Why Britain should be buying food from Brazil not trying to grow it all itself

The British government argues that the country needs to try to become more self-sufficient in food. I debated the issue with Peter Kendall, the head of the National Farmers Union, on BBC Newsnight.

Don't take globalization for granted

Twenty years ago, nobody foresaw the imminent fall of the Berlin Wall; two years ago, no one was predicting the partial nationalization of the Western banking system. The future is unknowable; caution, skepticism, and, above all, humility are essential in seeking to peer into it.

What, then, do we know? We know that globalization is the combination of distance-shrinking technology and market-opening government policy that is bringing the world closer together. Global connections are—for the most part—cheaper, faster, and more pervasive than ever. Technological progress is almost certain to continue, while powerful economic and political interests support further global integration. Continued globalization would therefore seem inevitable.

But it isn’t. Technology can’t (short of a nuclear winter) be uninvented, but its impact can be impeded. Today, globalization is neither uniform nor universal. It will always be incomplete. Clearly, then, it is also reversible. The cost of connectivity could rise, while governments could make foreign interactions costlier or tougher.

History shows that economic disintegration can happen: witness the devastating 1930s, the economic closure of Russia and China when they became communist, or the widespread pursuit of import-substitution policies in the 1960s and 1970s. Now, the global financial crisis has undermined faith in free markets. A long and deep recession could stoke protectionist pressures. An alliance among the losers from globalization, those who fear they might become losers, ideological opponents to globalization, and opportunistic lobby groups could conceivably throw it into reverse.

The retreat, if it happens, may be patchy rather than wholesale. Globalization is not an all-or-nothing state of the world; it is a process that can progress—or regress—to varying degrees and in different ways country by country. It operates through at least five channels: cross-border trade in goods and services; international capital mobility; the movement of labor across borders; the flow of ideas, information, and technology around the world; and politics: cooperation among national governments, international rules and institutions, and the activities of nongovernmental actors, such as Greenpeace, the Catholic Church, and even online social networks, such as Facebook.

Start with product markets. The Word Trade Organization’s (WTO) Information Technology Agreement prohibits countries from imposing tariffs on many IT products, but its scope is disputed: the United States objects to the EU’s tariffs on flat-screen monitors and multifunction printers, for instance. As new high-tech products emerge, they will be vulnerable to tariff encroachment and trade-limiting regulations. In agriculture, WTO rules have little bite. Most developing countries have plenty of scope to raise their tariffs on manufactured goods, since their current applied rates are well below the maximum allowed. Governments’ commitments to liberalizing trade in services, which account for the bulk of the global economy, are patchy.

A panoply of other measures can also be used to gum up trade, such as antidumping duties, trade-inhibiting regulations, and official tolerance of monopolies, cartels, and other anticompetitive practices. And if governments really want to, they can ignore WTO rules.

This need not involve a trade war. The WTO’s core principle of nondiscrimination is already being eroded almost daily as preferential pacts proliferate. Far from being “free-trade agreements,” these bilateral or regional deals are their antithesis, giving privileged access to some at the expense of others and tying up trade in a web of rules-of-origin requirements and other red tape. Such deals are also more prone to have quasi-protectionist labor and environmental clauses tacked on to them. Worse, they create their own infernal logic, whereby those who are discriminated against seek their own special deal.

After 13 years without a comprehensive WTO agreement, they seem like the only game in town for politicians and businesspeople, sapping efforts to conclude an ambitious Doha round and raising new obstacles to it, as countries and companies fight to preserve the preferences they have acquired.

Even where markets remain reasonably open, other factors can limit globalization. Regulations that are not protectionist in intent can nonetheless act as barriers to trade: think of food safety standards, port security inspections, and different accounting standards. Preferences can also tilt toward the local for all sorts of reasons.

Among them:

    * Green initiatives: People may opt for local holidays and farm produce to shrink their carbon footprint.
    * Culture: Viewers may prefer television programs that relate to their everyday experience.
    * Nationalism: Some may reject cheaper and better imports because they want to consume national products.
    * Politics: Witness the consumer boycott of Danish products in many countries following the Muhammad cartoon row—and the “Buy Danish” backlash.
    * And, of course, economics: Rising prosperity and demographic aging tends to skew demand away from imported goods towards services—such as cleaning and social care, that can only be provided on the spot. With or without government intervention, global connections could weaken.

One big question is whether higher oil prices will render globally scattered supply chains uncompetitive. To a certain extent, high oil prices are eventually self-limiting since they stimulate the development of additional supplies and crimp demand. Greater efficiency and the development of alternative energy sources could permanently depress oil demand. In any case, transport costs are relatively unimportant for higher value-added trade. So oil may not be that significant a drag on globalization.

Consider capital next. The global financial crisis continues to surprise; its long-term consequences are unpredictable. It could foster greater economic policy coordination, closer monetary integration in Asia, and the expansion of the eurozone. Or it could rankle national sensibilities in the Pacific and even split the eurozone.

The crisis would appear likely to curb financial globalization. Countries that maintain capital controls are less likely to lift them; poor countries that struggled to attract external finance in the go-go years will find it even tougher. Tougher international regulation could also hamper capital flows (not a bad thing in itself, admittedly). Yet tougher national rules could drive more finance offshore. Desperation has lowered the barriers to sovereign-wealth funds and other foreign investors taking big stakes in American and European banks. Ambitious reforms to the global financial system could end up prompting more, not less, financial globalization.

How so? Consider that although money flows freely, it does not reliably irrigate everywhere. The promise of financial globalization—that it will spread risk and allocate capital better—remains largely unfulfilled. Even emerging economies with excellent investment prospects cannot count on regular capital inflows; many feel obliged to pile up vast foreign-currency reserves. This is a huge waste of resources—and it perversely results in them becoming net savers. Judicious reforms, starting with the swap arrangements the Fed has started offering to a handful of emerging-economy central banks, could thus support further financial globalization

Don't take globalisation for granted

Today, globalisation is neither uniform nor universal. It will always be incomplete. Clearly, then, it is also reversible. Read my new article for McKinsey here

Madhouse economics

Ha-Joon Chang's suggestion that the world needs a dose of protectionism to tide it through the global recession is utterly misguided. Read my new article for Prospect here.

The economics of the madhouse

The failures of global finance have brought the world economy to its knees, threatening a re-run of the Great Depression of the 1930s. Such a terrible outcome is much more likely if policymakers follow Ha-Joon Chang’s suggestion that the world needs a dose of protectionism to see it through these troubled times.

Around the world, we are witnessing the devastating impact of globalisation going into reverse. What was once a virtuous circle of rising trade and booming economic growth has become a vicious spiral of collapsing demand and plunging exports. The question is: how to break this spiral? The answer, in my view, is coordinated government action to boost global demand, combining large fiscal stimulus packages, unconventional monetary policy measures, and the nationalisation and restructuring of zombie banks that are dragging the economy down with them. Chang, in contrast, favours limited protectionism—in effect, a tax on imports.

This should ring alarm bells among people who may be tempted by the siren song of protectionism. Most governments are scrambling to boost spending and /cut/ taxes to stimulate demand. David Cameron’s Conservatives oppose such a fiscal stimulus. Chang goes one step further: he is proposing a (selective) tax hike instead. The immediate impact would be to reduce people’s purchasing power in a highly regressive way. And since Chang proposes that all governments agree to raise their import taxes, demand would be dealt a further knock by the fall in demand for our exports. Higher taxes and lower exports as a cure for the global recession? This is the economics of the madhouse.

Chang is surely aware of this. After all, even he concedes that an all-out trade war would be a bad thing. But the difference between limited protectionism and a trade war is a matter of degree: the former would involve fewer casualties, for sure, but it would not lead to economic resurrection. And history shows that limited protectionism is often a precursor to much larger conflicts.

Chang claims that rising protectionism in the 1930s was not as harmful as is often claimed. It is true that trade collapsed for several reasons, including falling demand. But protectionism greatly amplified the damage. According to a study by Jakob Madsen of Monash University (Trade Barriers and the Collapse of World Trade During the Great Depression), world trade declined 14% in inflation-adjusted terms between 1929 and 1932 due to declining incomes, 8% because of policy-induced tariff increases, 5% due to deflation-induced tariff increases (when prices are falling, a tariff of, say, £1 per item rises in real terms), and a further 6% because of the imposition of non-tariff barriers. So, most of the collapse in trade was due to rising protectionism rather than falling demand.

Nor did protectionism save jobs. Research by Doug Irwin of Dartmouth College, the leading US trade historian, concludes that “The Smoot-Hawley tariff of 1930, for example, significantly reduced imports but failed to create jobs overall because exports fell almost one-for-one with imports, resulting in employment losses in those industries.”

Clearly, then, the costs of protectionism are large. Yet Chang claims that “temporary” protectionism would have a big benefit: it would provide breathing space for companies and workers to reinvent themselves. But that too is dubious. Protectionism does not provide the right incentives for businesses and workers to adapt. Companies that have a captive local market tend to milk it, rather than seeking out more competitive markets overseas—especially if they are prevented from doing so by others’ protectionism. And while protectionism may start off as a “temporary” response to the crisis, companies that benefit from it have every incentive to find new reasons to maintain it, and to devote their energies to lobbying politicians to that end. Just look at Europe’s Common Agricultural Policy, which was originally designed to prevent Europeans starving. The last thing we need is a CAP writ-large.

Protectionism would obstruct the world economy from adjusting, rather than encouraging it. There is, for instance, huge overcapacity in the US and European car industries. If each country acts to prop up their carmakers, none will thrive. Only if the least efficient shrink can the carmarkers that produce the cars people actually want to buy thrive. Chang’s prescription is also bizarre considering his main focus is aiding developing countries. If the EU keeps out foreign cars, India’s Tata Motors and his native South Korea’s Hyundai, Daewoo and Kia will suffer.

In Britain’s case, advocating protectionism is particularly perverse. One big reason why the manufacturing sector has shrunk so much in recent years is the pound’s prolonged overvaluation. Now that the pound has collapsed, UK-based exporters, not least its remaining manufacturers, have received a timely boost that will make them more competitive when the global economy recovers. An increase in global protectionism would close off their future export markets.

The real help that companies need to tide them through the crisis is not protectionism but access to finance and broad measures to stimulate demand. These would also boost employment, especially if combined with cuts in payroll taxes and increased help for workers to retrain and find new jobs.

I'm writing a new book. Can you help?

I'm writing a new book, on the future of globalisation. It will look at the risks to globalisation from the ongoing crisis (such as protectionism, nationalism and political extremism) and ask what needs to change in the global economy - and what shouldn't. As with my previous books, this will involve a combination of first-hand reporting, economic and political analysis, and reasoned argument.

As part of my research, I am reading a lot, talking to lots of people, and travelling around the world. I'd be really grateful if you could suggest papers I should read, people I should talk to, and places I should visit. I'm particularly interested in hearing about people that the mainstream media often neglects.

You may be able to point me to a small business in China whose exports have evaporated and whose migrant workers are going home, or to one that is prospering by taking on a new line of work.

You may know Icelandic people who can relate how their lives have been turned upside down by the financial collapse.

You may have connections to communities in Australia that until recently were booming by exporting to China, and drawing in lots of foreign workers as a result; how are they coping?

You may know Mexicans who have gone home from the US, or Poles who have left the UK or Ireland, because of the recession.

And amid all the gloom and despair, what new opportunities are emerging that could help build a better and fairer global economy?

Or something else entirely.

Please email me on mail AT philippelegrain DOT com

I'll get back to you if I think there could be a fit.

Thank you very much.

Freeland on Friedman

One of the casualties when Russian tanks rolled past Gori was the beguiling “Golden Arches Theory of Conflict Prevention” proposed by Thomas Friedman, the New York Times columnist: “No two countries that both have a McDonald’s have ever fought a war against each other.” Alas, you can buy Big Macs in both Moscow and Tbilisi, so we now know a little consumer capitalism is insufficient immunisation against old-fashioned clashes between imperialism and independence.

From the FT

Gene Epstein of Barron's recommends both my books

I have to say a big thank you to Gene Epstein, economics editor of Barron's, who recommends both my books as gifts "that promote thought".

Do you need an economics tutor?

This morning I spoke at a conference for economics teachers organised by tutor2u, which provides a very useful online resource for economics teachers and students. They have also published an article by me in the latest issue of their magazine, Latte. It was a great conference, with Stephen King of HSBC providing a really enlightening presentation about how globalisation is changing the world economy.

Should we worry that foreign companies are taking over British ones?

On the day that India's Tata won a bidding war for Corus, the Anglo-Dutch steelmaker that was once British Steel, I debated whether such foreign takeovers of British companies are a good thing with Will Hutton of the Work Foundation on BBC Radio 4's Today programme. Listen here

War on Want are wrong to claim Bangladeshi garment workers are exploited

War on Want, a British lobby group, on Friday launched a campaign against Primark, Tesco and Asda for selling cheap clothes made by Bangladeshi workers whom the lobby group claim are exploited because they "regularly work 80 hours a week for just 5p an hour".

I debated the charge that such "sweatshops" are harming Bangladeshi workers in a debate with John Hilary of War on Want on BBC Radio 2's Jeremy Vine show: Listen here

Race Convention 2006

Britain's Commission for Racial Equality is celebrating its 30th anniversary, and to mark the occasion it is organising a race convention to debate race relations and the issues that affect them.

