, N.J.: Princeton University Press, 2002).
7. Mario Vargas Llosa, ‘‘Can Culture Be Exempt from Free Trade Agreement?’’ Daily
Yomiuri, April 25, 1994.
8. Giddens, p. 66.
9. Berg and Karlsson, p. 51.
10. Berg and Karlsson, pp. 162–171.
306
Index
Page references followed by an f or n denote references to figures
and footnotes respectively.
Absolute poverty, 21, 26
China, 48
East Asian countries, 99–100
Nigeria, 108
Adjustment costs versus welfare gains,
142
Africa
AIDS/HIV, 60
contrasted to East Asian countries,
104–11
democratic power in, 269
development aid dependency,
105–6
development assistance, 184–85
education, 36
free trade and open economies in,
109–10
girls attending school, 45
‘‘green revolution,’’ 33
growth, 99, 108–9, 130
hunger and suffering, 32, 105
impact of politics and leaders on
development, 104–7
internecine conflicts, 41
isolation and regulation, 155
‘‘lion economies,’’ 109–11
long-lived leaders, 106
medicine, 187
openness, 103
307
oppression, corruption, and
protectionism, 105–6, 107
standard of living, 104
structural adjustment programs,
181
women, 44
See also specific countries
Africa Growth and Opportunity Act,
161
Agricultural tariffs, on meat, 238
Agriculture
East Asia, 101
protectionism and, 157–62
regulation of, 95–96
AIDS. See HIV/AIDS
Air pollution and emissions, 228,
229, 232
Air quality, 230
Al-Jazeera satellite channel, 269
Amazon rain forests, 236
American stock market, 240–41
‘‘Anarchist Front,’’ 8, 10
Anarchists/anarchy, 7–10
liberty and, 16
Annan, Kofi, 155
Anti-discrimination, India, 53
Anti-globalism, 287–89
Antidumping measures, 125–26, 160
Arab states, 269
Argentina
dependency theory, 163
economic crisis of 2002, 167
exchange rate crisis, 267
reduced inflation and poverty, 96
Asia
absolute poverty, 21
poverty, 25
in world economy, 289
Asian crisis, 259–63
exchange controls and, 249–50
IMF recommendations and,
178–79
South Korea and, 251
‘‘Asian tigers.’’ See East Asia
ATTAC, 139, 253, 257
Australia
Asian crisis and, 262
employment, 137
Autonomy, personal, 23
Ayittey, George, 106
Bahrain, 269–70
Balance of trade, 121–22
Bangladesh
child labor, 199
garment industry, 223
liberalization and poverty
reduction, 132
poverty line, 54
Barber, Benjamin, 11
Basic assets, people’s need for, 85
Bastiat, Fre´de´ric, 41
Bauer, Peter T., 185
Berg, Lasse, 21–23, 29, 290–91
Berggren, Niclas, 89
Bhagwati, Jagdish, 265
308
Bhalla, Surjit S., 26–27, 56
Bill and Melinda Gates Health Fund,
189
Birth control, 46
Birthrates, availability of
contraception and, 46
Borders, 287
internationalization and, 9
open, 10
‘‘the ox made peace’’ saying, 41
Botswana
free trade, 109
starvation, 34
Boutros-Ghali, Youssef, 193
Boycotts, 199–200, 201
Brazil
air pollution control, 228
Asian crisis and, 251
dependency theory, 163
exchange rate crisis, 267
failed government industrial
initiatives, 174
growth and income differences, 86
Bureau of Labor Statistics, 206
Burma
exclusion from global
environment, 289
human rights violations, 40
lack of growth and poverty, 132
protectionist policy and controlled
economy, 103
Bush, George H. W., 146
Bush, George W., 146
Business and politics, 16
California, Clean Air Acts, 226–28
‘‘California effect,’’ environmental
protection and, 226–28
Cambodia, starvation, 34
Canada, employment, 137
CAP. See European Union, Common
Agricultural Policy
Capital Access Index, 247–48
Capital controls, 249–52, 266
Capital markets, 242–48
Capitalism, 17
democratization and, 268–76
and freedom, 16-17, 242-48
medical advances and, 186–89
myopic focus on imperfections, 98
negative example, 98
‘‘neo-liberal’’ market and policy,
14–15
philanthropic, 189
progress and, 98
reducing the world’s problems, 61
unequal distribution in developing
countries, 152–55
uneven distribution of wealth due
to uneven distribution of, 154
what it is and is not, 16–18
Carbon dioxide emissions, 235
Carville, James, 240
Caste system, India, 53
Castro, Fidel, 287
Catholicism, democracy and, 40
Centralization, 41–42, 287
Chaebols, Asian crisis and, 260
Change in economic activity,
efficiency-related, 140–44
Cheap imports, avoiding, 120–22
Child labor, 193, 198–202
Children
AIDS orphans, 60
education, 45–46
309
Chile
dependency theory, 163
development and economic policy,
168
economic crisis, 250–51
liberalization and poverty
reduction, 132
China, 47–50
absolute poverty, 26, 48
agriculture investment, 47
air pollution control, 228
Berg and Karlsson in, 21–22,
290–91
democracy in, 270
equality/inequality, 133
foreign trade, 48
growth and income differences, 86
labor-intensive industries, 172
opening markets, 72
starvation, 34
telephony example, 234–35
women, 43
Chinese Exclusion Act of 1882, 146
Clean Air Acts, California, 226–28
Clinton, Bill, 146, 193, 223
Cold War, 38
Colombia, equality in, 86
Colonialism, wealth and poverty and,
152
Common Agricultural Policy (CAP)
See European Union
Communication, capital controls,
252
Communism, China, 49
Comparative advantage, 117–18, 170
Competition and competitive
markets
absence or lack of, 165, 167
with developing countries, 205
free, 16
‘‘infant industry tariffs’’ and,
173–74
multinational corporations,
213–14
unfair competition, 125–26
Computer chips, sand/silicon and,
233
Computers, China, 280
Concorde, failure of, 174
Confidence in an economy, 264, 270
Asian crisis and, 261–62
