Why Globalization Works, by Martin Wolf

A readable and very useful introduction to the Western economic universe.

One can visualize Martin Wolf's 'Why Globalization Works' as a Rambo-style bandoleer of gleaming brass bullets, to be used against the ill-informed, fanatical and often unacceptably hairy opponents of free markets.

He provides a lot of powerful ammunition. Being a trained economist and a good writer, a great part of the value of the book lies in the way he points out the extremely counter-intuitive effects of government policies in layman-friendly terms.

A very simple example is the use of a minimum wage policy, which simply leads to fewer people being hired.

Another is the discussion of the highly regulated, highly taxed countries of northern Europe. Successful tax collection is the bedrock of a functioning state, so he's keen to dispel the notion that competitive capitalism will cause the collapse of these nations.

In fact, these states are shown to be economically very successful, with populations willing to pay the price of higher taxes in return for superb social services. In many cases, these countries are net exporters of capital, unlike the deficit heavy Anglo-Saxon model of the UK and the US.

By competitive capitalism, or the race to the bottom, Wolf is referring to the frequently-leveled criticism that multi-national corporations will chase from one failing state to the other in their efforts to find willing victims for their pollution- spewing plants.

But Wolf points out that most foreign direct investment ends up in the richest countries, since they have the best and most secure physical and legal infrastructure. That's why very little FDI goes to sub-Saharan Africa and a huge amount goes to the US, Britain and Hong Kong. (Admittedly, much of this ends up in China).

As for pollution, the worst harm has been done by countries which are/were not part of the globalizing process, such as the former East Germany, which burnt filthy local brown coal to avoid importing oil.

He explains the economics of sorting out pollution: by taxing pollution, workers will get paid less, but that's the price they are presumably willing to pay to breathe cleaner air.

He also lays to rest the myth that the US is losing manufacturing jobs solely because of China. Rather, it is primarily because of increased productivity coupled with a market growing slower than productivity that makes many workers redundant.

By addressing something as broad as globalization, Wolf provides insights into a raft of vital issues: WTO, emerging markets, currencies and financial systems, the role of governments, as well as wealth creation and the ending of poverty.

He starts by reminding readers of the stunning achievements of Western liberal democracy and its colonial offshoots through the development of contractual systems, a strong but fair state, respect for private property and copyright and an independent judiciary.

However, he believes copyright protection has gone too far in the US, and that it verges on the immoral to deprive developing countries of cheap copies of items such as Aids drugs.

He juxtaposes these achievements with the disastrous paths of Marxism and Fascism chosen by so many countries last century. For generations increasingly distant from these terrible events, these reminders serve a useful purpose.

He comes out with some good lines when discussing the modern state: Were Bill Gates, the richest man in the richest country in the world, ever to ponder a military coup, he would have to recognize that even he could only match Defense Department spending for three months.

How different to former times, or many parts of the Third World today, when the richest individuals could take over the state, or hold it to ransom.

Yet despite its power, developed states do not turn their firepower onto their own citizens, thanks to a mature civil society.

That is the big challenge of the Party in China, he points out, where there are few alternatives to the incumbents in power, and reforms become unappealing when they go against the self interest of the governing class.

Indeed, it is clear that so far reform has not meant denial for the establishment: The communist party has been a huge beneficiary of reform in material terms thanks to its role as gatekeeper to the business universe.

He also points out how (contrary to Marxist theory) the nature of capitalism has made peaceful development far more cost effective for gaining wealth than wars of conquest. Indeed, mere possession of land seems now to be debilitating factor for many countries, with the largest countries in the world amongst the world's poorest.

That is even if they have vast natural resources, such as Nigeria and Russia, since these may lead to civil wars and corruption as competing factions try to extract, rather than create, wealth. Hence the success of resource-poor Japan.

Sometimes Wolf reminds us that getting to the bottom of economics is extremely tough - and that clear answers are often lacking.

This becomes clear in his lengthy discussion of inequality.

Increasing wealth only leads to stable states if a majority (the middle and working classes) can get their hands on some of it.

It is a little bit confusing therefore when he talks of reduced inequality on a country basis. Clearly, the total GDP of China, which has doubled and doubled again the past 20 years will make it seem on a population-weighted country basis as if inequality between the rich and poor countries has diminished.

But what of inequalities within countries? Here Wolf quotes a study by World Banker Branko Milanovic, who (wisely in the view of many China experts) ignores data from national accounts in his study of world income distribution between 1988 and 1993, relying on household surveys of income and expenditure.

Wolf says that such an approach has 'the significant disadvantage …of bearing little relation to figures in national accounts…which have the virtue of being self checking, since they are put together from independent evidence.'

It is hard to agree with Wolf here, at least in the case of China, where national accounts are notorious for manipulation. The most recent case occurred in summer 2004 when the 2003 GDP figure was revised upwards, apparently to narrow the growth figure for this year. The change supported the government's contention that cooling down the economy was working.

Milanovic concludes that global inequality rose between 1988 and 1993 and jumped a staggering 5%. He states that rising urban-rural differences, easily attested to in China's case by numerous domestic surveys and the recent banned book 'Investigation into the Peasantry', contributed to this process.

Wolf defends his position by listing three arguments: that it is impossible for national accounts to be so out of kilter with reality; that it is unlikely inequality has risen much faster than expected because of a rapid increase in unrecorded incomes and spending by the rich or finally, and that the household survey system is possibly unreliable.

He is possibly on dangerous ground here. The ethos of data gathering is very poor in China and has lead numerous researchers such as the distinguished academics Thomas Rawski and investment bank Goldman Sachs to create their own, proxy systems for measuring growth in China - similar to systems constructed by economists when dealing with the propaganda figures issued by the Soviet Union in its heyday.

As for the second argument, it is clear that in many lesser-developed countries, tax evasion, corruption (low paid officials driving Mercedes in small provincial Chinese cities for example) and a huge black economy lead to 'unrecorded income' and higher levels of inequality than are recorded officially.

The third argument, about methodology, is difficult to assess without more information.

In case, although we might get tangled up in inequality, it is true that increased growth does generally go with reduced absolute poverty - although how to measure absolute poverty is another fiendishly complicated statistical minefield.

Still, there are many variations to this trend. Chinese farmers have possibly fared worse after their initial spurt of wealth (from an appallingly low base in the wake of the Cultural Revolution) in the 1980s.

That is because as China moves to a cash economy, privatization follows. Farmers now have less access to (free) public goods such as education and health services than they had decades ago.

In the end, it is clear simply economics is not the panacea. Good government is critical for a developing nation, but very few of them have it. That is why they are still developing, Wolf concludes.

That question, bringing into play weighty issues of morality, culture and history, is even more vexed than the statistics on inequality. Wolf does not dim his economic focus by dwelling on them too much. But despite his belief in economics, it is possible the 'dismal science' pales into insignificance in comparison. That feeling becomes especially acute when economics cannot give clear answers on so many vital statistical issues.

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