I will be speaking at one of the sessions "Business and Diversity: For richer or poorer: globalisation, economics and integration", about globalisation, migration and their impact on race relations.

In case you are interested in attending, it is at 330pm on Monday 27 November at the Queen Elizabeth II Conference Centre in London.

CSR is irresponsible

Corporate social responsibility - it seems impossible to be against it: who wants companies to be irresponsible towards society? But words are deceptive. The premise behind CSR - that the profit motive is tainted, global capitalism is leading the world to rack and ruin, and business has a duty to give something back to society - is fundamentally flawed. And so too is the practice of it.

I spoke about this theme at a very stimulating seminar last week, which underscored how far the pernicious logic of CSR has won over businesspeople, politicians and anti-corporate campaigners alike.

Anyone in Europe or North America who doubts whether global capitalism can benefit the public good should look around at the material plenty that surrounds us. We are not just wealthier than ever before, we are healthier and better educated too.

Of course, profits and social welfare are not always synonymous. For profit-seeking to maximise social welfare, markets must be competitive and prices need to reflect true social costs and benefits. It is easy to think of cases where this is not so: for instance, a factory that spews out pollution without regard for its neighbours. But then the issue is: what is the best way to curb that pollution? I believe that legislation enacted by elected parliaments is infinitely superior to CSR. 

What, though, are we to make of companies' individual CSR projects? Are they good, bad or indifferent? The two key tests are: do they improve a company's long-term profitability? And do they advance the broader public good?

Consider corporate giving. Many businesspeople see charitable donations as a kind of feel-good advertising, or a way of improving a poor public image. Fair enough, but unless those benefits exceed the cost of the donation, it is damaging to profits. So what? - you may say - it is all in a good cause. Not so fast. Managers do not own companies, shareholders do. While managers may wish to earn kudos, or feel good about themselves, by making corporate donations to charity, generosity with other people’s money is not philanthropy, it is theft.   

CSR may also impose costs on companies that are partly hidden and hard to measure, so that even though a company thinks its CSR policy is profit-enhancing, it may in fact be a drag on profits. For instance, CSR can divert managers' energy and attention from the company's core business, discourage potentially profitable risk-taking behaviour, and allow managers to disguise poor performance at achieving the single bottom line through emphasis on the inherently subjective and incommensurate "triple bottom line".

Unsurprisingly, businessmen tend to see all CSR as win-win; while anti-corporate campaigners often believe that win-win activities are mere window-dressing and that CSR is only effective if companies sacrifice profits in the pursuit of greater social welfare. They both neglect, of course, the possibility that CSR could actually harm social welfare. 

Even window-dressing and tokenism have a financial cost – and if they produce no benefit at all, they reduce social welfare. Worse, CSR is often used as a pretext to restrict competition, and in an international context as a form of backdoor protectionism: expensive CSR commitments act as a barrier to entry for smaller firms, or those from developing countries. 

While it may be rational for companies to enact CSR policies if they are the lesser of two evils - if the cost of not doing so is greater than the cost of doing so - this does not mean that CSR is socially desirable. It may make business sense for a shopkeeper to pay off the Mafia if they threaten otherwise to burn down his store, but this does not make a protection racket socially beneficial. Likewise, it may make business sense for Tesco to give in to the demands of pressure groups who want it to do business in a more environmentally friendly way, because of the costs to its reputation if it doesn’t, but that doesn’t imply that the NGOs’ criticisms are correct, or that society is better off thanks to NGOs’ successful blackmail of Tesco.   

The most pernicious kind of CSR is the more ambitious kind: the efforts to impose higher global labour and environmental standards around the world. Although it is probably a win-win for rich-country multinationals operating in poor countries to offer higher-than-average wages and working conditions – as indeed they do – because they want to attract the best workers, trying to enforce too high a standard, or pulling out of developing countries altogether, costs poor people their jobs and thus an opportunity to improve their lives.

Of course, there are many examples of abuse and exploitation, but it is not true that developing countries' lower labour and environmental standards are by definition a bad thing. They are a consequence, not a cause, of poverty and it is only through companies making products in developing countries and selling them on the global market - thereby raising living standards - that those standards are going to rise. Capitulating to NGOs' wrong-headed demands may be rational, profit-seeking behaviour for multinationals - but it harms the poor people it purports to help.

The bigger problem with CSR is that it is undemocratic. The UN's Global Compact, for instance, talks about spreading "good practices" based on "universal principles". But who decides what those good practices and universal principles are? Ask people what the world’s problems are and you will get a variety of opinions. Ask them what the solutions are, and how we might achieve them, and you get an even wider range of answers. If everyone agreed on the solution to the world’s problems, there would be no need for politics. We could just appoint administrators and let them get on with the job. But in fact, people disagree on just about everything. That is why we have elections, governments and political debate. It is a messy, rough-and-ready way of deciding society’s priorities, but it is less bad than all the alternatives - not least CSR.   

Companies’ social responsibility is to make profits, not decide how, or how much, the environment should be protected. It is a duty that they have to their shareholders who have entrusted their savings to them. Workers’ jobs depend on it. So does a country’s prosperity: scarce resources should only be tied up in a company if it is adding value. Profit is not a dirty word. Profits help pay for schools, hospitals and pensions. 

Certainly, people have aims besides getting richer. They care about how the pie is shared out, as well as its size. They also care about how the pie is produced: whether corporate activity damages the environment or compromises workers’ safety and dignity. These plural aims do not always conflict: companies with happy workers are often profitable, and vice-versa. But sometimes they do. That is where there is a role for governments: to draft and enforce laws that express society’s collective view about how, say, the balance between economic growth and environmental protection should be struck.   

This traditional model of governance has many advantages. The lines of responsibility are clear: governments set the rules of the game, companies then aim to make profits subject to those constraints. This is not only democratic. It is also fair: laws are transparent, apply equally to all companies, and are impartially enforced by the courts. And it is flexible: laws can vary according to local conditions and preferences. The best way to help workers and the environment is generally through national laws drafted on the basis of democratic participation and consultation.

Governments are more than capable, either individually or collectively, of achieving social aims through legislation. And if there is an appropriate framework of laws that ensures effective competition and corrects market failures, maximising profits is not just good for a company’s shareholders, it is in society’s best interests too. So companies are not irresponsible if they maximise profits within the framework of the law; it is society that is irresponsible if it seeks to pursue (often misguided) social and environmental aims through CSR.

Globalisation is working

Robert Wade of the LSE wrote an article in July's issue of Prospect alleging that Globalisation Isn't Working. I have written a response to this, which is published today on Prospect's website, and which I am also publishing on here. Needless to say, globalisation is working.

Globalisation is working

Globalisation isn’t working, according to Robert Wade (July). If you exclude China—a mere 1.3bn people—it has not made much of a dent in global poverty or inequality, he claims. And if you ignore the boom years since 2000—why bother using up-to-date statistics?—it hasn’t delivered faster growth either. This is a weak argument, which appears to stand up only by excluding evidence that contradicts it—but even on its own terms it isn’t correct. In fact, developing countries that have embraced globalisation are growing faster than before; so fast that they are closing the gap with rich countries, slashing poverty and reducing global inequality for the first time since the industrial revolution catapulted Europe forward. Globalisation is working.

Wade claims that, “If the liberal argument holds, we would expect the global shift towards free markets in the past 25 years to have raised the rate of world economic growth. Instead, there has been a slowdown in developed and developing countries. Between the era of managed capitalism (roughly 1960-78) and the era of globalisation (roughly 1979-2000), the growth rate of world output fell by almost half, from 2.7 per cent to 1.5 per cent.”

Not so. According to the latest IMF figures, the world economy grew by 3.3 per cent a year from 1986-95 and by 3.9 per cent a year from 1996-2005. Better still, while in 1986-95 emerging economies grew only fractionally faster than advanced economies (3.7 per cent a year compared with 3 per cent), in 1996-2005 they grew over twice as fast (5.5 per cent a year compared with 2.7 per cent). Far from stagnating, the world economy is booming—and developing countries are outpacing developed ones.

But in any case, Wade’s methodology is shoddy. Even if global growth had slowed since 1979, one could not deduce from such aggregate figures that globalisation wasn’t working. Contrary to what he asserts, there has not been a global shift towards free markets, let alone one that can be dated to 1979. Countries have opened their markets to varying degrees and at different times; some have failed to liberalise at all or have even become more protectionist. What’s more, globalisation is not the only economic change of the past 40 years, and so cannot necessarily be considered responsible for any particular change in economic performance. The right way to judge whether globalisation is working is to look at individual economies’ performance before and after they liberalised, controlling for other changes that might affect the picture—and one finds a mountain of evidence that it is indeed delivering the goods.

For instance, World Bank studies of 19 countries over four decades conducted in the early 1990s showed that liberalisation boosts economic growth. More recently, Romain Wacziarg and Karen Welch of Stanford University have found that between 1950 and 1998, “countries that have liberalised their trade regimes have experienced, on average, increases in their annual rates of growth on the order of 1.5 percentage points compared to pre-liberalisation times.”

Consider China. Since 1978, it has gone from a system where trade was determined by the central government’s five-year plan to one where a huge number of private companies engage in foreign trade, import licences have largely been abolished, industrial tariffs have fallen to single figures and service sectors are being opened up too. The volume of China’s trade has risen seventy-fold, trade’s share in the economy fivefold and the country’s share in world trade has jumped from 0.8 per cent to 7.7 per cent. Over the same period, Chinese living standards, as measured by GDP per person at purchasing power parity, have risen fivefold—and the country has witnessed the fastest fall in poverty ever recorded.

China’s great leap forward has certainly helped reduce global inequality since 1980, as Wade now concedes: “the Gini coefficient has indeed fallen since 1980, meaning that international income distribution has become more equal.” (Four years ago, in his Prospect debate with Martin Wolf on global poverty and inequality, Wade hotly disputed this.) Yet Wade dismisses this fall in inequality by claiming it is solely due to China. Even if this were true, it would surely still be very welcome: it is no small matter if the Chinese, who account for one in four of the developing world’s population, are catching up with Americans and Europeans. But the fall in inequality is not just due to China. India, home to more than a fifth of the developing world’s population, is also catching up with the west. Indeed, the income share of the poorest 70 per cent of the world’s population has increased significantly since 1980. The countries that are continuing to fall behind are mostly in sub-Saharan Africa. It is a tragedy that some very poor countries are doing very badly. But it is not an indictment of globalisation—by and large, the poorest countries are victims not of globalisation, but of a lack of it—nor does it alter the fact that global inequality is falling overall. 

Wade points out that absolute income gaps are widening and argues that this is a matter for concern. Really? Consider again his example of economy A, where the average income is $10,000, and economy B, where it is $1,000. Their relative income is 10:1 and the absolute gap between them is $9,000. Suppose B grows at a racy 10 per cent a year. Its income will rise by $100 to $1,100. If the absolute gap between A and B is not to widen, A can add at most $100 to its income of $10,000, which means growth cannot exceed 1 per cent. In short, because A starts off so much richer than B, even if B booms the absolute gap between them will initially widen unless A stagnates—and if A stagnates, B is unlikely to boom, since A’s demand for its exports will also stagnate. Perhaps Wade wants the gap between rich and poor to shrink through economic stagnation in rich countries—if so, he should say so explicitly. But surely what is happening now is preferable: rich countries are growing steadily, but poor countries are growing faster, and thus catching up in relative terms. If this continues, they will eventually narrow the absolute gap too. For example, if B grows at 10 per cent a year for 30 years, its income will rise to $17,449; while if A grows at 2 per cent a year over the same period, its income will rise to $18,114.

Wade also dismisses the huge fall in global poverty since 1980, by saying its scale “depends entirely on China.” In fact, while the proportion of people in developing countries living in extreme poverty almost halved between 1981 and 2001, from 39.5 per cent to 21.3 per cent—a huge achievement, regardless of whether those who escaped poverty were Chinese or Congolese—even (arbitrarily) excluding China, the poverty rate fell from 31.5 percent to 22.8 per cent. Wade calls this “only 9 per cent”: in fact, this 9 percentage-point fall means the poverty rate fell by over a quarter. Extreme poverty edged down in Latin America and the Caribbean, fell by two fifths in south Asia and more than halved in north Africa and the middle east.

There’s no doubt about it: globalisation is working. We need to do more to help everyone reap its benefits, not misguidedly try to protect the poor from trade-led development.

Inefficient markets

A high-stake reform

A decade ago, a fresh-faced Tony Blair briefly touted “stakeholder capitalism” as New Labour’s big economic idea. But he soon recoiled: the notion, made fashionable by Will Hutton’s The State We’re In, that companies should be accountable not just to the short-term demands of their shareholders but also to the long-term interests of their wider stakeholders, such as their employees, was dismissed as dangerously radical. Yet in the dying days of the Blair era, the government is quietly pushing through parliament a bill to reform company law that could have dramatic consequences for British businesses. The bill will for the first time put company directors’ duties into statute. They will be required to ensure that the business is run in the financial interests of its shareholders, but also to “have regard to” its impact on employees, customers, suppliers, communities and the environment. The bill will also make it easier for shareholders to sue directors for failing in their statutory duties.