Congo, 99
Consumers
efficiency and gains for, 141, 142
globalization consisting of everyday
actions of, 12–14
multinational corporations and,
213
Consumption, environment and,
228–37
Contraception/birth control, 46
Copper, China’s telephony example,
234–35
Corruption
Africa, 105–6, 107
controls and, 252
economic freedom and, 70–71
world government possibilities,
257
Costa Rica, 132-33
Crimes against humanity, 287
Criminal syndicates, immigration
schemes, 147
Cuba
equality in, 86
310
human rights violations, 40
Cultural choice, 278–85
Cultural identity, 283
Cultural imports, traditions
considered ‘‘authentic,’’ 283
Cultural innovation, 150
Culture, 17
change and renewal in, 282–84
cultural encounters of globalism,
281–85
freedoms and voluntary relations
in, 17, 283–84
global homogeneity, 280–82
isolation and preservation, 283
as a process, 283
Currency exchange, Tobin tax and,
253–58
Currency overvaluation, Asian crisis
and, 261
Currency speculation, 254–57, 261,
266
Daewoo, 223
de Soto, Hernando, 91–95
‘‘Dead capital,’’ 93
Debt
developing countries, 177–85
freedom and, 270–72
national debts, 271
short-term, 260–61
Debt cancellation, 181–84
Decentralization, 270
Deforestation, 232
Deliberate choice, 285
Demand, worldwide, 281
Democracy, 17, 289
demands that parallel debt
cancellation, 183
demands that parallel receipt of
aid, 185
multinational corporations’
presence in oppressive countries,
222
reducing the world’s problems, 61
representative democracy as
preferable form of government, 8
tasting and thus demanding, 286,
291
Democratization, 38–42, 268–76
East Asian countries, 100
Democratizing the World Bank and
International Monetary Fund,
177
Deng Xiaoping, 47
Dependency theory, 163–64
Derivatives, 254–55
Desalination, 35, 233
Developing countries
abolition of tariffs and quotas, 176
‘‘catch-22’’ of trade conditions,
194–96, 197
deaths from polluted indoor air,
229
debt, 177–85
debt cancellation, 183–84
direct international investments in,
154–55
East Asia’s distinguishing features
and, 100–101
elites and, 94
export dollars surpassing
development assistance, 162
foreign direct investment in, 256
311
free trade, 169–72
growth and openness, 129–32
growth in open poor economies
versus open affluent ones,
133–35
growth rates, 129, 130
hunger, 31–35
IMF recipients’ unwillingness to
follow advice, 181
investment in, 154–55, 244–45,
256
labor organizations and transfer of
technology to, 196
Latin America, 163–68
life expectancy of women, 46
loss sustained by protectionism,
156–62
manufactured goods exports,
170–72
medicine and, 186–89
neo-colonist policymaking
controls, 193
potable drinking water, 34–35
property rights, 90–98, 92
repeat debt cancellations, 184
respect for patent and IP rights,
196–97
shortcuts to development, 278–80
stunting growth for sake of
environmental protection,
228–29
tariffs, 173–76
trade with other developing
countries, 175
unequal distribution of capitalism,
152–55
vaccinations for children in, 189
wage increases, 204, 205f, 218
wages paid by multinational
corporations in, 216–18
See also Industrialized countries;
specific countries
Development. See Growth and
development
Development assistance
Africa, 105–6, 184–85
export dollars surpassing, 162
India, 183
Ivory Coast, 183
political leaders and, 185
‘‘Dictatorship of the market,’’ 268
See also Political systems,
democratization
Diplomatic relations, freezing, 201
Direct international investments in
developing countries, 154–55
Disease, cost of cures, 188
Dollar, David, 79, 96, 97
Domestic subsidies, as de facto trade
barriers, 126–27
Dumping
EU products, 159
‘‘price dumping,’’ 125–26
East Asia
absolute poverty, 26
child labor, 200
growth ‘‘miracle,’’ 99–103
hunger, 31
impact of politics on development,
99–103
life expectancy, 100
likened to flock of geese, 172
312
post-WWII production and
prosperity, 119
Eastern Europe, inequality, 57
Eco-dumping, 193
Economic adjustments, 140–44
Economic and financial crises
Asian crisis, 178–79, 249–50,
251, 259–63, 264
avoiding, 264–67
confidence in an economy and,
261–62
crisis management, 265
currency overvaluation and, 261
International Monetary Fund and,
260, 265
Latin American crisis of 1980s,
252
reforms and, 252
Economic equality. See Equality
Economic free zones
China, 48
multinational corporations and,
219–20
Economic freedom
Africa, 107
corruption and, 70–71
equality increase and, 88f
and growth and development,
72–83
prosperity and, 73
and reduction in poverty, 95f
Economic Freedom of the World, 95
Economic growth
China, 48
free movements of capital and,
248
India, 51, 53, 77–78
inequality and, 84–89
Economic liberalism, 15
rights of ownership and, 91
Economic liberalization, 61
China, 48, 49
effects of transition to, 88–89
India, 52
Economic policy
structural adjustment programs
and, 180–81
threatened by the market, 273–74
Economic reforms, 15
promised reforms and IMF grants,
179–80
Economic refugees, 147–48
Economic reversals, China, 48–49
Economies, long-term commitments
for, 264–65
The Economist magazine, 222, 265
Economy
freedoms and voluntary relations
in, 17
long-term commitments for
economies, 264–65
Education, 36–37
children, 45–46
of children, 200–201
East Asia, 100–101
girls and women, 45–46
India, 45, 53
Edwards, Sebastian, 131–32
Efficiency
