Exercise 9.1:
Is increased economic globalization always a good thing?

During the past few years, international meetings of the World Trade Organization, the World Bank, and the International Monetary Fund have been disrupted by activists protesting increasing globalization in the world economy. Through their protests and demonstrations, the activists are challenging economists, corporations, and policymakers to ask the following question: is increased economic globalization always a good thing?

Due to falling information and transportation costs, as well as steadily falling trade barriers, national economies are becoming increasingly inter-related and interdependent. The economic benefits of increasing internationalization are well known: increased consumption possibilities and the promise of higher material standards of living. Indeed, this was the economic argument that helped to promote passage of the North American Free Trade Agreement in the 1990s, as well as other multi-country trade agreements that sought to reduce trade barriers.

However, in recent years there have been mounting concerns about the uneven pace of economic growth around the world, lack of labor market and environmental regulations in developing countries, and the risks of wide-open capital markets. Protestors, mostly from developed nations, see these problems as the inevitable consequence of spreading global capitalism and have drawn attention to their cause by disrupting international economic meetings in Seattle, Washington, DC, and Prague with mass protest marches and demonstrations. Their efforts have forced economists, governments, and corporations to rethink their views on globalization and how best to increase living standards in developing countries.

Their protests are beginning to have some effect on international trade and development policy. The World Bank, one of the primary sources of development aid for poor countries, has broadened its economic development policies to focus not only on trade liberalization and free capital flows, but also the development of institutional structures that promote "empowerment, opportunity, and security" within developing countries. The change in World Bank development policy underscores the realization that capitalism and free trade alone are not enough to reduce world poverty. In addition, developing countries need complementary institutions—enforceable property rights, the rule of law, fair and impartial court systems, democratic elections—to support the development of competitive market-based economies. Without them, many of the labor market, environmental, and human rights abuses that the protestors have highlighted will continue.

Developing policies that both encourage economic development and protect the environment and workers requires a delicate balancing act. Protestors would like to see greater environmental and labor market safeguards included in future trade liberalization agreements. However, developing countries are concerned that adding new restrictive regulations will drive up production costs, reducing their comparative advantage and limiting their trade opportunities. Any compromise will need to weight both the benefits and the costs of such regulations. The real issue is not whether globalization is good for the world's economies, but rather how policymakers can help make global capitalism work more smoothly, efficiently, and fairly. This will require not only the removal of trade barriers but also the development of institutions that promote free and fair trade.

References:

World Bank World Development Report 2000/2001  http://www.worldbank.org/poverty/wdrpoverty/

Business Week Special Report: Global Capitalism—Can it be Made to Work Better? November 6, 2000  http://www.businessweek.com/2000/00_45/b3706001.htm

The Economist  http://www.economist.com

The Real Losers from Seattle December 11-17, 1999

The Case for Globalisation September 23-29, 2000