Predictably, the coalition of unions and NGOs campaigning for greater corporate social responsibility complain that the reforms do not go far enough — they would rather directors had a “duty of care” to communities and the environment. But even in its current form, the bill is a big victory for them. It would, for instance, allow NGOs to sue directors for failing to give due regard to their company’s environmental impact. Friends of the Earth (FoE) could buy a few Tesco shares and then sue the directors of the supermarket chain for, say, failing to do enough to encourage recycling, squeezing its suppliers too hard or sourcing fruit from developing countries where environmental rules do not live up to FoE’s expectations. The mere threat of legal action would have directors scrambling to cover themselves.

That is bad for business—and a shoddy way of advancing green goals. Soundly based, transparent and predictable environmental regulation is surely preferable to expecting company directors to second-guess what courts might deem appropriate.

A flawed charter

NGOs have long demanded that governments, businesses and international organisations be open and accountable for their actions—and rightly so—but what about NGOs themselves? The self-appointed guardians of global rectitude ask us to rely on their word that they are beyond reproach. But in a belated response to closer scrutiny, this is finally starting to change: 11 leading international NGOs have just signed up to a new “accountability charter”.

The new charter’s signatories make much of their commitment to accountability and transparency, as well as to principles such as good governance, independence and ethical fundraising. But they still ask us to take too much on trust. For instance, saying “we are accountable to our stakeholders”—including future generations and ecosystems—sounds great, but how? Declaring that: “We will listen to stakeholders’ suggestions on how we can improve our work and will encourage inputs by people whose interests may be directly affected” is scarcely robust accountability.

Nor does the charter do enough to guarantee NGOs’ independence. It does not, for instance, force directors to reveal their political and business links. Its ethical-fundraising pledge commits NGOs to reveal their donors’ names only “in cases where the size of their donation is such that it might be relevant to our independence,” which is worryingly vague.

Above all, there are no guarantees that this voluntary charter will actually be enforced. Pledging to apply it “progressively” and promising to produce an annual report are not enough; NGOs must also agree to independent monitoring. In short, the charter falls far short of what is needed.

A plague of populism

To show off their intellectual superiority, certain very clever people love arguing outrageously contrarian things. No matter how misguided the anti-globalisation brigade’s positions may be, the former chief economist of the World Bank makes a habit of defending them. In the latest edition of New Perspectives Quarterly, he goes out of his way to deflect criticism of the new breed of Latin American populists such as Venezuela’s Hugo Chávez: “Now, if by populism one means worrying about how the bottom two-thirds of the population fares, then populism is not a bad thing,” the Nobel laureate argues—even though the distinguishing feature of Chávez’s populism is clearly not his apparent concern for the poor, which is more than matched by Brazil’s Lula, but his penchant for quick-fix remedies and anti-American grandstanding.

“Obviously, it is of concern if these new leaders of the left in Latin America pretend there are no laws of economics,” Stiglitz astutely adds. “But the question is whether the IMF strictures are the only ones consistent with good economics,” he continues, changing the subject and setting up a straw man—“The answer to that is a resounding no.” But the real issue—whether Chávez’s profligacy is bringing a lasting improvement to poor people’s lives or whether Venezuela’s oil windfall is being squandered—has been dodged. Stiglitz is no stranger to populism himself.

The sceptics are wrong: Freeing trade has boosted growth in China and India

In a comment on my recent post on the contribution of trade liberalisation to Asia's success, Jim takes issue with my contention that

China and India are very powerful examples of the benefits of liberalisation: before they started their reforms, growth was slow, but as they have opened up their economies, growth has accelerated.

He argues that growth speeded up before they opened up, and that their growth since they opened up is not due to freer trade.

Jim makes three specific counter-claims:

1. 'Both India and China grew strongly through the 1980s, well before any significant trade liberalisation.'
2. 'While they did eventually liberalise significantly and kept growing, the evidence that the trade opening caused the growth is pretty thin.'
3. 'China is at best middling in terms of trade openness in comparison to other developing countries.'

I'll address each in turn.

1. It is not true that China and, to a lesser extent, India did not undertake any significant trade liberalisation in the 1980s.

In the mid-1970s, all trade was centrally controlled in both countries. But starting from December 1978, China began to open up. In the 1980s:

• The central government's monopoly on foreign trade was broken.
• A large number of foreign trade corporations were established (there were over 5,000 by 1988), with trading rights also granted to big companies.
• Special economic zones and open cities were established.
• Joint ventures with 25% foreign investment were permitted, and these were granted the right to trade directly.
• Companies were allowed to keep some of the foreign currency earned through trade.
• The remninbi's artificially high official rate was devalued from 1.5 to the dollar in 1979 to 8.7 in 1991.

In short, in place of the central government's absolute control over foreign trade, a large number of companies were permitted to trade, with trade regulated through import licences and tariffs instead. Free trade it wasn't, but it was certainly a much more liberal regime than before.

India's trade liberalisation in the 1980s was more modest - by 1990 some 30% of imports, mainly capital and intermediate goods, could be imported without specific licences and import quotas were replaced with less harmful, albeit very high, tariffs - but then so too was its economic growth.

Whereas China's economy grew by an average of over 9% a year in both the 1980s and the 1990s (subject to the caveat that applies to all official Chinese statistics), India's managed only 4.8% in 1981-88.

That was an improvement on the wretched 3.2% recorded in 1965-81, but still pretty poor, especially given the rapid rise in India's population, which meant that living standards rose much more slowly than GDP.

True, India's economy boomed between 1988 and 1991 - but this growth spurt proved unsustainable and ended in financial crisis. Since the economic reforms in 1991, which ended import licensing and slashed tariffs, India's growth has averaged 5.8%.

As Arvind Panagariya quite rightly points out: 

Bradford DeLong and Dani Rodrik have argued that reforms in India cannot be credited with higher growth because the growth rate crossed the 5 percent mark in the 1980s, well before the launch of the July 1991 reforms. This is a wrong reading of the Indian experience for two reasons. First, liberalization was already under way during the 1980s and played a crucial role in stimulating growth during that decade. Second, growth in the 1980s was fragile and unsustainable. The more systematic and systemic reforms of the 1990s... gave rise to more sustainable growth.

In short, Jim's claim is incorrect. A more accurate summary of what happened in the 1980s is: "China made big steps to liberalise its trade and was rewarded with much faster economic growth, while India opened up less and enjoyed only a modest uptick in growth."

2. Trade liberalisation is clearly not the only reform that China and (to a lesser extent) India have undertaken, and it is not responsible for all their growth. But it has certainly boosted both China's and India's rate of growth.

The Ravallion/Chen article that Jim mentions says nothing about the impact of trade liberalisation on growth: it is concerned with poverty and inequality. And its findings do not contradict my contention: although some people may lose from trade liberalisation in the short term, the long-term productivity gains from freeing trade, which boosts competition and innovation, raise long-term growth, thus reducing poverty.

There is a mountain of evidence to support the belief that freeing trade promotes economic growth in developing countries. For instance:

• Studies of nine countries – Chile, Colombia, Egypt, Ghana, Israel, Korea, the Philippines, Turkey, and, yes, India – directed by Anne Krueger and Jagdish Bhagwati for the National Bureau of Economic Research in the late 1970s showed that liberalising trade led to faster economic growth.
• These findings were confirmed by studies of nineteen countries – Argentina, Brazil, Chile, Columbia, Greece, Indonesia, Israel, Korea, New Zealand, Pakistan, Peru, the Philippines, Portugal, Singapore, Spain, Sri Lanka, Turkey, Uruguay, and Yugoslavia – over four decades conducted in the early 1990s by Demetris Papageorgiou, Michael Michaely, and Armeane Choksi of the World Bank.

Just look at China:

• Since 1978, China has gone from a system where trade was wholly controlled by the central government to one where a huge number of private companies engage in foreign trade, import licenses have largely been abolished, industrial tariffs have fallen to single figures and service sectors are being opened up too.
• The volume of China's trade has risen 70-fold, trade’s share in gross domestic product has risen five-fold and the country’s share in world trade has jumped from 0.8% to 7.7%.
• Over the same period, Chinese living standards, as measured by GDP per person at purchasing power parity, have risen five-fold - and the country has witnessed the fastest fall in poverty ever recorded.

Not connected? Hardly. Indeed, Harm Zebregs finds that foreign direct investment alone boosted GDP growth by 3 percentage points a year in the 1990s, even though it accounted for only 5 percent of GDP. 

3. Whatever measure of openness you use, China is more open than most developing countries.

Its weighted average industrial tariff is less than 6%, compared with a developing-country average of 8% (bound) and 12.5% (applied).

Imports account for over a quarter of GDP, a huge figure for a such a large and populous economy.

So is China a fully open economy? Clearly not. Is it much more open than before? Yes. Is it now more open than most developing countries? Most certainly.

So I repeat:

China and India are very powerful examples of the benefits of liberalisation: before they started their reforms, growth was slow, but as they have opened up their economies, growth has accelerated.

Deconstructing Doha

Time is running out for the Doha Round. It's been said so many times, but this time it really is true. To see why, count back from July 2007. That is when President Bush's fast-track authority, which forces Congress to vote on trade deals without the possibility of amending them, is due to expire.

With the president so unpopular, the trade deficit so huge and the prospect of a Democratic majority in Congress by then, the chances of fast-track being renewed are vanishingly slim: it only passed by one vote the last time around.

But without fast-track, Congress could amend any WTO deal to death, unpicking the bargain American negotiators had painstakingly struck with the other 148 WTO countries and thus making it unacceptable to them.

So if July 2007 is the deadline for Congress approving a WTO deal, early 2007 is surely the absolute latest an agreement could be reached if Congress is to have enough time to scrutinise and vote on it.

That in turn means that this July, or at a real push September, is the deadline for reaching the outlines of a deal, with the details hammered out in the final months of this year.

So how near are trade negotiators to striking that big political bargain?

Important elements are in place. The contours of an eventual deal are clear. The grand bargain involves the EU and the US opening their agriculture markets - the EU cutting its farm tariffs, the US its subsidies - in return for greater access to industrial and services markets in developing countries, notably India and Brazil.

The poorest countries also need to be bought off with duty-free access to EU and US markets; in particular, the US has to hack down its cotton subsidies, while the EU has to compensate its ex-colonies for eroding the margin of their preferential access to EU markets. 

Negotiators have a pretty clear idea of each other’s true bottom lines. What is lacking is political will.

The paradox of Doha is that an ambitious deal is an easier sell than a modest one. A "Doha lite" would still involve political pain, since EU and US farmers will object to any cut in agricultural support, while offering little for exporters to get excited about. They might prefer to spend their political capital on securing bilateral trade agreements instead.

But a more ambitious agreement would not only make cuts in US farm subsidies easier to swallow, by giving US farmers new export opportunities in Europe and elsewhere. It would also give US and EU exporters of manufactures and services eyeing up new markets in India and China something to fight for.

The problem, as always, is getting from here to there. Tony Blair is said to be keen to hold a summit to break the logjam. He had better hope that his good friends George Bush and Peter Mandelson are on the same wavelength.

A flawed charter

Eleven international NGOs have signed up to a new accountability charter, which says

We recognise that transparency and accountability are essential to good governance,whether by governments, businesses or non-profit organisations. Wherever we operate, we seek to ensure that the high standards which we demand of others are also respected in our own organisations... We agree to apply the Charter progressively to all our policies, activities and operations.

It's a positive first step. As I explained in an earlier post, NGOs have previously failed to live up to the high standards that they rightly demand of others. But it still doesn't go far enough.

For far too long, NGOs have had the benefit of the doubt in global politics. While they routinely question the motives and actions of others, they purport to be whiter than white. While others are criticised for acting in their own self-interest, NGOs claim to act for the common good. But that is nonsense. Remember Greenpeace and Brent Spar? NGOs are pressure groups that advance their own interests as well as what they claim to be the common good. Their choice of campaigns, for instance, is influenced by the need to raise money, so who funds them matters a great deal. Their leaders claim to speak on behalf of their supporters and/or members, so it is important that they are properly accountable to them. They often work in partnership with businesses and governments, so the links between them need to be transparent. And so on.

So what of the actual charter? Note first that it is voluntary. That may be fine if NGOs stick to it - but who checks whether it is actually being enforced? The NGOs say it will be applied "progressively": how fast is that? NGOs are notoriously sceptical of businesses' various voluntary codes of conduct and this healthy scepticism should apply to their own code too. Promising to produce an annual report is great, but as I recommended in Open World, the NGO charter also needs to be independently monitored.

Second, the list of stakeholders is ten long - and if you are accountable to so many groups you are in effect accountable to nobody. Saying "we are accountable to our stakeholders" sounds great, but how? The list includes "future generations" and "ecosystems", neither of which can actually hold NGOs to account. It's just not good enough to say that "We will listen to stakeholders’ suggestions on how we can improve our work and will encourage inputs by people whose interests may be directly affected."

Third, the charter falls far short of what is needed to ascertain NGOs' political and financial independence. It does not, for instance, commit directors to reveal their other business and political links. Nor does its "ethical fundraising" pledge commit NGOs to reveal their donors' names "except in cases where the size of their donation is such that it might be relevant to our independence", which is worryingly vague.