‘‘creative destruction’’ and, 140–44
in production, 137–40, 237
in world economy, 172
EFTA. See European Free Trade
Association
Egypt, registering property, 92
313
Ehnmark, Anders, 12
Elections, China, 49
Elmbrant, Bjørn, 240
Emigration. See Immigration/
emigration
Emissions
air pollution and, 228, 229, 232
carbon dioxide, 235
regulations, 226–28
Employment
free trade and, 136–44
NAFTA and, 204
work hours and workday pace,
205–6, 207f
Employment benefits, proportion of
U.S. wages, 144
EMS. See European Monetary
System
Enhanced Border Security and Visa
Entry Reform Act of 2002,
145–46
Environmental conditions,
developing countries, 193–94
Environmental improvements, per
capita GDP and, 229–30
Environmental protection, 193–94,
224–38
Environmental regulations, prosperity
and, 225–26
Environmentally Significant
Consumption, 228
Equality, 84–89
free capital markets and, 244
results in trade-liberalizing
countries, 133
Eriko, 78
Eriksen, Thomas Hylland, 283
Estonia, trade liberalization, 144
Ethiopia
equality in, 86
starvation, 34
EU. See European Union
Europe
competition with developing
countries, 205
Eastern, inequality, 57
mobility, 145
spread of prosperity, 25
work-related stress and burnout,
206–9
See also specific countries
European Commission, cost of EU
trade barriers, 160
European Free Trade Association
(EFTA), economic differences
between countries, 135
European Monetary System (EMS),
261, 267
European Union (EU)
Common Agricultural Policy,
158–60
economic differences between
countries, 135
employment, 137
Everything-but-Arms initiative,
161
meat subsidies, 237–38
mobility, 145
need for immigrants, 148
subsidies, 158–61, 237–38
summit in Gothenburg, Sweden,
9–10
trade barriers, 125
See also specific countries
314
Everyday actions, globalization
consisting of, 12–14
Everything-but-Arms initiative, 161
Exchange rates, 255, 256
fixed or controlled, 260–61,
266–67
Exhausting raw materials, 235
Expenditures, environmental
compliance portion, 227
Export-processing zones. See
Economic free zones
Export subsidies, 159
Facilitating economic change,
141–42
Famine disasters, 33–34
Financial crises. See Economic and
financial crises
Financial markets, 240–48
attention to government finance
management, 271
Tobin tax and, 256
Finland, employment, 137
Food production, employment
example, 137–38
Foreign direct investment, Tobin tax
and, 256
Foreign Policy magazine, 89
Forest acreage increase, 232
Frankel, Jeffrey, 132
Fraser Institute, 107
Free markets, 17
democracy and, 268–76
‘‘market fundamentalism’’ and, 15
See also Capital markets
Free movements of capital
determinant of equality, 89
economic growth and, 248
enabling the poor, 90
investment and, 244–48
See also Capital controls
Free trade
benevolent attitude and, 201–2
‘‘catch-22’’ for developing
countries, 194–96, 197
determinant of equality, 89
developing countries, 169–72
employment and, 136–44
enabling the poor, 90
growth benefits of, 128–35
immigration/emigration and,
145–50
important imports, 120–27
information sharing and, 128–29
innovation and, 128–29
job creation/dissolution and,
136–44
mutual benefit, 114–19
rules governing genuine free trade,
192–93
skepticism of, 192–93
See also specific countries
Freedom
China, 47, 290–91
of choice, 11, 13–14, 18, 23,
278–85, 285. See also Pluralism
economic. See Economic freedom
efficient use of resources and
capital and, 128
of enterprise, 100, 101
expansion of, 40
of expression, 17
of migration/movement, 90. See
also Immigration/emigration
315
personal, 16. See also Individual
liberty
power over our own lives and, 11,
290–91
of the press, 17
self-determination and, 286–91
tasting and thus demanding, 286,
291
Freedom House, 39
French culture, 283–84
Friedman, Thomas, 268
Fugitives, numbers living as, 60
Fyodorov, Boris, 179
Garbage, problem of, 232
Gates, Bill, philanthropy in
developing countries, 189
GDP. See Gross domestic product
Geijer, Erik Gustaf, 12
Gender equity, prosperity and, 45
George, Susan, 139
Germany, 72
Ghana
equality/inequality, 133
liberalization, growth, and
development, 110
Giddens, Anthony, 284
‘‘Gini coefficient’’ for measuring
inequality, 57
Girls
education, 45–46, 53
life expectancy in South Asia, 46
Global Alliance for Workers and
Communities, 218–19
Global economic institutions,
177–84
See also World Bank; International
Monetary Fund
Global environmental problems,
statistics and facts, 230–35
Global food production, 32–33
Global growth, past centuries, 76
Global homogeneity, 280–82
Global inequality, 54–59
Global misery, 20–24, 60–61
The Global Trap, 136
Globalism
cultural encounters of, 281–85
self-determination and, 286–91
Globalization, 9–14
credit for the good that happens,
289–90
criticism, 10–11, 14–15
democratization of political
systems and, 268–76
freedom and, 286–91
growth during 1990s, 135f
of late 19th century, 287–88
and local power relations and the
poor, 90
reservations about, 60–61
as scapegoat, 289
Globalization index, 89
Gold and green forests, 224n
Goldman-Sachs, 251
Government
administration and collection of
Tobin tax worldwide, 257
expansion of government
machinery, 275
industrial initiatives in developing
countries, 174–75
interventions in ‘‘miracle’’
economies, 100
316
mismanagement of finances, 271
need for, 8
See also specific countries
Gray, John, 15
‘‘Green revolution,’’ 33
