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Making a Go of Globalization
For free trade to work, political imagination must match economic growth.

By Henry Kissinger
Los Angeles Times Syndicate
Monday, December 20, 1999; Page A33

The collapse of the World Trade Organization conference in Seattle amid chaos in the streets was worse than a diplomatic fiasco; it spelled a missed opportunity. President Clinton could have used the occasion to put forward a farsighted program for dealing with what portends to be one of the gravest challenges of the new century: the huge gap between the sophistication of the dominant economic model, called globalization, and traditional political thinking still based on the nation-state.

But instead of assuming the mantle of President Truman's leadership role in inspiring the structure of the post-World War II world, Clinton decided to play to the gallery. In advance of the conference, he welcomed the prospect of demonstrations, thereby encouraging tactics of intimidation toward a group of ministers who were America's guests. And even after violence occurred, he justified the demonstrations with the argument that, previously, "decisions were largely the province of trade ministers, heads of governments and business interests. But what all those people in the street are telling us is that they would also like to be heard." But why had they not been heard before in the seventh year of the administration? Why convene the trade ministers if the American government now claimed that there was something illegitimate about their principal sphere of authority?

What was in fact needed at Seattle was a road map for the next phase of globalization, designed to preserve its economic benefits while broadening its political scope. Globalization has encouraged an explosion of wealth and technology never approximated in any historical epoch. Such rapid change challenges prevailing social and cultural patterns. Markets generate growth but also dislocations. While these dislocations are arguably the engine of ultimately greater well-being, political leaders are obliged to deal with their consequences here and now. A sense of political unease is inevitable, especially in the developing world -- a feeling of being at the mercy of forces neither the individual nor the government can influence any longer.

A new approach must begin with the realization that, by any objective measurement, globalization has been a huge success -- especially for the United States. During the past two decades, the United States has generated unprecedented wealth; broadened and deepened the availability of capital; funded the development and broad distribution of a variety of new technologies; and created markets for a huge array of goods and services, all the while improving its distribution of income. So far as the U.S. economy is concerned, these are "the good old days."

To be sure, even in the United States, globalization has left some individuals and groups behind. Jobs are lost in some sectors even as they multiply in others. Yet the protectionist argument that globalization generically produces unemployment is, in the United States, belied by the reality of full employment coupled with rising wages. The world's puzzlement at protectionist pressures in advanced industrial countries has been well-expressed by Joseph Stiglitz, soon to retire as chief economist of the World Bank: "What are developing countries to make of the rhetoric in favor of capital liberalization when rich countries -- with full employment and strong safety nets -- argue that they need to impose protective measures to help those of their own citizens adversely affected by globalization?"

While the benefits of globalization have been dramatic in the United States, the effect on the rest of the world has been more ambiguous, at least in the short run. Europe, the next largest beneficiary, reacts warily to foreign takeovers, even from other European countries, though these reflect the free movement of capital that is one of the chief tenets of globalization, as well as of the European Union. And Europe has found it difficult to dismantle the traditional dominant role of its governments. Similarly, Japan's economy and politics have stagnated partly because of the reluctance to open up to keep pace with globalization.

But the economic and political consequences of globalization have been most severe for the developing countries. In a world where capital can move freely, investments will flow toward the highest return. This mobility of capital presents considerable risks as well as great opportunities for the host countries, for foreign capital will leave if better opportunities open up elsewhere, or if the host country's economy suffers a perhaps cyclical decline. Large, diverse economies, such as those of the United States and Europe, with highly developed capital markets and a body of commercial law, can cope with these fluctuating movements. The fragile, brittle economies and social structures of most developing countries are disproportionately vulnerable, at least in the short and medium term.

These problems are compounded because urbanization, which is inherent in industrialization, inevitably brings with it the weakening of traditional political and social support systems. Even when their material conditions improve in absolute terms, the migrants become increasingly conscious of the gap between rich and poor that, in almost all developing countries, the early stages of globalization seem to magnify. Therefore, political and economic indices frequently swing wildly out of phase with each other.

Moreover, capital flows are not necessarily determined by the economic performance of the host country. Speculative capital moves to take advantage of short-term trends; it can benefit from downturns as well as from booms. During downturns, domestic capital flees while foreign financial institutions protect themselves by reducing exposure even in healthier economies, to offset losses incurred elsewhere. All this turns national or regional difficulties into global crises.