I could go on. Suffice to say that although the new charter is welcome, NGOs are still not committing themselves to the same levels of transparency and accountability that they demand of others.

Is Asia's success due to trade protection?

In a thoughtful comment on my recent Doha post, Matthew argues that

It is simply not the case that the enormous growth of the Asia tigers is evidence of the efficacy of free trade because most of those economies were protected behind trade barriers and currency controls for most of their development and still are.

I started replying in a comment, but then I thought the subject was so important that I would start a new post about it instead.

I think that China and India are very powerful examples of the benefits of liberalisation: before they started their reforms, growth was slow, but as they have opened up their economies, growth has accelerated. Just because they still have some tariffs in no way implies that their faster growth stems from this residual protection: if it did, the increase in growth would surely have preceded liberalisation, which it did not. Critics claim that if developing countries lower their tariffs they will be giving up their chances of development – yet China’s markets are already far more open than those of most developing countries and it is thriving. I think China's decision to join the WTO was a powerful signal that its leaders believed that to sustain economic growth, the country needed to liberalise further, as indeed it has done.

But what about South Korea? Undeniably, it has protected some of its export industries. Undeniably too, it has grown in leaps and bounds. The question is: did the trade protection cause the growth?

Not necessarily. South Korea might have succeeded despite the trade protection, or the trade protection might have had little effect at all. Observing that tariff protection preceded development does not in any way demonstrate a causal link. Saudi Arabia has grown rich while protecting its industry behind tariff walls, yet the source of its prosperity is soaring oil prices, not infant-industry protection.

In an exhaustive study of South Korea's experience for the Institute for International Economics, Marcus Noland and Howard Pack find that

the weight of the evidence derived from both econometric and input-output studies… indicates that industrial policy made a minor contribution to growth in Asia... Countries with less dedicated and less competent bureaucracies and policymaking apparatuses that are more amenable to lobbying pressures could expect even smaller net benefits.

They conclude that governments would do better to focus on measures other than selective industry protection to foster development. Along with sound macroeconomic policies,

Growth-enhancing measures in the Asian countries, which did not differentiate among sectors, included large expenditures on primary and secondary education, the building of large and efficient social infrastructure, a favourable attitude towards technology transfer, including both technology licensing and direct foreign investment, and a substantial investment in public technology institutions.

The bottom line is that South Korea’s success does not support the critics’ faith in state-led development through infant-industry protection – and developing countries should not mistakenly try to follow that path today.

Indeed, if a government protects the domestic market, by definition a local company can sell at a higher price in that market that it can abroad. Selling at home becomes much more profitable than selling abroad. So import protection creates a strong incentive to focus on the domestic market instead of exporting on the world market.  Other things equal, then, protecting an industry is unlikely to turn it into a world-beating exporter. South Korea got round this by providing cheap loans and other benefits to exporters - giving companies an offsetting incentive to sell abroad - and by cutting off those loans if the companies were not successful on the world market - thus allowing the market, not the government, to pick winners. In crucial aspects, then, the South Korean system mimicked many of the advantages of a free-trade environment.

Time to behave better

NGOs demand that governments, businesses and international organisations be open and accountable for their actions. Hear, hear. But what about NGOs themselves? The likes of Oxfam and Greenpeace fall far short of the standards on which they rightly insist in others. These self-appointed guardians of global rectitude are scarcely models of transparency and accountability - a flagrant case of "do as I say, not as I do". As I have long argued, if NGOs are to be taken seriously in global politics this has to change - and it appears that they are finally starting to put their houses in order. The FT reports that 11 NGOs will on Tuesday sign a voluntary “accountability charter”. Sounds promising. Watch this space.

How best to tackle global poverty?

Discussing debt relief and third world development with Noreena Hertz on the Today Programme. Listen here

French myth-making

Many French people rejected the constitution because they regard Brussels as the handmaiden of "ultra-liberal" Anglo-Saxon capitalism, intent on deregulating markets and opening up the French economy to competition. Just look, they say, at the EU's proposed services directive, which would tear down barriers to trade in services, or at the eastward enlargement of the EU, which has exposed French workers to competition from low-wage, low-tax economies such as Poland. The upshot, they claim, is that the EU is driving social standards down and pushing unemployment up.

This is mostly nonsense. Start with the blindingly obvious: an organisation whose biggest budget item is the common agricultural policy, which shovels vast subsidies to European farmers (many of them French) and imposes swingeing taxes on foreign food, is not "ultra-liberal" by any stretch of the imagination. Europe is not even a free trade zone. Although most barriers to trade in manufactured goods have been abolished, vast swathes of the European economy remain segmented along national lines. Europe's single market does not encompass its many service sectors—such as finance, media, law, construction, health, education and energy—which account for 70 per cent of the European economy and a similar proportion of its jobs. Far from being ultra-liberal, the EU is only semi-liberal.

But the French were right that Europe was edging in a liberal direction. The admission last year of ten new member states, most of which are less interventionist than France, has boosted competition somewhat, although since they account for less than 5 per cent of the total EU economy their impact on France has not been huge. And had Jacques Chirac not blocked it back in March, the EU's services directive would have exposed the French economy to more competition. Workers in uncompetitive sectors would have suffered, but consumers, exporters and the economy as a whole would have gained.

Yet even the completion of a true single European market stretching from Lisbon to Latvia would not imply a "race to the bottom" of taxes and standards. It is simply not true that factories and jobs are inevitably lured to countries with the lowest taxes and regulations, pressing down on standards in France. For a start, many services—such as haircuts, childcare and nursing—can only be provided locally. Moreover, taxes and regulations are only one factor among many that determine where people work and companies establish themselves. Although France's high taxes and regulations may deter some, its well-educated workforce, excellent infrastructure, geographical position, quality of life and membership of the euro will attract others.

International competition does not necessarily drive taxes and standards down. France's tax revenue accounts for around half of its economy—just as it did ten years ago. Indeed, in some European countries, taxes are rising. Over the past three years in supposedly ultra-liberal Britain the government's tax take as a share of the economy has risen by two percentage points—and is set to rise by a further point over the next two years.

Nor can Europe, still less EU enlargement, be blamed for France's high unemployment. France's jobless rate has been high for over 20 years, long before even the creation of the single market in 1993, much less last year's EU enlargement. Moreover, within that European single market, jobless rates vary from 4.6 per cent in Austria to 12.3 per cent in Belgium, so there is nothing inherent in the single market that prevents France from creating jobs.

The truth is that the main fault for France's enduring high unemployment lies at home: its outdated product and labour market regulations discourage companies from hiring workers and make it costly for them to adjust to changing tastes and technologies. Does this mean that France has to deregulate its economy, and embrace ultra-liberal Anglo-Saxon ways, in order to get unemployment down? No. Far from blaming Europe for its travails, France ought to be looking to successful European social democracies, such as Denmark and Sweden, to solve its problems. The Nordic countries have thriving economies that combine high standards for working conditions with low unemployment. Without too much pain France could enjoy similar success.

Sorry, but we just don't need the global compact

Globalisation is not perfect, but it is overwhelmingly a force for good. The rapid growth of trade and investment across national borders is spreading greater prosperity and opening up new opportunities to billions of people around the globe. China has recorded the fastest fall in poverty the world has ever seen. Global inequality is now declining for the first time since the Industrial Revolution, as China, India and others begin to catch up with the West. Those countries that are still floundering  notably in Africa  are largely victims not of globalisation, but of a lack of it.

Yet economic globalisation poses important challenges for a political order that remains anchored around nation states. States have unique powers to tax and regulate, as well as the unrivalled legitimacy that national allegiance and democratic accountability confer. Unfortunately, though, some states are incapable of enforcing their own laws, let alone providing the good governance and sound policies required for sustained economic development.

Some critics go further. They claim that globalisation is stripping governments everywhere of their powers. Huge global companies increasingly rule the roost, exploiting the poor and the environment for their own profitability, with little or no restraint. To stave off a devastating "race to the bottom" of labour and environmental standards, the global clout of multinational companies must be co-opted to achieve what critics believe to be desirable social change. In short, global companies must be compelled to be "socially responsible".

pressure groups pushing pet schemes, consultants peddling money-spinning advice, companies seeking to protect their profits from attacks on their reputation, and international organisations keen to be seen to be doing good. One of the many corporate social responsibility (CSR) schemes is the United Nations' Global Compact, a voluntary charter whose signatories pledge to uphold nine broad principles of human rights, labour standards and environmental protection throughout the world.

Hong Kong show.

Even where governments can't  or won't  regulate appropriately, companies (especially foreign ones) are ill-suited to setting and enforcing social norms. Companies' social responsibility is to make profits within the constraints of the law, not to decide how, or how much, the environment should be protected. And people generally prefer domestic misrule  even by autocrats  to foreign intervention, however well-meaning.

The UN Global Compact, according to a seemingly innocuous statement on its website, "utilises the power of transparency and dialogue to identify and disseminate good practices based on universal principles". But who decides what those "good practices" and "universal principles" are? If everyone agreed on the solution to the world's problems, there would be no need for politics. But in fact, people disagree on just about everything.

It is not only undemocratic for self-interested foreign companies blackmailed by self-selected anti-capitalist campaigners to be setting social standards in developing countries. It is also inefficient and unfair. There is no single right way to regulate: preferences and circumstances differ. Moreover, relying on a small group of big foreign companies to enforce rules ensures that any efforts will be patchy and limited. Global CSR not only has echoes of imperialism. It can also harm the people it purports to help if, for instance, imposing too costly environmental standards causes workers to lose their jobs.

The world needs more globalisation and better government. It does not need more CSR.

For richer, for poorer

Dear Philippe,

Isn't it ironic that globalisation's most startling legacy is not to be fusion food, cheap flights or the web - but debt and deflation? That those of us who worried about the Third World debt crisis, are about to confront our own First World debt crises?

And would you agree that there is a certain irony in poor, developing countries going cap-in-hand to Cancun to beg favours from rich countries, when in fact these same countries are keeping the rich in pocket? According to the World Bank, developing countries are " net lenders to developed countries". "Globalisation" allows rich countries to live beyond their means (including their environmental means) and then to raid the piggy banks of poor countries for finance. The result: huge reserves of IOUs - or debt. Can we discuss how to moderate globalisaton's most damaging legacy: the coming first world debt and deflation crisis?

Ann Pettifor

Dear Ann,

I think fears of deflation are overblown: UK inflation is 3.1%. Where prices are falling - notably Japan - domestic policy failures, not globalisation, are mainly to blame. Japan is a net lender to the world - by over $100 billion a year - not a net borrower. Poor countries can, of course, choose not to tap foreign finance. Those with underdeveloped financial markets should certainly limit destabilising surges of speculative money. But long-term foreign investment in factories can do wonders for countries that are short of domestic savings and know-how.

The big issue in Cancun, though, is trade, not finance. The evidence that freeing trade boosts economic growth - and hence reduces poverty - is incontrovertible. Witness China's great leap forward since it started opening up. The average Chinese person is over six times richer than 20 years ago - the number living on less than a dollar a day fell by 150 million between 1990 and 1998, the fastest fall in poverty ever recorded. The Chinese clearly believe freeing trade is good: that's why they recently joined the WTO. Why don't you?

Philippe

Dear Philippe,

Where did I say I was against trade? Globalisation is not primarily about trade, despite smokescreens erected by "globalisers" and "anti-globalisers" alike. Globalisation is primarily about finance; about transforming the global economy, so that the "money-changers" - not the productive trading sector, now run the world.

The truth is neatly summed up in one statistic. In 1970, 90% of all international transactions were trade transactions, and only 10% were financial transactions. By 2000, 90% of all transactions were financial, and only 10% were trade transactions.

Philippe, be honest: the money-changers have taken over the temple. Trade is now just a small part of the global economy. And the result is devastating: de-regulating international capital has made it easier for rich countries to siphon off resources from poor countries.

Ann

Dear Ann,

I didn't say you were against trade: I said you were against freeing trade. Please correct me if you have changed your views. If so, it might explain why you have not contested my point that freeing trade boosts growth and reduces poverty.

Your assertion that globalisation is primarily about finance, not trade and investment, is incorrect: the volume of transactions on financial markets bears little relation to their importance. It is also beside the point. Developing countries can reap all the benefits of opening up to foreign trade and investment, while maintaining firewalls to protect them against the instability of global financial markets. That is what Vietnam has done under its policy of doi moi - and in the ten years after 1988, when it began to open up its economy, its poverty rate halved. Who said globalisation isn't good for the poor?

Philippe

Dear Philippe,

What do you mean the "volume of financial transactions on financial markets bears little relation to their importance"? This is like saying "volumes of money bear little relation to their importance". I repeat: globalisation is largely about those with money making even bigger volumes of money.

While some countries have become richer by designing, manufacturing and trading (and I am all in favour of that), it is countries (like the UK) that make money from money that have really thrived under globalisation. Of course it's good for poor countries to trade - fairly - but whether it has enriched them is open to question. China's growth numbers, as you know, are treated with great scepticism by all. And, anyway, China's is not a globalised economy - it maintains capital controls.