Greider, William, 136, 138–39
Gross domestic product (GDP)
capitalism and inequality in,
153–54
growth and, 76–77
multinational corporations’ sales in
relation to, 214–16
per capita GDP level and
environmental improvements,
229–30
trade increases and rise in per
capita income, 132
Growth and development, 72–83
broad, free financial markets and,
247–48
child labor decline and, 200
conflict between environment and,
224–38
connected to better air and water
quality, 230
East Asian growth ‘‘miracle,’’
99–103
economic freedom and, 72–83
free trade and growth, 119f
free trade benefits, 128–35
GDP and, 76–77
global growth in past centuries, 76
government intervention and, 100,
102, 165–66, 174–75
growth in open poor economies
versus open affluent ones,
133–35
impact of African politics on,
104–11
impact of East Asian politics on,
99–103
pollution and, 229
stunting growth for sake of
environmental protection,
228–29
See also Developing countries;
Economic growth
Haiti
exports to EU, 161
registering property, 92
HDI. See Human Development
Index
Health care improvements, 29, 53
Heckscher, Eli F., 161
HIPCs. See Highly indebted poor
countries
High school education, 36
Highly indebted poor countries
(HIPCs), 182
HIV/AIDS
deaths, 60
lower-priced inhibitors for,
187–88
Honduras, stagnation and poverty,
132
Hong Kong
Asian crisis and, 251
freedom of enterprise, 101
‘‘open’’ economy, 103
post-WWII production and
prosperity, 119
Human capital, 67
317
Human condition
historically, 73, 75
worldwide improvement, 28–29
Human development, 27
Human Development Index (HDI),
56, 57–58
Human Development Report 1997 of
UNDP, 25
Human Development Report of 1999
of UNDP, 55, 57–58
Human dignity, 287
Human nature, meeting our needs,
139–40
Human rights, 286, 289
Indian caste system, 53
violations, 16, 40
Humanism, 22–24
Hunger, 21, 31–35, 60
‘‘Hypercapitalism,’’ 10, 242
Hyperinflation, 96, 131, 167
Ignorance, 291
Illarionov, Andrei, 180
ILO. See International Labor
Organization
IMF. See International Monetary
Fund
Immigrants
dollar benefit to host country, 149
illegal, 149
need for, 148–50
welfare policy reform and, 149–50
Immigration/emigration, free trade
and, 145–50
Imperialism, wealth and poverty and,
152
Import barriers, 120
Import duties, reduction, 162
Import quotas, 120
Import substitution, 163
Import tariffs, 176
Income
distribution in liberal economy,
87–88
gaps, 82–83
high growth and income
differences, 86
living standards and, 77f
trade increases and rise in per
capita income, 132
world income distribution, 1960,
1980, and 2000, 58f
Indebtedness, freedom and, 270–72
Index of openness, 103
India, 51–53
Berg and Karlsson in, 21–22
child education, 36
development assistance, 183
education, 45, 53
failed government industrial
initiatives, 174
‘‘green revolution,’’ 33
growth and development, 51, 53,
77–78
relief for the poor, 97–98
service sector jobs, 170
starvation, 34
women, 43
Individual decisionmaking and
responsibility, 67
Individual liberty, 8, 11, 14, 16, 22,
89, 290–91
See also Freedom; specific freedoms,
liberties, and rights
318
Indonesia
absolute poverty, 99
Asian crisis and, 250, 251, 260,
263
dictatorships, 269
failed government industrial
initiatives, 174
government intervention, 100
growth and income differences, 86
‘‘open’’ economy, 103
water supply, 35
worker satisfaction, 219
Industrial Revolution, standard of
living improvement and, 60–61
Industrialized countries
abolition of tariffs and quotas, 176
annual growth rates, 129, 130
competition with developing
countries, 205
learning from, 278–80
size in relation to corporations,
214–16
work-related stress and burnout,
206–9
Inequality
distribution of capitalism in
developing countries, 152–55
economic growth and, 84–89
‘‘Gini coefficient’’ for measuring,
57
global, 54–59
between persons versus between
countries, 56–57
results in trade-liberalizing
countries, 133
‘‘Infant industry tariffs,’’ 173
Infant mortality, 29, 30f, 53
Infectious disease, WHO and,
188–89
Inflation, 96, 100
hyperinflation, 96, 131, 167
Information sharing, free trade and,
128–29
Information technology, 52–53, 170,
215, 279–80
Injustices, 21
Innovation
‘‘creative destruction and,’’ 140
cultural, 150
free trade and, 128–29
new garbage and old raw material
uses, 233
saving and investment and, 76
Intellectual property (IP) rights,
196–97
International financial markets,
246–48
attention to government finance
management, 271
International investments in
developing countries, 154–55
International Labor Organization
(ILO), 196, 200, 218
International markets, access to,
279–80
International Monetary Fund (IMF),
177–84
Asian crisis and, 260
crisis management and, 265
Internationalization
borders and, 9
cultural encounters of globalism,
281–85
East Asia, 102–3
‘‘hypercapitalism’’ and, 10
319
Internet, 11–12
access to international markets
and, 279–80
women and, 45
Investment
considerations other than wages,
204–5
in developing countries, 154–55,
244–45, 256
in East Asia, 102–3
free movements of capital and,
244–48
risk, 247, 254–56
Tobin tax and, 253–58
Investment boundaries, 243–44
Investors, Asian crisis and herd
mentality of, 262
IP. See Intellectual property rights
Iraq, human rights violations, 40
Islam, democracy and, 40
Isolationism, 289
Ivory Coast, development assistance,
183
