Globalize Gradually
Globalization and Its Discontents by Joseph Stiglitz vs. In Defense of Globalization by Jagdish Bhagwati
Countries should globalize gradually. Trade and market liberalization are fundamental drivers of economic growth. Liberalizing too rapidly, however, can be destabilizing—as the East Asian Crisis and Russia’s transition to a market economy show. The solution is a “gradualist” approach: slowly developing the institutions of an open economy. Despite the contrasting titles of their books, Stiglitz and Bhagwati agree that globalization can be good if pursued prudently.
Trade liberalization leads to growth. The empirical evidence “against an inward-looking . . . trade strategy is really quite overwhelming” (Bhagwati 61). The most comprehensive research on the subject comes from the OECD and NBER—two nonpartisan organizations who, in the 1960s and 1970s, published exhaustive studies of over a dozen developing nations (India, Brazil, Mexico, and more). Douglas Irwin’s case study of the McKinley tariff protection is another seminal work. The benefits of trade are well-established in economics. Articulating the theories is beyond the scope of this paper, but suffice it to say that “the most counterintuitive but true proposition in economics has to be that one can specialize and do better” (Bhagwati 61).
Rapid liberalization, however, can be destabilizing. At a minimum, “very rapid and large-scale trade liberalization” displaces “workers in import-competing industries” (Bhagwati 255). In the worst-case scenario, “hasty and imprudent financial liberalization” leads to crises and recessions (Bhagwati 199). During the East Asian Crisis of 1998, the “lack of banking and financial regulation[s]” enabled “panic-fueled outflows of capital” (Bhagwati 203, 200). The East Asian countries had exposed themselves to foreign capital flows before “their institutional practices had . . . been suitably modified for transition” (Bhagwati 203). Similarly, in Russia, “excessively rapid reforms” (Bhagwati 32)—“shock therapy”—precipitated the country’s recession in 1998.
Building the institutions of an open economy takes time. Developing nations usually lack the adjustment programs—such as unemployment insurance—that can help workers displaced by trade. On a grander scale, liberalization is more than simple deregulation; it requires “the establishment of the institutions that underlay a market economy” (Stiglitz 139). This “transformation of . . . social and political structures” takes time (Stiglitz 135). History shows successful countries have all liberalized gradually. China, by adopting a “gradualist approach” (Stiglitz 183), “averted” the East Asian Crisis and grew to become the world’s second largest economy (Stiglitz 126). Likewise, of the former Soviet Bloc countries, “Hungary, Slovenia, and Poland have shown that gradualist policies lead to less pain in the short run, greater social and political stability, and faster growth in the long [run]” (Stiglitz 188).
Trade liberalization drives economic growth, but, as the East Asian Crisis and the experience of Russia show, rapid liberalization can be destabilizing. “Great economists in the past”—from Adam Smith to John Maynard Keynes—“have uniformly been against shock therapy” (Bhagwati 253-4) Because the institutions of an open economy take time to develop, countries should globalize gradually.