Ann

Dear Ann,

Do you really think it is City traders who make Britain rich? The wealth of nations springs mainly not from their financial turnover but from their ability to use technology productively. That is why globalisation in the form of international trade and foreign investment is such a good thing. New technologies spread faster; foreign competition keeps companies on their toes; countries specialise in what they do best and buy the rest for less from abroad. For sure, if you choose to define globalisation narrowly as just the free movement of hot money, it is a mixed blessing. But trade liberalisation has an outstanding record of raising living standards and reducing poverty.

Since 1980, an amazing thing has happened. Global inequality, which had been rising since the Industrial Revolution enabled the West to race ahead, has begun to fall. China, home to one in five of the world's people, is catching up with rich countries. India, where a further sixth of the global population live, has also begun to close the gap - as have many other Asian countries. Developing countries that embrace globalisation are making up ground on the West; those that reject it are falling further behind. One can quibble with the precise data, but the broad trend is not in doubt, as any visitor to Shanghai, a futuristic city that only 15 years ago was mostly marshland, can testify.

Philippe

Dear Philippe,

Of course City traders have helped make us rich. Our own goods exports are in decline, and now as a nation, we pay our way thanks to "invisibles" - making money from money. On global inequality, I profoundly disagree. Inequality numbers are very political. No institution collects numbers on income distribution. And the numbers that are collected are of incomes - not assets. The rich have assets, not incomes. The poor have incomes and debts, not assets. If you add in assets, as we do, then globalisation is generating wealth for the rich, and debts for the poor. This is the "hoover effect" - globalisation is sucking wealth from the poor, and concentrating it in the hands of the few.

Ann

Dear Ann,

Of course, the City contributes to Britain's prosperity, but it is not the main reason our country is rich. Financial services account for only 6% of the UK economy.

Global inequality is indeed hard to measure, but simple arithmetic suggests it is falling, as more sophisticated studies can confirm. Half the people in the developing world live in China and India. Both their economies are growing much faster than the US's, Europe's and Japan's. So the gap between rich and poor is narrowing. And as the poor's incomes rise, they will save and accumulate assets - just as we have done. To claim that "the rich have assets, not incomes" suggests that far from New Economics, you have no economics: assets are only valuable because they provide a stream of future income.

Philippe

Dear Philippe,

In economics, defamation is the sincerest form of flattery. So thank you. To check the facts, read the New Economics Foundation's book, Real World Economic Outlook - which includes distinguished economists and a Nobel Prize Winner.

Ann

Dear Ann,

You ask poor readers to plough through your book. I shall be much briefer: if the world followed your prescriptions, we would all be much poorer. And let's not count Nobel prizes: as you know, the overwhelming majority of economics laureates are in favour of globalisation.

Philippe

Ann Pettifor is a director of the New Economics Foundation and was a co-founder of Jubilee 2000. Email: ann.pettifor@neweconomics.org. Philippe Legrain is the author of Open World: The Truth about Globalisation.

Cultural globalization is not Americanization

"Listen man, I smoke, I snort ... I've been begging on the street since I was just a baby. I've cleaned windshields at stoplights. I've polished shoes, I've robbed, I've killed. ... I ain't no kid, no way. I'm a real man."

Such searing dialogue has helped make City of God a global hit. A chronicle of three decades of gang wars, it has proved compelling viewing for audiences worldwide. Critics compare it to Martin Scorsese's Goodfellas.

If you believe the cultural pessimists, Hollywood pap has driven out films like Cidade de Deus, as it is known in its home country. It is a Brazilian film, in Portuguese, by a little-known director, with a cast that includes no professional actors, let alone Hollywood stars. Its focus is not a person at all, but a drug-ridden, dirt-poor favela (slum) on the outskirts of Rio de Janeiro that feels as remote from the playground of the rich and famous as it does from God.

Yet City of God has not only made millions at the box office, it has also sparked a national debate in Brazil. It has raised awareness in the United States, Britain, and elsewhere of the terrible poverty and violence of the developing world. All that, and it makes you wince, weep, and, yes, laugh. Not bad for a film distributed by Miramax, which is owned by Disney, one of those big global companies that globaphobes compare to cultural vandals.

A lot of nonsense about the impact of globalization on culture passes for conventional wisdom these days. Among the pro-globalizers, Thomas Friedman, columnist for The New York Times and author of The Lexus and the Olive Tree (Farrar, Straus & Giroux, 1999), believes that globalization is "globalizing American culture and American cultural icons." Among the antis, Naomi Klein, a Canadian journalist and author of No Logo (Picador, 2000), argues that "the buzzword in global marketing isn't selling America to the world, but bringing a kind of market masala to everyone in the world. ... Despite the embrace of polyethnic imagery, market-driven globalization doesn't want diversity; quite the opposite. Its enemies are national habits, local brands and distinctive regional tastes."

Fears that globalization is imposing a deadening cultural uniformity are as ubiquitous as Coca-Cola, McDonald's, and Mickey Mouse. Europeans and Latin Americans, left-wingers and right, rich and poor -- all of them dread that local cultures and national identities are dissolving into a crass all-American consumerism. That cultural imperialism is said to impose American values as well as products, promote the commercial at the expense of the authentic, and substitute shallow gratification for deeper satisfaction.

City of God's success suggests otherwise. If critics of globalization were less obsessed with "Coca-colonization," they might notice a rich feast of cultural mixing that belies fears about Americanized uniformity. Algerians in Paris practice Thai boxing; Asian rappers in London snack on Turkish pizza; Salman Rushdie delights readers everywhere with his Anglo-Indian tales. Although -- as with any change -- there can be downsides to cultural globalization, this cross-fertilization is overwhelmingly a force for good.

The beauty of globalization is that it can free people from the tyranny of geography. Just because someone was born in France does not mean they can only aspire to speak French, eat French food, read French books, visit museums in France, and so on. A Frenchman -- or an American, for that matter -- can take holidays in Spain or Florida, eat sushi or spaghetti for dinner, drink Coke or Chilean wine, watch a Hollywood blockbuster or an Almodóvar, listen to bhangra or rap, practice yoga or kickboxing, read Elle or The Economist, and have friends from around the world. That we are increasingly free to choose our cultural experiences enriches our lives immeasurably. We could not always enjoy the best the world has to offer.

Globalization not only increases individual freedom, but also revitalizes cultures and cultural artifacts through foreign influences, technologies, and markets. Thriving cultures are not set in stone. They are forever changing from within and without. Each generation challenges the previous one; science and technology alter the way we see ourselves and the world; fashions come and go; experience and events influence our beliefs; outsiders affect us for good and ill.

Many of the best things come from cultures mixing: V.S. Naipaul's Anglo-Indo-Caribbean writing, Paul Gauguin painting in Polynesia, or the African rhythms in rock 'n' roll. Behold the great British curry. Admire the many-colored faces of France's World Cup-winning soccer team, the ferment of ideas that came from Eastern Europe's Jewish diaspora, and the cosmopolitan cities of London and New York. Western numbers are actually Arabic; zero comes most recently from India; Icelandic, French, and Sanskrit stem from a common root.

John Stuart Mill was right: "The economical benefits of commerce are surpassed in importance by those of its effects which are intellectual and moral. It is hardly possible to overrate the value, for the improvement of human beings, of things which bring them into contact with persons dissimilar to themselves, and with modes of thought and action unlike those with which they are familiar. ... It is indispensable to be perpetually comparing [one"s] own notions and customs with the experience and example of persons in different circumstances. ... There is no nation which does not need to borrow from others."

It is a myth that globalization involves the imposition of Americanized uniformity, rather than an explosion of cultural exchange. For a start, many archetypal "American" products are not as all-American as they seem. Levi Strauss, a German immigrant, invented jeans by combining denim cloth (or "serge de Nîmes," because it was traditionally woven in the French town) with Genes, a style of trousers worn by Genoese sailors. So Levi's jeans are in fact an American twist on a European hybrid. Even quintessentially American exports are often tailored to local tastes. MTV in Asia promotes Thai pop stars and plays rock music sung in Mandarin. CNN en Español offers a Latin American take on world news. McDonald's sells beer in France, lamb in India, and chili in Mexico.

In some ways, America is an outlier, not a global leader. Most of the world has adopted the metric system born from the French Revolution; America persists with antiquated measurements inherited from its British-colonial past. Most developed countries have become intensely secular, but many Americans burn with fundamentalist fervor -- like Muslims in the Middle East. Where else in the developed world could there be a serious debate about teaching kids Bible-inspired "creationism" instead of Darwinist evolution?

America's tastes in sports are often idiosyncratic, too. Baseball and American football have not traveled well, although basketball has fared rather better. Many of the world's most popular sports, notably soccer, came by way of Britain. Asian martial arts -- judo, karate, kickboxing -- and pastimes like yoga have also swept the world.

People are not only guzzling hamburgers and Coke. Despite Coke's ambition of displacing water as the world's drink of choice, it accounts for less than 2 of the 64 fluid ounces that the typical person drinks a day. Britain's favorite takeaway is a curry, not a burger: Indian restaurants there outnumber McDonald's six to one. For all the concerns about American fast food trashing France's culinary traditions, France imported a mere $620-million in food from the United States in 2000, while exporting to America three times that. Nor is plonk from America's Gallo displacing Europe's finest: Italy and France together account for three-fifths of global wine exports, the United States for only a 20th. Worldwide, pizzas are more popular than burgers, Chinese restaurants seem to sprout up everywhere, and sushi is spreading fast. By far the biggest purveyor of alcoholic drinks is Britain's Diageo, which sells the world's best-selling whiskey (Johnnie Walker), gin (Gordon's), vodka (Smirnoff) and liqueur (Baileys).

In fashion, the ne plus ultra is Italian or French. Trendy Americans wear Gucci, Armani, Versace, Chanel, and Hermès. On the high street and in the mall, Sweden's Hennes & Mauritz (H&M) and Spain's Zara vie with America's Gap to dress the global masses. Nike shoes are given a run for their money by Germany's Adidas, Britain's Reebok, and Italy's Fila.

In pop music, American crooners do not have the stage to themselves. The three artists who featured most widely in national Top Ten album charts in 2000 were America's Britney Spears, closely followed by Mexico's Carlos Santana and the British Beatles. Even tiny Iceland has produced a global star: Björk. Popular opera's biggest singers are Italy's Luciano Pavarotti, Spain's José Carreras, and the Spanish-Mexican Placido Domingo. Latin American salsa, Brazilian lambada, and African music have all carved out global niches for themselves. In most countries, local artists still top the charts. According to the IFPI, the record-industry bible, local acts accounted for 68 percent of music sales in 2000, up from 58 percent in 1991.

One of the most famous living writers is a Colombian, Gabriel García Márquez, author of One Hundred Years of Solitude. Paulo Coelho, another writer who has notched up tens of millions of global sales with The Alchemist and other books, is Brazilian. More than 200 million Harlequin romance novels, a Canadian export, were sold in 1990; they account for two-fifths of mass-market paperback sales in the United States. The biggest publisher in the English-speaking world is Germany's Bertelsmann, which gobbled up America's largest, Random House, in 1998.

Local fare glues more eyeballs to TV screens than American programs. Although nearly three-quarters of television drama exported worldwide comes from the United States, most countries' favorite shows are homegrown.

Nor are Americans the only players in the global media industry. Of the seven market leaders that have their fingers in nearly every pie, four are American (AOL Time Warner, Disney, Viacom, and News Corporation), one is German (Bertelsmann), one is French (Vivendi), and one Japanese (Sony). What they distribute comes from all quarters: Bertelsmann publishes books by American writers; News Corporation broadcasts Asian news; Sony sells Brazilian music.

The evidence is overwhelming. Fears about an Americanized uniformity are over-blown: American cultural products are not uniquely dominant; local ones are alive and well.

With one big exception: cinema. True, India produces more films (855 in 2000) than Hollywood does (762), but they are largely for a domestic audience. Japan and Hong Kong also make lots of movies, but few are seen outside Asia. France and Britain have the occasional global hit, but are still basically local players. Not only does Hollywood dominate the global movie market, but it also swamps local products in most countries. American fare accounts for more than half the market in Japan and nearly two-thirds in Europe.

Yet Hollywood's hegemony is not as worrisome as people think. Note first that Hollywood is less American than it seems. Ever since Charlie Chaplin crossed over from Britain, foreigners have flocked to California to try to become global stars: Just look at Penelope Cruz, Catherine Zeta-Jones, and Ewan McGregor. Top directors are also often from outside America: Think of Ridley Scott or the late Stanley Kubrick. Some studios are foreign-owned: Japan's Sony owns Columbia Pictures, Vivendi Universal is French. Two of AOL Time Warner's biggest recent hit franchises, Harry Potter and The Lord of the Rings, are both based on British books, have largely British casts, and, in the case of The Lord of the Rings, a Kiwi director. To some extent, then, Hollywood is a global industry that just happens to be in America. Rather than exporting Americana, it serves up pap to appeal to a global audience.

Hollywood's dominance is in part due to economics: Movies cost a lot to make and so need a big audience to be profitable; Hollywood has used America's huge and relatively uniform domestic market as a platform to expand overseas. So there could be a case for stuffing subsidies into a rival European film industry, just as Airbus was created to challenge Boeing's near-monopoly. But France has long pumped money into its domestic industry without persuading foreigners to flock to its films. As Tyler Cowen perceptively points out in his book Creative Destruction: How Globalization Is Changing the World's Cultures (Princeton University Press, 2002), "A vicious circle has been created: The more European producers fail in global markets, the more they rely on television revenue and subsidies. The more they rely on television and subsidies, the more they fail in global markets," because they serve domestic demand and the wishes of politicians and cinematic bureaucrats.