Japan
employment, 137
government intervention, 100, 102
labor-intensive industries, 172
MITI (department of industry),
174
‘‘open’’ economy, 103
post-WWII economy, 99
wages, 203–4
wealth, 134
Job creation/dissolution
East Asia, 101
free trade and, 136–44
job market changes, 142–44
technological advances and, 140
wages and, 143–44
Jobs
lack of challenge and development
in, 208
length of stay in United States,
143
Jospin, Lionel, 17
Jubilee 2000 campaign, 183
Karlsson, Stig, 21–22, 290
Kearny, A. T., 89
Kenya
equality in, 86
lack of growth and poverty, 132
‘‘vampire state,’’ 106
Khatuun, Halima, 279
King, Martin Luther, Jr., 202
Klein, Naomi, 220, 222, 263
Kohl, Helmut, 222
Kraay, Aart, 79, 96, 97
Krugman, Paul, 138, 194
Kuttner, Robert, 15
Kuwait, water supply, 35
Kuznets, Simon, 86
Labor-intensive industries, 172
Labor organizations, transfer of
technology to developing
countries and, 196
Land ownership
private, 235–36
Russia, 94–95
Land socialism, 94–95
Lao Tzu, 70
320
Latin America
crisis of 1980s, 252
dictatorships, 269, 272
hunger, 31
lack of growth and poverty, 132
‘‘open’’ economy, 103
in world economy, 289
Legal codes protecting enterprise and
competition, East Asia, 100
‘‘Liberal’’ and ‘‘libertarian,’’ term use,
14n
Liberal market economy, 16
See also Economic liberalization
Liberal society and the right to
choose, 18
Liberalization
freedom of choice and, 278–85
necessary institutions for, 265
self-determination and, 286–91
See also Economic liberalization
Liberalization of thinking/thought, 9,
290
Liberty. See Freedom; Individual
liberty
Libya, human rights violations, 40
Life expectancy
average, 28–29, 75f
East Asian countries, 100
South Asian girls’, 46
women in developing countries, 46
Lim, Linda, 219
Liquidity shortage, 262
Literacy/illiteracy, 14, 36, 37f, 53
illiteracy, 60
Lomborg, Bjørn, 230–35
Mad cow disease crisis, 238
Malaysia
absolute poverty, 100
Asian crisis and, 260
Berg in, 29
capital regulation, 249–50
government intervention, 100
growth and income differences, 86
labor-intensive industries, 172
‘‘open’’ economy, 103
Mankind and human relations,
creativity and man’s capacity to
achieve great things, 17
Manufactured goods, versus raw
materials exports alone, 169–72
Market economy, versus market
society, 17
‘‘Market fascism,’’ 268
‘‘Market fundamentalism,’’ 15
Material development/materialism,
17–18, 27
Mauritius
free trade, 109–10
growth and income differences, 86
Meat production and subsidies,
European Union, 237–38
Mechanization, change brought
about by, 200
Media, changing people, 22
Medicine, developing countries and,
186–89
Mercantilism, 120
Merck Corporation, free medicine,
187
Messerlin, Patrick, 160
Mexico
air pollution control, 228
dictatorships, 269
environmental regulations, 224–25
equality in, 86
321
exchange rate crisis, 267
free trade policy and exports,
171–72
‘‘Tequila crisis,’’ 252
Middle East, 269
girls attending school, 45
hunger, 31
See also specific countries
Milken Institute, Capital Access
Index, 247–48
Mill, James, 120
Mill, John Stuart, 82
Mismanaged policy, 251
Mixed economy, 17
Mobility
physical. See Immigration/
emigration
social, 82–83
Modernization of thought, 22–24,
290
Monetary policy, East Asia, 100
Monopolies and trusts, multinational
corporations, 211–12
Monopoly protection, trade barriers
and, 123
Monsanto Corporation, ‘‘golden rice’’
technology, 187
Morality, multinational corporations,
222–23
Morocco, equality in, 86
Mortality prevention costs, WHO
and, 189
‘‘Most favored nation’’ treatment,
124–25
Mugabe, Robert, 106, 107
Multilateral trade negotiations,
123–24
See also Trade agreements; World
Trade Organization
Multinational corporations
bad behavior and morality in,
221–23
competition and, 213–14
consumers and, 213
Daewoo example, 222
dominance, 216, 217f
economic free zones and, 219–20
finance of research and long-term
projects, 220–21
in foreign and developing
countries, 216–18
versus government-owned
enterprises such as Russia,
212–13
growth compared to nation states,
214–16
impartial inspections for worker
satisfaction, 218–19
information technology and, 215
monopolies and trusts, 211–12
Nike example, 218–19
nonemployee wages versus
employee wages, 217–18
oppressive governments and, 222
positive aura for trademarks, 222
power, 210–11
quality and productivity, 213–14
reinvesting profits in country of
operation, 220–21
sales in relation to GDP, 214–16
size of firms, 214–16
technology and environmental
regulation compliance, 227–28
wages, 216–18, 221
322
working conditions, 218–19, 220
The Mystery of Capital, 91
NAFTA. See North American Free
Trade Agreement
Narayanan, K. R., 53
Nation states
multinational corporations’ growth
compared to, 214–16
separatism, 41
National Academy of Sciences, 228
National debts, 271
National financial markets, 242–48
National judicial systems, 287
Natural resources, developing
countries, 152–55
Nepal, boycotts, 199
Nigeria, economy, 108
Nike, 218–19
No Logo: Taking Aim at the Brand
Bullies, 220, 222
Nordstro¨m, Ha°kan, 132
North Africa, hunger, 31
North American Free Trade
Agreement (NAFTA), 171, 204,
224
North Korea
economy, 72
exclusion form global
environment, 289
human rights violations, 40
starvation, 34
ultra-protectionist policy and
controlled economy, 103
Norwegian Institute for Foreign