The way the international system manages its periodic crises compounds the political challenge. The standard remedy of international institutions -- especially of the International Monetary Fund -- has been to restore creditworthiness by imposing drastic austerity on the affected countries. But these exactions are perceived as a form of neocolonialism in which the concerns of foreign lenders are given priority over the well-being of the affected.

During the first 20 years of the post-colonial period, public moneys financed most investments in the developing world. When, in the 1980s, Western taxpayers revolted against these grants, many developing countries were striving to attract private Western capital. And until the mid-1990s, private investment seemed to enable emerging countries to build up their industrial capacity. Since then, the American -- and more recently the Japanese and European -- financial markets have been such powerful magnets as to discourage capital flows into areas where the political risk is greater and the regulatory system less predictable, as in Latin America or non-Japanese Asia. But since domestic capital is more expensive, companies that are obliged to depend on it are at a grave competitive disadvantage.

This dynamic coincides with a drive toward bigness almost for its own sake that has become the key corollary, almost the synonym, for globalization. As local enterprises feel obliged to merge with multinationals with better access to global capital markets, the typical developing country's business sector bifurcates: One set of enterprises is integrated into the global economy and owned by large international corporations; the rest, cut off from globalization, employ most of the labor force at the lowest wages and with the bleakest prospects.

Both sets of companies raise political issues: the multinationals because they seem to withdraw key decisions affecting the public welfare from domestic political control; the local companies because they generate political pressures on behalf of protectionism and against the globalization model. Moreover, to the extent the hitherto local economy becomes integrated globally, it grows more vulnerable to a prolonged recession in the United States. This is the dark cloud hanging over globalization: If -- or when -- the U.S. economy turns down, the global consequences could be catastrophic.

Some argue that the answer to these dangers is even freer trade more rapidly. And in a long-term sense, this may well be true. But because globalization in essence involves global adoption of the American model, it is important to remember that the flexible labor markets of America, the deregulated financial institutions, the relatively cheap capital and the bias toward lowering costs took decades to evolve. This model cannot be replicated rapidly in the developing world and not, in any event, fast enough to prevent a growing political backlash against globalization.

The key challenge is that very few people anywhere view themselves primarily as components of a global economic mechanism. They identify political accountability with the nation-state and demand that governments cushion them against excessive suffering or dislocation. Leaders -- especially in democracies -- are overturned when they are perceived to have failed in this task. Protectionism beckons, together with attacks on America as the leading industrial power.

The industrialized countries have avoided many of these consequences largely because they have not left their citizens naked in the face of market changes. Restraints on monopoly and a social safety net have been fundamental to the policies of the industrial democracies for nearly a century. By contrast, the developing world has few safety nets except a crude form of protectionism.

If these conditions persist or grow worse, the world could evolve into a two-tiered system in which globalized elites are linked by shared values and technologies while the populations at large, feeling excluded, seek refuge in nationalism and ethnicity and in attempts to become free of what they perceive as American hegemony. In such an atmosphere, attacks on globalization can evolve into a radical chic, especially where the governing elites are small, and the gap between rich and poor is vast and growing.

No economic system can be sustained without a political base. The challenge for those who believe in free trade is to match economic growth with political imagination; to navigate between those who see the world in only technical economic terms and their critics who yearn to return to some quasi-socialist model of government control. The challenge is to foster an international sense of social responsibility without strangling a successful economic system in regulations imposed by international bureaucrats.

The historical antitrust policies of the United States have yet to find a global expression. The international financial system needs to reduce its volatility and learn to cushion the impact of crises. The role of speculative capital remains a challenge. In dealing with economic crises, a better balance needs to be established between the claims of lenders and the social needs of affected societies. The concerns of our society for labor standards and the environment must be met without choking off free trade and without giving developing countries the impression that our real goal is to throttle their competition.

I do not pretend to have the answers to these questions. But I know that pandering to demonstrators is not one of them.

The writer, a former secretary of state, is president of Kissinger Associates, an international consulting firm that has clients with business interests in many countries abroad.

© Copyright 1999 The Washington Post Company

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