Another American export is also conquering the globe: English. Around 380 million people speak it as their first language and another 250 million or so as their second. A billion are learning it, about a third of the world's population are exposed to it, and by 2050, it is reckoned, half the world will be more or less proficient in it. A common global language would certainly be a big plus -- for businessmen, scientists, and tourists -- but a single one seems far less desirable. Language is often at the heart of national culture: The French would scarcely be French if they spoke English (although Belgian Walloons are not French even though they speak it). English may usurp other languages not because it is what people prefer to speak, but because, like Microsoft software, there are compelling advantages to using it if everyone else does.

But although many languages are becoming extinct, English is rarely to blame. People are learning English as well as -- not instead of -- their native tongue, and often many more languages besides. Some languages with few speakers, such as Icelandic, are thriving, despite Björk's choosing to sing in English. Where local languages are dying, it is typically national rivals that are stamping them out. French has all but eliminated Provençal, and German Swabian. So although, within the United States, English is displacing American Indian tongues, it is not doing away with Swahili or Norwegian.

Even though American consumer culture is widespread, its significance is often exaggerated. You can choose to drink Coke and eat at McDonald's without becoming American in any meaningful sense. One newspaper photo of Taliban fighters in Afghanistan showed them toting Kalashnikovs -- as well as a sports bag with Nike's trademark swoosh. People's culture -- in the sense of their shared ideas, beliefs, knowledge, inherited traditions, and art -- may scarcely be eroded by mere commercial artifacts that, despite all the furious branding, embody at best flimsy values.

The really profound cultural changes have little to do with Coca-Cola. Western ideas about liberalism and science are taking root almost everywhere, while Europe and North America are becoming multicultural societies through immigration, mainly from developing countries. Technology is reshaping culture: Just think of the Internet. Individual choice is fragmenting the imposed uniformity of national cultures. New hybrid cultures are emerging, and regional ones re-emerging. National identity is not disappearing, but the bonds of nationality are loosening.

As Tyler Cowen points out in his excellent book, cross-border cultural exchange increases diversity within societies -- but at the expense of making them more alike. People everywhere have more choice, but they often choose similar things. That worries cultural pessimists, even though the right to choose to be the same is an essential part of freedom.

Cross-cultural exchange can spread greater diversity as well as greater similarity: more gourmet restaurants as well as more McDonald's. And just as a big city can support a wider spread of restaurants than a small town, so a global market for cultural products allows a wider range of artists to thrive. For sure, if all the new customers are ignorant, a wider market may drive down the quality of cultural products: Think of tourist souvenirs. But as long as some customers are well informed (or have "good taste"), a general "dumbing down" is unlikely. Hobbyists, fans, artistic pride, and professional critics also help maintain (and raise) standards. Cowen concludes that the "basic trend is of increasing variety and diversity, at all levels of quality, high and low."

A bigger worry is that greater individual freedom may come at the expense of national identity. The French fret that if they all individually choose to watch Hollywood films they might unwittingly lose their collective Frenchness. Yet such fears are overdone. Natural cultures are much stronger than people seem to think. They can embrace some foreign influences and resist others. Foreign influences can rapidly become domesticated, changing national culture, but not destroying it. Germans once objected to soccer because it was deemed English; now their soccer team is emblematic of national pride. Amartya Sen, the Nobel prize-winning economist, is quite right when he says that "the culturally fearful often take a very fragile view of each culture and tend to underestimate our ability to learn from elsewhere without being overwhelmed by that experience."

Clearly, though, there is a limit to how many foreign influences a culture can absorb before being swamped. Even when a foreign influence is largely welcomed, it can be overwhelming. Traditional cultures in the developing world that have until now evolved (or failed to evolve) in isolation may be particularly vulnerable.

In The Silent Takeover: Global Capitalism and the Death of Democracy (Free Press, 2001), Noreena Hertz describes the supposed spiritual Eden that was the isolated kingdom of Bhutan in the Himalayas as being defiled by such awful imports as basketball and Spice Girls T-shirts. Anthony Giddens, the director of the London School of Economics and Political Science, has told how an anthropologist who visited a remote part of Cambodia was shocked and disappointed to find that her first night's entertainment was not traditional local pastimes but watching Basic Instinct on video.

Is that such a bad thing? It is odd, to put it mildly, that many on the left support multiculturalism in the

West but advocate cultural purity in the developing world -- an attitude they would be quick to tar as fascist if proposed for the United States or Britain. Hertz and the anthropologist in Cambodia appear to want people outside the industrialized West preserved in unchanging but supposedly pure poverty. Yet the Westerners who want this supposed paradise preserved in aspic rarely feel like settling there. Nor do most people in developing countries want to lead an "authentic" unspoiled life of isolated poverty.

In truth, cultural pessimists are typically not attached to diversity per se but to designated manifestations of diversity, determined by their preferences. "They often use diversity as a code word for a more particularist agenda, often of an anti-commercial or anti-American nature," Cowen argues. "They care more about the particular form that diversity takes in their favored culture, rather than about diversity more generally, freedom of choice, or a broad menu of quality options."

Cultural pessimists want to freeze things as they were. But if diversity at any point in time is desirable, why isn't diversity across time? Certainly, it is often a shame if ancient cultural traditions are lost. We should do our best to preserve them and keep them alive where possible. As Cowen points out, foreigners can often help, by providing the new customers and technologies that have enabled reggae music, Haitian art, and Persian carpet making, for instance, to thrive and reach new markets. But people cannot be made to live in a museum. We in the West are forever casting off old customs when we feel they are no longer relevant. Nobody argues that Americans should ban nightclubs to force people back to line dancing. People in poor countries have a right to change, too.

Moreover, some losses of diversity are a good thing. In 1850, some countries banned slavery, while others maintained it in various forms. Who laments that the world is now almost universally rid of it? More generally, Western ideas are reshaping the way people everywhere view themselves and the world. Like nationalism and socialism before it, liberalism -- political ideas about individual liberty, the rule of law, democracy, and universal human rights, as well as economic ones about the importance of private property rights, markets, and consumer choice -- is a European philosophy that has swept the world. Even people who resist liberal ideas, in the name of religion (Islamic and Christian fundamentalists), group identity (communitarians), authoritarianism (advocates of "Asian values") or tradition (cultural conservatives), now define themselves partly by their opposition to them.

Faith in science and technology is even more widespread. Even those who hate the West make use of its technologies. Osama bin Laden plots terrorism on a cellphone and crashes planes into skyscrapers. Antiglobalization protesters organize by e-mail and over the Internet. José Bové manipulates 21st-century media in his bid to return French farming to the Middle Ages. China no longer turns its nose up at Western technology: It tries to beat the West at its own game.

True, many people reject Western culture. (Or, more accurately, "cultures": Europeans and Americans disagree bitterly over the death penalty, for instance; they hardly see eye to eye over the role of the state, either.) Samuel Huntington, a professor of international politics at Harvard University, even predicts a "clash of civilizations" that will divide the 21st-century world. Yet Francis Fukuyama, a professor of international political economy at the Johns Hopkins University, is nearer the mark when he talks about the "end of history." Some cultures have local appeal, but only liberalism appeals everywhere (if not to all) -- although radical environmentalism may one day challenge its hegemony. Islamic fundamentalism poses a threat to our lives but not to our beliefs. Unlike communism, it is not an alternative to liberal capitalism for Westerners or other non-Muslims.

Yet for all the spread of Western ideas to the developing world, globalization is not a one-way street. Although Europe's former colonial powers have left their stamp on much of the world, the recent flow of migration has been in the opposite direction. There are Algerian suburbs in Paris, but not French ones in Algiers; Pakistani parts of London, but not British ones of Lahore. Whereas Muslims are a growing minority in Europe, Christians are a disappearing one in the Middle East.

Foreigners are changing America even as they adopt its ways. A million or so immigrants arrive each year (700,000 legally, 300,000 illegally), most of them Latino or Asian. Since 1990, the number of foreign-born American residents has risen by 6 million to just over 25 million, the biggest immigration wave since the turn of the 20th century. English may be all-conquering outside America, but in some parts of the United States, it is now second to Spanish. Half of the 50 million new inhabitants expected in America in the next 25 years will be immigrants or the children of immigrants.

The upshot of all this change is that national cultures are fragmenting into a kaleidoscope of different ones. New hybrid cultures are emerging. In "Amexica" people speak Spanglish. Regional cultures are reviving. Repressed under Franco, Catalans, Basques, Gallegos, and others assert their identity in Spain. The Scots and Welsh break with British monoculture. Estonia is reborn from the Soviet Union. Voices that were silent dare to speak again.

Individuals are forming new communities, linked by shared interests and passions, that cut across national borders. Friendships with foreigners met on holiday. Scientists sharing ideas over the Internet. Environmentalists campaigning together using e-mail. House-music lovers swapping tracks online. Greater individualism does not spell the end of community. The new communities are simply chosen rather than coerced, unlike the older ones that communitarians hark back to.

Does that mean national identity is dead? Hardly. People who speak the same language, were born and live near each other, face similar problems, have a common experience, and vote in the same elections still have plenty of things in common. For all our awareness of the world as a single place, we are not citizens of the world but citizens of a state. But if people now wear the bonds of nationality more loosely, is that such a bad thing? People may lament the passing of old ways. Indeed, many of the worries about globalization echo age-old fears about decline, a lost golden age, and so on. But by and large, people choose the new ways because they are more relevant to their current needs and offer new opportunities that the old ones did not.

The truth is that we increasingly define ourselves rather than let others define us. Being British or American does not define who you are: It is part of who you are. You can like foreign things and still have strong bonds to your fellow citizens. As Mario Vargas Llosa, the Peruvian author, has written: "Seeking to impose a cultural identity on a people is equivalent to locking them in a prison and denying them the most precious of liberties -- that of choosing what, how, and who they want to be."

The delusion of world capitalism

Globalisation has become a convenient catch-all for everything many people dislike about the modern world. In truth, it is simply shorthand for how our lives are becoming increasingly intertwined with those of distant peoples and places around the world - economically, politically and culturally. These links are not always new, but they are more pervasive than ever before.

Globalisation gathered momentum after the Second World War and received a further boost in the 1980s and 1990s as many countries - China, Mexico, Russia, India and others - embraced open markets. But there has been a spectacular political backlash on the streets of Seattle and elsewhere. Globalisation is the focus for popular fears about American power, the might of big business, the pace of economic change and a sense of powerlessness in the face of intangible global forces. The debate is increasingly polarised between market fundamentalists and anti-capitalists. But a simple truth has been lost: far from being a single, uniform system that imposes markets and American ways everywhere, globalisation embraces a wide variety of options from which people and governments can pick and choose. Sweden, for instance, is among the most open economies in the world, yet its social democratic society is a long way from America's.

In his new book, John Plender argues convincingly for radical reform of American financial capitalism. He argues that poor regulations exacerbate financial markets' intrinsic weaknesses and that poor countries often pay the price for it, but he remains a fan of the American model and believes that Europe should adopt more American ways. His insightful and wide-ranging book is a must for anyone who wants to understand how global finance shapes the world.

Admirers of American capitalism argue that its sophisticated financial markets allow investors to take punts on new technologies and efficiently redeploy capital from failing firms to more productive uses. Yet one country that shares many of its features has singularly failed to match its economic success: Britain. Cut-throat financial markets are no panacea. Nor are they as efficient as supporters make out. The world is

still suffering a hangover from the biggest financial bubble of all time: hundreds of billions of dollars that poured into dotcom-related companies have been wasted. Although Europe was not immune to this mania, America's excesses were far greater.

The bursting of the bubble has highlighted the system's many flaws. Most mergers and takeovers destroy value. The incestuous relations between investment bankers, accountants, lawyers, company bosses and fund managers are reminiscent of crony capitalism. Corporate scandals make a mockery of claims that managers serve shareholders' interests, rather than their own. To satisfy short-termist institutional investors and inflate the value of their share options, bosses gamble with their company's future to ramp up the share price. Unsurprisingly, trust in the financial system has evaporated since the collapse of both Enron and WorldCom.

Despite the advances of Europe's single market and the euro, its single currency, Continental capital markets are still much less developed than America's. Plender thinks this is a weakness - and that Europe should become more like America. Now Europe's cosy, club-like capitalism is not the stakeholders' paradise that some portray it as. Nor are the benefits of well-functioning capital markets to be sniffed at. And it is certainly true that many countries in Europe are crying out for reforms to reduce unemployment and stimulate entrepreneurship. But embracing the flawed American model does not look like the solution.

As Plender himself lucidly explains, American-style hostile takeovers may produce narrow financial returns, but at the expense of social stability and the trust and loyalty of employees. Indeed, he argues that the notion that companies should be run exclusively for shareholders sits oddly with the increasing importance of footloose knowledge-workers. The world is awash with capital, but skilled workers are in short supply. Since they ultimately create value, ignoring their wishes will end up making companies - and the economy - worse off. The stakeholder model of capitalism may have life in it yet.