Affairs, global inequality report,
56, 57
OECD. See Organization for
Economic Cooperation and
Development countries
On Asian Time: India, China, Japan
1966–1999, 21, 29
One World, Ready or Not: The Manic
Logic of Global Capitalism, 136,
138–39
Openness
East Asia, 103
growth and, 129–32
variables testing for, 131–32
Oppression
Africa, 105–6, 107
China, 49
living in, 291
multinational corporations’
presence and, 222
overlooking, 202
of tradition, 284–85
women, 43–46
Organization, 68
Organization for Economic
Cooperation and Development
(OECD) countries
average life expectancy, 28–29
economic free zones and, 220
percent of world GDP, 155
Ownership
private land ownership, 94–95,
235–36
protection of, 66
rights of, 91, 100
See also Intellectual property;
Patent rights; Property rights
Pakistan
growth and income differences, 86
lack of growth and poverty, 132
323
Passport requirements, 287, 288
Patent rights, respect for, 196–97
Penetrating new markets, price
dumping and, 126
Per capita incomes, 76
Perot, Ross, 204
Personal responsibility, 67
Peru, registering property and
businesses, 92, 93
Pharmaceutical companies, 186–89
the Philippines, registering property,
92
Pinochet, Augusto, 168, 287
Pluralism, developments and, 280–82
Political dictatorships, 185, 201, 220,
236, 269, 270, 272, 287
Political institutions, globalized
humanity acquiring power at
expense of, 10
Political leaders
development assistance and, 185
tariff walls and, 174–75
Political power and controls, 9–10,
165–66
Political systems, democratization,
268–76
Politics, 17
freedoms and voluntary relations
in, 17
impact of African politics on
growth and development,
104–11
impact of East Asian politics on
growth and development,
99–103
playing at business, 16
Pollution
air, 228, 229, 232
growth and, 229
Poor people, 55–56
in developing countries, 13–14
freedom of choice and, 13–14
property rights, 90–98
Pope John Paul II, 20
Population growth, India, 51, 52
Potable drinking water, 34–35
Poverty, 60
absolute, 21, 26, 48, 99–100, 108
East Asian countries, 99
economic freedom and reduction
in, 95f
growth benefiting the poor, 79–81
India, 51, 52
in last few centuries, 73, 75–76
long-term growth and, 81
reduction, 25–30, 132
remedy for, 83
‘‘trickle-down’’ effect and, 80
United States, 83
Poverty lines, 54–55
Power
freedom and power over our own
lives, 11, 290–91
globalization and local power
relations with the poor, 90
globalized humanity acquiring
power at expense of political
institutions, 10
multinational corporations,
210–11
political, 9–10, 165–66
powerlessness/loss of power, 11, 12
purchasing power, 55–56
Predetermination, 287–88
‘‘Price dumping,’’ 125–26
324
Prices, 65–66
Production
environmental problems and,
236–37
free trade and, 136–44
led and driven by trade, 129
raw materials and, 122, 169–72
specialization, 115–19, 120
world output, 129
Productivity
multinational corporations,
213–14
wages and, 194
Profits, 65–66
Property, 67
as ‘‘dead capital,’’ 93
private land ownership, 235–36
Property rights, 90–98
See also Rights of ownership
Prosperity
companies/investors and, 172
economic freedom and, 73
environmental protection/
improvement and, 224–26, 230,
231f
former colonies, 99
free trade and, 17, 118f
gender equity and, 44
growth and spread of, 14, 25, 81,
134–35
opportunities for women and, 44
Protectionism
Africa, 105–6, 107
backlash, 124
developing countries’ loss sustained
by, 156–62
reappearance, 288
trade subject to conditions and,
192–97
Protectionist countries
annual growth rates, 129, 130
financial crises and hyperinflation,
131, 167
growth in open poor economies
versus open affluent ones,
133–35
Latin America, 163–68
policy results, 129, 130–31
Public spending, 275
undemocratic societies, 97–98
Purchasing power, 55–56
Qatar, 269
Quader, Noorul, 223
Quantity of trade, 121–22
Rahman, Helen, 46
Raw materials, 233–35
exports, 163–64, 167
processing and manufacturing,
169–72
production, 122
R&D. See Research and development
Reebok, 218
Reforms
African growth and, 108–9
demands that parallel debt
cancellation, 183
demands that parallel receipt of
aid, 185
East Asia, 101
economic, 15, 179–80
Latin American crisis and, 252
welfare policy reform, 149–50
325
Refugees
economic, 147–48
noneconomic, 146–47
Regional trade agreements, 125
Registering property, 92–94
Regression analysis, 131
Regulation, 69–71
Africa, 155
agricultural, 95–96
capital. See Capital regulation
East Asia, 101
emissions, 226–28
environmental, 224–28
Russia, 95
Research and development (R&D)
drug prices and R&D
expenditures, 187–88
multinational finance of research
and long-term projects, 220–21
Reyes-Heroles, Jesus, 194
Rights of ownership
East Asia, 100
economic liberalism and, 91
Risk
investments and, 254–56
spreading by diverse investing, 247
Robinson, Joan, 123
Romer, David, 132
Roosevelt, Franklin D., 150
Rothbard, Murray, 126
Russia
Asian crisis and, 251
equality in, 86
exchange rate crisis, 267
IMF and, 179–80
modernization of private sector,
212–13
private land ownership, 94–95
Rwanda, poverty line, 54
Sachs, Jeffrey, 103, 108–9, 129,
130–31, 133–35, 188
Sala-i-Martin, Xavier, 56
Sand/silicon, 233
Saudi Arabia
human rights violations, 40
water supply, 35
women, 45
Save the Children (Sweden),
199–200
Saving and investment, 68, 81–82
innovation and, 76
See also Investment
