May 28, 2004

Switching to offense

I just finished Jagdish Bhagwati's In Defense of Globalization and the short summary is: don't bother. If you want a smart, detailed defense of globalization, you'll have to go elsewhere-- Paul Krugman's Peddling Prosperity springs to mind. Bhagwati's book is too thin and too glossy.

On a stylistic level, Bhagwati writes atrociously. Not only does he consider Kevin Costner a "gifted actor", but he lacks all ability to deploy metaphors: "Japan comes at us like images of a kaleidescope" (It does not). On top of it all, we have to deal with his "witticisms." Oy. Apparently Bhagwati (or his editors) decided that rigorous citation and facts would only confuse his dim-witted readers, so he opts for lame jokes to make his case:
Too often, US proponents of aid to poor countries have tried to hide the altruism and sought to justify aid flows on grounds of enlightened self-interest, arguing that it is good not only for our souls but really for our material well-being. This rationale is amusingly illustrated by the story where a rich man a poor one are praying in a church. [The rich man wants a million dollars to pay off a loan; the poor man wants a buck to buy bread.] The rich man pulls out a hundred dollars from his wallet and gives the money to the poor man, saying, "Buy as much bread as you want with this hundred dollars, but get out of here. I need the Lord's undivided attention!" Now there is enlightened self-interest for you.
That's cute, and I'm sure this joke earns yuks at dinner parties, but couldn't this space be better spent making actual arguments? Someone should really point out the vast-- usually painful-- difference between citing a few witticisms and actually being witty.

But okay. Literary fulminating aside, the book revisits a few interesting globalization issues, and raises a few provocative questions.

1) Bhagwati brings up the idea of "ladders of comparative advantage", a theory suggesting that countries specializing in labor-intensive goods-- such as toys or textiles-- eventually shift to more capital-intensive industries, such as computer production. The upshot is that the world market is never flooded with labor-intensive products, and prices are never unduly depressed. As Bangladesh gets into the textile market, South Korea moves on to bigger, flashier things.

Thus far, empirical evidence supports that theory. Most of Asia has withdrawn from labor-intensive exports just as China has become the world manufacturing center for textiles, toys, etc. But the question is: will China decline anytime soon? A billion people is a lot of people, and it seems to me that as China shifts into capital-intensive industries, labor migration from the countryside will keep the textile and toy factories thriving for decades to come. This presents a problem if, say, Africa and other excessively Third World countries start to develop into serious industrial economies. There's no reason to assume that ladders of comparative advantage will continue to hold.

2) Bhagwati argues that trade liberalization should happen as rapidly as possible. He quickly dismisses economists like Joseph Stiglitz who worry about the unemployment problems that might ensue. Basically, Stiglitz correctly supposes that domestic industries will quickly start firing workers once the arrival of cheap imports depresses prices. Bhagwati simply shrugs and says that these unemployed workers will quickly find jobs in the newly created export sectors.

In theory, of course, this should hold. Lowering tariffs will allow a country-- blessed by comparative advantage-- to create more jobs, especially in export industries. But that's just the theory. In reality, can often prove quite difficult for workers to adapt to new industries, especially if they need to learn new skills or travel long distances to find the new jobs. Stiglitz' concerns are certainly valid, and demand more attention than a glib retort.

3) That said, Bhagwati sensibly notes that, regardless of what you think of rapid trade liberalization, it is rarely prudent to quickly loosen a country's capital controls.

4) Is it really the case that unmanaged, caution-to-the-wind trade liberalization always works best? To take the very broad view, of course it is true that export-promoting (EP) trade strategies will benefit a country more than import-substitution (IS) strategies. No sensible economist believes that protectionism is more beneficial than trade in the long run. But that doesn't mean the short-run details are negligible.

Take a closer look at, say, the East Asian "tigers" that deftly employed export-promoting strategies. Most of these countries did well by subsidizing and nurturing their high-tech manufacturing and information-based service industries. Taiwan, for instance, doubled public spending on research and development from 1985 to 1990, as evidenced by its famous Hsinchu Science-Based Industrial Park. The authoritarian South Korean government used the financial sector to steer credit to targeted industries, socialized risk, and fostered a number of state-owned enterprises. On the tariff front, let's not forget that, until about 1986, Taiwan and South Korea both had average tariffs hovering around 25%. For optimal effect, it seems, export-promotion needs a measured dose of smart government policy.
-- Brad Plumer 7:14 PM || ||