The crisis-prone international capital markets are a particular headache for developing countries. Hot money flooding in and out can wreck their fragile economies. Blaming all this instability on developing countries will not wash. The flaws are inherent in speculative financial markets - and exacerbated, Plender argues convincingly, by wrong-headed rich-country regulations.

The rules that aim to limit banks' risk-taking, for instance, encourage them to lend too much in booms and too little in busts. Banks that become "too big to fail" are bailed out rather than punished for their recklessness. Central bankers likewise prop up falling stock markets, but fail to intervene to curb their excesses. Far from being impotent, as many anti-globalisers claim, regulators still have a huge - albeit often perverse - influence over markets.

If Plender's book has a weakness, it is that it overstates the importance of corporate governance and finance more generally. It can therefore give the impression that capitalism is in worse straits than it really is. How capital is allocated - or misallocated - is important. It helps determine the fate of companies and their workers, the size of people's pensions, and the success or failure of whole economies. But less so than competitive product markets - and free trade - which continue to deliver higher living standards for all. The worry is that capital markets' failings will undermine trust in global capitalism in general, pushing people to seek false security behind protectionist barriers that would do huge harm to rich and poor countries.

Where Plender's critique of global capitalism is nuanced and original, Charles Derber's People Before Profit is an inchoate anti-globalisation rant. Like Naomi Klein, Derber thinks that poverty can be cured simply by giving people more say. Greater global democracy has become the panacea for anti-globalisers, who make a virtue of their lack of understanding of economics. Yet the slogan "people before profit" is empty. For sure, markets are imperfect, and collective action (by governments or others) is often justified; but politics alone cannot tell us how and what society should produce to satisfy people's needs, as the collapse of the Soviet Union demonstrated. Without markets - and profits - people are condemned to penury.

Derber, a sociology professor at Boston College, senses a "constitutional moment", akin to the birth of the US in 1776 - "a special period in which the rules of the game are up for grabs". Yet his blueprint for greater global democracy is unrealistic and mostly undesirable. A world parliament is a non-starter: 60 million Britons, or indeed 900 million rich Europeans, Americans and Japanese, will not accept being outvoted and taxed - by 1.3 billion poorer Chinese. Derber fantasises about networks of local activists "thinking globally" to frame international rules to protect their communities. But people (and communities) often have conflicting, rather than shared, interests. And except for genuinely global problems such as climate change, uniform rules are generally undesirable in a far from uniform world.

Derber proposes a four-pronged "New Deal for the world" that involves global regulation, redistribution, "decommodification" and participation. He wants, for instance, to affirm "the right of each nation to choose its own development model". Quite right, too: countries should be - and are - able to choose how they engage with the world. China's economic model differs from neighbouring North Korea's, South Africa's from Zimbabwe's. But he also wants to enforce global labour and environmental standards. So much for allowing each country to choose its own path! International companies, he argues, should not only face the same standards everywhere, they should pay the same wages "adjusted appropriately to the living costs of other nations". But if wages could not reflect differences in productivity, poor countries would receive no foreign investment. Why hire a less productive Vietnamese worker if you have to pay her as much (adjusted for living costs) as a more productive American? Far from earning more, workers from poor countries would end up out of a job.

Paul Kingsnorth, an Oxford-educated former deputy editor of the Ecologist, shares Derber's world-view. But his book, One No, Many Yeses, is more entertaining. Part travelogue, part voyage of self-discovery through Mexico, Genoa, Papua New Guinea and other places of tension, it is an enlightening guide to the ragbag of anti-globalisation movements.

Kingsnorth argues that anti-globalisers are united by what they oppose. The "one no" of his title is, naturally, globalisation. But they favour a variety of alternatives and lifestyles - the "many yeses". Where the book falls down is in its analysis of globalisation's alleged ills. "Power is marginalising more people than at any time in history," he claims. Yet according to the UN, the number of regimes considered (however imperfectly) democratic leapt from 44 to 82 between 1985 and 2000, while the number of authoritarian regimes dwindled from 67 to 26.

"The world is more unequal - more unfair - than at any point in human history. This in a nutshell, is globalisation's story - the rich getting richer, and the poor getting poorer," Kingsnorth writes. In fact, global inequality has been falling since 1980 - witness China's and other east Asian countries' catch-up. The proportion of the world's population living on less than a dollar a day declined from 28 per cent in 1990 to 23 per cent in 1998. Countries that have embraced globalisation have seen remarkable progress. In Vietnam, for instance, of the poorest twentieth of the population in 1992, 98 per cent were better off six years later. Who said globalisation doesn't help the poor?

Free trade fallacy II

Eight years ago, in "The Next American Nation", Michael Lind terrified Americans with the threat of "ever-increasing low-wage, high-skill competition" from the third world, to which free-traders allegedly had "no answer." But after this menace failed to materialise, Lind changed his tune. Developing countries, far from being hypercompetitive are, in fact, unable to compete with rich countries, he now argues (Prospect, January 2003).

At least he is consistent about one thing. He pins the blame on free trade, which he dismisses as utterly "discredited." But in fact, it is Lind's views that are-or should be-discredited.

Lind's argument is this. Developing countries that adopt free trade are failing to prosper, let alone catch up with rich ones. Most enjoyed much faster economic growth in the more interventionist 1960s and 1970s than in the more liberal 1980s and 1990s. In order to catch up with the rich world, newly industrialising countries ought to protect their infant industries-as Britain, the US, Germany, Japan and others once did. More broadly, Lind is disdainful of mainstream economic analysis, appealing instead to the lessons of history. But his grasp of history is as shaky as his knowledge of economics.

Lind ascribes the rapid development of the US, Germany and others in the latter half of the 19th century and the first half of the 20th to protectionist policies inspired by Friedrich List's ideas about economic nationalism. He quotes various statesmen who believed in protectionism and points to various protectionist measures countries employed, and deduces from this that those measures are responsible for their countries' development.

But the true historical picture is different. The main reason why Britain, followed by the US and northern Europe, developed so fast in the 19th century was the rapid pace of technological innovation. Free trade (adopted by nearly all countries bar the US) provided an added boost during the long boom from 1850 to 1875. Free capital flows were important too: British savings financed the development of the new world. America's openness to European workers was also crucial; around 35m Europeans set sail for the resource-rich and labour-scarce US in the century after 1820. Lind's claim-that protectionism explains how America and others got rich in the 19th century-does not stand up.

Nor does his contention that the raising of trade barriers that began in the late 19th century, gathered pace in the early 20th and culminated in the full-blown protectionism of the 1930s was not as catastrophic as people think. The collapse in trade and investment in the 1930s, and the consequent slide into depression, suggest otherwise.

Lind argues that while developing countries are industrialising, they should protect their budding businesses and only adopt free trade later. For sure, there is a respectable theoretical case for limited, and temporary, government support to infant industries: that companies learn by doing, that the technical knowledge they acquire spills over to other local businesses, and that inefficient capital markets may fail to finance these young companies at competitive rates. But in practice, governments have a dismal record at picking winners. Typically, they favour powerful lobbies, not the dynamic upstarts that become world-beaters. Even those with unusual foresight rarely provide would-be winners with an incentive to become competitive, because their pledges to keep support temporary do not typically prove to be credible. Moreover, if the root of the problem is deficient capital markets, governments ought to target their policies at fixing financial flaws, rather than taxing consumers and setting companies the wrong price incentives by imposing import barriers.

In the real world, protectionism does not aid development. It is true that some developing countries grew faster in the 1960s and 1970s than in the generally more liberal 1980s and 1990s. But that is not an argument against liberal economics. In each and every decade, countries that pursued free trade grew faster than more protectionist ones. Whereas developing countries with open economies are catching up with rich ones, those with closed economies are falling further behind. A trip to Bangalore in India, the countryside around Ho Chi Minh City in Vietnam, China's coastal regions or Ciudad Juárez on Mexico's border with the US provides ample evidence of this. Statistics confirm it: whereas income per person rose by only 1.4 per cent a year on average in the 1990s in developing countries that are turning their backs on globalisation, it soared by 5 per cent a year in those that are embracing it. Rich-country incomes rose by 2.2 per cent a year.

Even so, Lind contends that it is right to support a high-tech manufacturing sector "in the interests of national security, economic independence and economic diversification." In essence, individual aspirations for a better life should be subjugated to the national interest, as defined by government elites. But is that what poor people in poor countries want? And if so, are governments capable of delivering it? The rusting hulks of abandoned state-sponsored steel factories in Ghana and elsewhere suggest not.

Lind concedes that import substitution failed in many countries, including Argentina and India, but argues that it succeeded in others, such as South Korea. Even by his logic then, protectionism is no panacea. More importantly, a closer look at South Korea's record shows that most of its growth came from the industries where it had a comparative advantage, like shoes and electrical goods, rather than from government-directed heavy industries. Good government was crucial to South Korea's development. But its vital contribution was in prioritising education, making it easy for companies to import the inputs and technologies they needed for export, encouraging people to save and helping companies to invest-not in pursuing import substitution. Crucially, where the South Korean government provided cheap loans to companies, it ensured that the money was invested productively by cutting off funds to companies that were not successful exporters. Indirectly, the market, not the government, picked winners.

Lind concludes by calling for developing countries to have a choice in selecting a development strategy. Quite right-and they do. It is true that IMF programmes may stipulate certain policies that, although often good for the economy, trample on a country's right to decide for itself. But countries are not forced to sign up to these agreements. Nor are WTO rules foisted upon them: developing countries only make the policy commitments that they choose to and are, in any case, granted special and differential treatment. More to the point, it is simply untrue that developing countries are aching to pursue import-substitution polices but are prevented from doing so. Many, such as India, have mistakenly done so in the past and have now seen the error of their ways.

None of this is to deny that rich countries are hypocrites. They are often prone to an economic nationalism that protects lobbies-agro-industry, steelworkers, textile magnates-at the expense of the wider good. The global intellectual-property rules they support are self-serving. But that rich countries' actions are not as liberal as their words is a tar on their governments, not liberal ideas themselves.

HARDtalk: Is the anti-globalisation movement wrong?

On BBC News 24's HARDtalk tonight (Friday 13 December), Allan Little interviews Philippe Legrain, economist.

Globalisation is, to many, the issue of our age. More trade means more wealth creation and greater prosperity for rich and poor alike, its supporters say.

Why then after a decade of radical liberalisation is so much of the world sinking into deeper poverty while the rich nations get steadily richer?

And why does the anti-globalisation movement seem to have ignited the passion of so many, especially the young?

Philippe Legrain is an evangelist for globalisation. He is an economist and a former special advisor to the World Trade Organisation. He talks to Allan Little.

Business doesn't rule

Progressive politics ought to be about hope: that we can create a fairer society where everyone can make the most of their potential. Yet the prevailing mood on the left is despair. Globalisation, many believe, is leading the world to rack and ruin - and there is little we can do about it. American-led corporate power is elbowing aside government and trampling on democracy.

Critics such as Naomi Klein, Noreena Hertz and George Monbiot claim that companies run the world. Their brands are colonising our minds. Their sheer size gives them clout. Their financial muscle bends elected representatives to their will. Their freedom to shift factories from country to country disempowers workers. The governments we elect connive in this, either because they are in the pockets of big business or because their power has leached away. So our votes are useless. In place of democracy, we face a grim choice between apathetic acquiescence and doubtless futile resistance.

This is dangerous claptrap. Start with brands. If they are so powerful, why couldn't Coca-Cola convince us to drink New Coke? Why does own-label cereal outsell Kellogg's? The grip of Nike shoes hardly compares with that of patriotism or love. Although some susceptible people, mainly poor kids, may unfortunately be gulled into spending money they can ill afford, this hardly means brands are conquering the world.

Brands are actually signs of corporate weakness, not strength. It is only because fickle consumers have so much choice that companies try to woo them with their branding. Monopolists needn't bother. Moreover, companies that are trying to sell an image or a reputation are incredibly vulnerable to anything that is perceived to damage them. Remember how Shell caved in to a handful of Greenpeace activists over the disposal of the Brent Spar oil platform? As companies increasingly make a virtue of being "socially responsible" - of being good to their employees, the environment and the community, rather than mere money-making machines - their vulnerability can only increase. Thus, brands, far from being vehicles for corporate global domination, give people unprecedented sway over companies' behaviour.

Corporate power is much exaggerated. Take the oft-repeated "fact" that 51 of the 100 biggest economies are corporations. It is arrived at by comparing companies' sales and countries' gross domestic product (GDP). But this double-counting inflates companies' importance, since one company's inputs are another's sales. A less misleading comparison - between companies' value-added, the difference between their sales and the cost of their inputs, and countries' value-added, their GDP - reveals that only two companies make it into the top 50 value-added creators. The biggest, Wal-Mart, an American supermarket chain that owns Asda, created value-added of $68bn (£43bn) in 2000, around the same as Chile's GDP - and less than a 20th of Britain's. Together, the 50 largest countries are 22 times bigger than the top 50 corporations.