Scandinavia, wealth, 135
Schengen Agreement, 145
Schools, quality of, 201
Schumpeter, Joseph, 140
Scully, G. W., 87–88
Self-determination, 286–91
Self-sufficiency policies, 163–65
post-WWII, 118–19
Sen, Amartya, 27, 34, 70
Separatism in nation states, 41
Service sector, developing countries,
170
Sex equality. See Gender equity
Shang Ying, 44
Short-term capital flows, regulation,
250–52
Short-term debts, 260–61
Shortages of raw materials, 234–35
Simon, Julian, 149
Singapore, Asian crisis and, 251, 262
326
The Skeptical Environmentalist:
Measuring the Real State of the
World, 231–33
Slavery, 23–24
Smith, Adam, 122, 271
Social development, India, 53
Social dumping, 193
Social mobility, 82–83
Socialism, China, 47
Society, freedoms and voluntary
relations in, 17
South America
failed government industrial
initiatives, 174
meat importation, 238
South Asia
girls attending school, 45
girls’ life expectancy, 46
hunger, 31
South Korea
Asian crisis and, 259–60, 263
economy, 72
government intervention, 100, 102
growth and income differences, 86
labor-intensive industries, 172
‘‘open’’ economy, 103
post-WWII production and
prosperity, 119
standard of living, 99
wealth, 134
Southeast Asia
child labor, 200
dictatorships, 269
hunger, 31
Soviet Union (former), starvation, 34
Spain, employment, 137
Specialization, 115–19, 120
Speculation, currency, 254–57, 261,
266
Standards of living, 59f
economic freedom and, 74f
HDI and, 56
income, 77f
Starvation, 33–34
See also Hunger
State-directed capital flows, 247
Steel manufacturing, cleaner
technology, 227–28
Stiglitz, Joseph, 15
Stock market fluctuations, 241–42
Subsidies, 157–61, 237–38
domestic subsidies as de facto
trade barriers, 126–27
Sudan, human rights violations, 40
Surplus exchange, 117, 121
grants and, 159
Sweden
agricultural efficiency and
employment, 138
child labor, 199–200
educational voucher system, 201
employment, 137
example of ‘‘catch-22’’ in trade
conditions, 195
failure of digital television, 174
need for immigrants, 148
Symbolic sanctions, dictatorships,
201
Syria, human rights violations, 40
Taiwan
Asian crisis and, 251, 262
economy, 72
government intervention, 100
327
growth and income differences, 86
labor-intensive industries, 172
‘‘open’’ economy, 103
standard of living, 99
Tanzania, foreign debt, 182–83
Tariff walls, 174–75
Tariffs and quotas, 114
antidumping tariffs, 126
developing countries’ tariffs,
173–76
‘‘infant industry tariffs,’’ 173
tariff reduction negotiations,
122–25
tariff reductions, 156–62
See also Tobin tax, 254
Tax avoidance, 82
Taxation, 82–83, 275
Taxpayers
debt cancellation and, 182
subsidies and, 237
Technological advances, 17, 68
addressing raw material shortages,
234–35
‘‘creative destruction and,’’ 140
developing countries and, 278–80
Technology, 23
cleaner technology, 227–28
expediting social progress, 45
growth and, 134–35
importing new ideas and
techniques, 128–29
Terrorist attacks of September 11,
2001, 145–46
Thailand
Asian crisis and, 259, 260
equality/inequality, 133
government intervention, 100
growth and income differences, 86
labor-intensive industries, 172
‘‘open’’ economy, 103
worker satisfaction, 219
Third World. See Developing
countries
Tobin, James, 253, 266
Tobin tax, 253–58, 266
Trade
among developing countries, 175
balance of trade, 121–22
‘‘catch-22’’ of trade conditions,
194–96, 197
environmental problems and,
236–37
increases and rise in per capita
income, 132
quantity of, 121–22
subject to conditions and
protectionism, 192–97
See also Free trade; specific countries
Trade agreements, 289
impartial code of rules for
honoring, 124
provisions stipulating standards,
193–96
regional, 125
See also World Trade Organization
Trade barriers
domestic subsidies as de facto
barriers, 126–27
Latin America, 163–68
patent and IP infringement as,
196–97
See also Tariffs and quotas;
Subsidies; Antidumping
measures
328
Trade controls, Russia, 95
Trade policy
East Asia, 103
separating effects of one policy
from another, 131
Trade-Related Aspects of Intellectual
Property Rights (TRIPS)
agreement, 196, 197
Trade sanctions, dictatorships and
temporary sanctions, 201
Trademarks, multinationals and
positive aura for, 222
Tragedies and risks surrounding
immigration policy, 147
Transportation, environmental
problems and, 236–37
‘‘Trickle-down’’ effect of growth, 80
TRIPS. See Trade-Related Aspects of
Intellectual Property Rights
agreement
Turkmenistan, human rights
violations, 40
Uganda
IMF compliance, 181
liberalization, growth, and
development, 110
poverty reduction, 132
UN Food and Agriculture
Organization, 31
UNCTAD. See United Nations
Trade and Development
Program
Undemocratic societies, public
spending, 97–98
Underdevelopment, 60
UNDP. See United Nations
Development Program
Unemployment
free trade and, 136–44
wages and increase in, 194
UNEP. See United Nations
Environmental Program
Unfair competition, price dumping,
125–26, 160
UNFPA. See United Nations
Population Fund
Unilateral free trade, 123
United (Dutch charity), immigrant
mortality estimates, 147
United Kingdom
England’s wealth, 134
foreign firm R&D investment in,
221
Ireland’s wealth, 135
United Nations, governing world
government, 256
United Nations Development
Program (UNDP), 25, 229
United Nations Environmental
Program (UNEP), 196
United Nations Population Fund
(UNFPA), 148
United Nations Trade and
Development Program
(UNCTAD), 162, 183
United States
Africa Growth and Opportunity
Act, 161
antidumping tariffs, 126
Asian crisis and, 263
Chinese Exclusion Act of 1882,
146
329
competition with developing
countries, 205
employment, 137
Enhanced Border Security and
Visa Entry Reform Act of 2002,
145–46
foreign firm R&D investment in,
221
immigration policy, 145–47
investment considerations other
than wages, 204–5
job market, 143–44
poverty line, 54–55
receipt of immigrants, 150
spread of prosperity, 25
stock market, 240–41
subsidies, 161
terrorist attacks of September 11,
2001, 145–46
wages, 143–44
work-related stress and burnout,
206–9
WTO agreements and, 124
‘‘Untouchables,’’ 53
Uruguay Round, 156
U.S. Federal Reserve, 241
Usury, 14
Uzbekistan, poverty line, 54
Vaccinations for children in
developing countries, 189
Vargas Llosa, Mario, 283–84
Variables testing for openness,
131–32
Vietnam
equality/inequality, 133
labor-intensive industries, 172
liberalization and poverty
reduction, 132
worker satisfaction, 219
Virtual Souk, 279
Vishal, Ram, 286
Wages, 68–69
developing countries, 193–94
East Asia, 101
immigrants and, 149, 150
increase in, 204, 205f
low starting wages, 150
minimum wage compared to
wages paid by multinationals,
219
multinational corporations in
developing countries, 216–18
productivity and, 194, 203–4
U.S., 143–44
Wal-Mart, child labor and, 199
Wall Street Crash of 1929, 288
Warner, Andrew, 103, 108–9, 129,
130–31, 133–35
Wars, diminishing number of, 40–41
Water supply, 232–33
potable, 34-35
shortage of pure water, 60
Wealth and poverty
global inequality and, 54–59
growth and the rich and poor,
79–81
the half truth, 20–24
social mobility and, 82–83
uneven distribution of wealth in
world, 154
See also Poverty
Welfare. See Public spending
330
Western world
effects of globalization on wages
and productivity, 203–9
protectionism in, 288
See also Industrialized countries
WHO. See World Health
Organization
Wilk, Richard, 228
Women
Africa, 44
in Bangladeshi garment industry,
223
China, 43
democratic process and, 38, 45
economic independence, 78, 223
education, 45–46
freedom of choice and, 13–14
India, 43
Internet and, 45
life expectancy in developing
countries, 46
opportunities and prosperity for,
44
oppression of, 43–46
refugees, 147
Saudi Arabia, 45
Women’s rights, 44
Work, 82–83
quantity as a constant, 138–39
stress and burnout from, 206–9
work hours and workday pace,
205–6, 207f
See also Employment; Job creation/
dissolution; Jobs
Worker satisfaction, impartial
inspections of multinationals,
218–19
Working conditions, 193–96
in multinational firms, 218–19,
220
World Bank, 177–84
absolute poverty figures, 26
on education in India, 45
on global equality, 57
on government interventions in
‘‘miracle’’ economies, 100
on growth and inequality, 86–87
on poverty in China, 48
World Development Report 2000/
2001, 81
World economies, as business
corporations, 214–16
World government, administration
and collection of Tobin tax, 257
World Health Organization (WHO),
188–89
World hunger, 31–35
World income distribution, 1960,
1980, and 2000, 58f
World population, 26, 290
World Trade Organization (WTO)
impartial code of rules for
honoring agreements, 124
‘‘most favored nation’’ treatment,
124–25
Seattle meeting of 1999, 124
331
tariff reduction negotiations,
122–25
TRIPS agreement, 196, 197
World War I (WWI), 288
World War II (WWII)
Japan’s economy and, 99
post-WWII self-sufficiency
policies, 118–19
Worldwatch Institute, 237
Worldwide depression, 288
WTO. See World Trade
Organization
Wulfstan, Archbishop, 20
WWI. See World War I
WWII. See World War II
Yang Zhengming, 290
Yao, Shujie, 48
Yugoslavia (former), conflicts, 41
Zaire, ‘‘vampire state,’’ 106
Zambia
IMF compliance, 181
standard of living, 99
Zhou Litai, 218
Zimbabwe
as least economically free country,
107–8
‘‘vampire state,’’ 106

About the Author
Johan Norberg is a fellow at the Swedish think tank Timbro. His
book In Defense of Global Capitalism received rave reviews in
Europe. He is also the host of a British Channel 4 documentary,
‘‘Globalization Is Good.’’ His previous books include The Resistance
Man Vilhelm Moberg, The History of Swedish Liberalism,
and State, Individual, and Market.

Cato Institute
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“The particular charm of this passionate
essay is that capitalism
would not interest Norberg if it
were not such a mighty engine of
human liberty. It is a young man’s
book, addressed to the idealistic
young.”
—Rosemary Righter
The Times of London
“Norberg is Europe’s answer to our
own Naomi Klein.”
—Dave O’Brien
Winnipeg Free Press
“Giving clear and verifiable sources,
he nails one by one the fallacies and
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Johan Norberg is a fellow at the
Swedish think tank Timbro. His previous
books include The Resistance Man
Vilhelm Moberg and State, Individual,
and Market.
“Johan Norberg’s book is a stunningly insightful, brilliantly detailed refutation
of the crank theories of the anti-globalists. In Defense of Global Capitalism is
a shining example of what a gifted mind can do working with the truth to
advance the cause of capitalism, which in the end is the cause of every
decent man and woman.”
—Ben Stein