In any case, inferring from companies' size that they are as powerful as countries is fatuous. Whereas companies have to attract workers and capital that are free to go elsewhere, countries can impose taxes and regulations: mighty Exxon Mobil pays taxes even in tiny Luxembourg. Supposedly footloose companies cannot, in fact, easily escape governments' writ: they are tied to places in many ways - by their customers, a skilled workforce or the good roads, schools and hospitals that our taxes pay for. Even if companies became more mobile, governments could collude to nab them, by cooperating over tax raising, for instance.

Companies that fail to persuade customers to buy enough for them to earn sufficient profits to pay shareholders and workers an acceptable return go bust or get taken over, whereas even failed states rarely disappear. The only "companies" with powers remotely comparable to those of states are the drug cartels: Colombia's earn billions of dollars a year, control parts of the country, have private armies and operate outside the law.

Wal-Mart seems puny in comparison. Indeed, because it faces fierce competition from other retailers, it has less scope to mark up its prices than the only shop in an isolated skiing village. Competition can constrain even the biggest companies - one reason why globalisation is such a good thing. Closed domestic markets, where national champions can cosy up to government, are much more likely to be monopolised than open global ones. So even though global companies are bigger than before, they are not necessarily more powerful. It is the absence of competition, not size, that gives companies clout.

If companies were taking over the world, you'd expect them to be grabbing a bigger slice of the economic pie. They exist, after all, to make profits. Yet from a recent cyclical peak of 12.6% of GDP in 1997, US corporate profits fell to 11% in 2000 and 9.3% in 2001 - in line with the average over the past 50 years of 10.5%. The figures for Britain show a similar trend.

Of course, companies sometimes have an undue influence on governments. So money and politics should be kept as separate as possible and government conducted more openly. Yet business has a right to lobby governments, just as trade unions, environmental groups and individuals do. This does not imply that governments are companies' lackeys.

Governments can - and do - tame the corporate leviathans. The European Commission stopped giant General Electric from buying Honeywell. The US government nearly broke up Microsoft, which is still being prosecuted by US states and investigated by the European Commission. Business has to abide by a battery of legislation on workers' rights, product liability, health and safety, environmental protection and much else. Where governments fear to tread, lawyers do not: each year people start almost 2 million lawsuits against American companies, which pay out damages of around $150bn a year. Last but not least, taxes on company profits have steadily risen as a share of rich OECD countries' GDP: from 2.2% in 1965 to 3.3% in 1999. If businessmen are running the show, they must be masochists.

The truth is companies are not running the show. We are still free to determine our future - as individuals, as groups of like-minded people and through the power of our elected governments. If people really wanted to, they could reverse globalisation - as they did in the 1930s, with catastrophic consequences. All it takes is enough votes for the Greens, Socialist Alliance or BNP.

Globalisation is a choice, not an imposition. Progressives should embrace it because it makes us richer - in the broadest sense - and allows governments to spend more on schools, hospitals and helping the underprivileged. It does not imply that Britain has to become like America: Sweden's economy is far more open than Britain's, yet its welfare state is second to none. Globalisation comes with several options: we can to a large extent pick and choose what kind of globalisation we want. Don't burn your Nikes: politics is not dead.

The not so global economy

When the World Trade Organisation last held a ministerial meeting, anti-globalisation riots made Seattle seem like a war-zone. Two years on, hapless WTO ministers are about to fly into a real war-zone. They plan to meet on November 9th in Doha, the capital of Qatar, the Gulf state that plays host to al-Jazeera, the Arab TV station that is scooping the world’s media with its coverage of the war in Afghanistan. The US and the EU insist the meeting should go ahead as scheduled, although an escalation of hostilities could yet derail it.

American and European leaders have been quick to link the push for freer trade with the fight against terrorism. “Trade is about more than economic efficiency,” declared Robert Zoellick, US trade supreme, “it promotes the values at the heart of this protracted struggle.” His EU counterpart, Pascal Lamy, echoed this view: “The greater the military and security pressures - and the greater the risk that resentment will be strong - the more we have to push for generous opening of our economies to developing countries.”

Reality does not live up to this rhetoric. Free trade is indeed a wonderful thing; it is a pity that rich countries do not practise what they preach. Not only do rich countries conspire to keep out poor countries’ main exports, agriculture and textiles, they are also busy carving up world markets through preferential pacts that make a mockery of free trade.

Perhaps rich countries will override their mercantilist instincts for the sake of fighting terrorism. But don’t bet on it. The dirty secret about Doha is that even the launch of a new WTO round of negotiations is unlikely to do much to bring about genuinely global free trade.

 

The Rise of the WTO

Surely, though, we already live in a global economy? That is what commentators and politicians everywhere keep telling us. It is true that many trade barriers have been slashed. Better transport and communications have drawn distant markets closer. The opening up of China and the collapse of the Soviet Union have brought another 1.7 billion people into the capitalist world. Many countries in the developing world, notably India and Mexico, have also liberalised their economies. Rich-country governments have privatised, deregulated and abolished most capital controls.

This globalisation has thrust the WTO onto centre stage. Its membership has swollen to 142 countries. After a long march that began in 1986, China is on the brink of joining. President Vladimir Putin has declared that Russia’s accession to the WTO is a “top priority”. One of Yugoslavia’s first acts after the removal of Slobodan Milosevic was to apply to rejoin the WTO. Even Saudi Arabia—which has grown rich by restricting rather than expanding its exports—is clamouring for membership. Another 30 countries are also in the queue.

The WTO’s role now stretches beyond liberalising trade. It is becoming a regulator of the would-be global economy. Its agreements span everything from agriculture, manufacturing and services to intellectual property, investment and subsidies. They stipulate, for instance, how high a duty Switzerland can impose on steel imports, which kind of government subsidies are acceptable, how countries must regulate their telecoms sector, as well as how long patents must be respected.

The WTO’s core principle is non-discrimination: governments are not meant to treat products differently on the basis of where they are made. They are encouraged to lower their trade barriers, which discriminate between domestic and foreign products; and when they do so, they are meant to lower them equally to all WTO members. That way all foreign producers compete on a level playing field. So, for example, Switzerland should tax American and Japanese steel equally and eventually aim to eliminate its import duties altogether.

WTO rules are enforced by a dispute-settlement mechanism that is binding on all its members. It operates much like a commercial court. When a country feels that another is breaching an agreement, it can appeal to a WTO panel. The panel can authorise the imposition of trade sanctions if a recalcitrant loser refuses to abide by its verdict.

No wonder, then, that everyone wants to be a member of the WTO. Countries want a say in setting the rules (the WTO operates by consensus, so every member’s consent is needed), as well as recourse to arbitration when they feel wronged. They want better access to export markets and the increased foreign investment that flows when investors know that domestic laws are bound by international agreement. In short, they want to avoid being left out of the ever-expanding global economy.

All of this is true. Yet it is only part of the picture. Talk of a global economy is overblown. National economies are not blending into one big global melting pot. Most economic activity still takes place within, not across, national borders. Whole swathes of the economy remain highly protected. When countries do trade, they do so predominantly with their neighbours. And increasingly, they do so according not to regional or bilateral rules, not global ones.

Consider the huge increase in international trade over the past 20 years. Cross-border trade in goods and services has tripled from $2,300 billion in 1980 to $6,800 billion in 1999. Yet over the same period, world output has also nearly tripled, from $10,700 billion to $30,900 billion. As a share of world output, cross-border trade has only inched up—from 21.5% in 1980 to 22% in 1999.

Some economies are more international than others. Whereas a huge continental economy like the US traded only 12% of GDP in 1999, a middling one like Britain traded 27% and a small one like Ireland 86%. While some economies are becoming more open, others are not. China traded twice as much in 1999 (21% of GDP) as it did in 1980. The US trades a bit more. Japan trades much less (down from 14.5% in 1980 to 10.5% in 1999).

Few countries are genuinely global traders. Most trade primarily with a handful of others, typically their neighbours. Take Western Europe. Over two-thirds of its merchandise trade is with other countries in the region. Among the 15 members of the EU, the figure is 63.5%. All EU countries trade more with each other than they do with the rest of the world. Look next at North America. The US, Canada and Mexico—the three members of the North American Free-Trade Agreement (NAFTA)—also trade mostly with each other. Over half of their exports are within Nafta, as are two-fifths of their imports. Finally, consider Asia. A little under half of Asia’s exports are to other Asian countries; nearly three-fifths of Asia’s imports come from the region.

Pull together all these statistics, and a different picture of the world economy emerges. Three largely self-contained regional hubs account for three-quarters of it: the EU, which trades a mere 11% of its collective output with the rest of the world; NAFTA, which trades just over 8%; and Japan, 10.5%. The rest of the world is linked to one, or several, of these hubs through a tangled web of bilateral trade agreements.

So much for the death of distance. Geography still matters. Transport costs are one reason why so much of the economy is not global. Shipping light bulbs across the world, for instance, is uneconomical. Another reason is that many companies need to be quite near their customers: Dell assembles and services computers for the European market in Ireland, not Asia. Indeed, since many services have to be provided on the spot, much of the economy is set to remain local. Nurses, hairdressers, fitness instructors and therapists cannot ply their trade from the other side of the globe. These “high-touch” services, as Adair calls them, are the fastest growing part of rich-country economies.

Politics remains important too. Companies do not operate in a borderless world. For a start, many trade barriers remain, notably in agriculture, textiles and many services. The average import duties on farm products is around 40-50%; Japan’s tax on foreign rice is nearly 1,000%; rich OECD countries spend more subsidising their farmers each year than the entire GDP of sub-Saharan Africa. National differences in accounting, tax and regulatory standards also segment markets. But the biggest reason why talk of a global market is fanciful is that three-fifths of world trade takes place on preferential terms.

Over 170 regional trade agreements are in force around the world, half of them concluded since 1990. A further 70 or so are in the making. Every WTO member, except Japan and South Korea, is a party to one—and both are now looking to join in.

Regional agreements may be bilateral or plurilateral, involve all trade or just some, be between neighbours or span continents. Some are customs unions, like the EU, with a common external tariff; others are free-trade areas, like Nafta, where each member has its own tariffs on imports from the rest of the world. They may have common institutions, like North American Development Bank or the European Commission. They may have a mechanism for settling intra-regional trade disputes, like both the EU and Nafta. But what they all have in common is that trade within them is freer than trade with the rest of the world. This preferential treatment encourages regional trade at the expense of global trade.

Take the EU. Meshing Europe’s markets together has skewed its pattern of trade. Trade within the EU’s single market, which is relatively cheap and easy, has grown much faster than trade with the rest of the world, where firms still have to contend with a thicket of tariffs and regulations. That is a big reason why Britain now sends 58.5% of its merchandise exports to the rest of the EU, up from 35% when it joined in 1973.

A similar process is happening in Nafta. Mexico has replaced Japan as the US’s second-biggest export market, behind Canada. Its two Nafta partners now account for 36% of US exports, up from 28% in 1990. Since 1997, US exports to non-Nafta countries have actually been falling. As for Canada and Mexico, nearly nine-tenths of their exports are now within NAFTA.

In this not-so-global economy, the WTO is less important than it seems. Regionalism makes a mockery of its core principle of non-discrimination. Admittedly, WTO rules do allow regional agreements, but only if they meet certain conditions: they must cover “substantially all trade”, eliminate internal trade barriers, and “not on the whole” raise protection against excluded countries. Few regional deals meet these criteria. Yet since all its members are rushing to conclude them, the WTO turns a blind eye. No country has challenged the legality of all these discriminatory deals—and none is likely to.

To be fair, regionalism is not all bad. Nafta has locked in Mexico’s economic and political reforms. The EU has cemented peace in Europe. It is building a single market with a single currency that promises huge economies of scale for companies and the benefits of increased competition, such as lower prices, for consumers. It has helped poorer countries, like Ireland and Spain, catch up with France and Germany. And it is a testbed and model for other countries that want to co-operate regionally.

Together, Europeans have more clout - not least when the Commission negotiates at the WTO or vets mergers, such as that between General Electric and Honeywell, that might otherwise harm European consumers. They can stand up to the US - over bananas, beef, steel, tax, planes, Cuba, and so on. The EU gives Europeans more policy options. Like Americans, they are freer to choose. That is a bonus - even if they sometimes choose the wrong things. But this added discretion comes at a cost, insofar as some Europeans’ interests diverge from others’. Acting alone, for instance, Britain might subsidise its farmers less.

All in all, the EU is a good thing. But its huge network of preferential pacts is not. The EU has “partnership” agreements with all most other European countries. It also has deals with Turkey, Israel and Morocco. It is negotiating agreements with most other Arab countries. By 2005, the only countries in its vicinity with which it is unlikely to have a sweetheart deal are Libya, Iraq and Yemen.

Further afield, the EU has struck deals with Mexico and South Africa. It is pursuing agreements with Chile and the four Mercosur countries (Argentina, Brazil, Paraguay and Uruguay). It is also pressing 71 poor African, Caribbean and Pacific (ACP) countries, mostly ex-colonies, to sign up to new regional arrangements. The EU’s network of preferences covers most of the world. There are just six countries—Australia, Canada, Japan, New Zealand, Taiwan and the US—with which it trades on a non-preferential basis.

The rationale for all these preferential pacts is partly political. The European Commission is keen on them because they are foreign policy by other means (something normally controlled by member states). Bilateral deals strengthen EU member states’ influence abroad. The Europe and Euro-Med agreements, for example, help to anchor Eastern Europe and North Africa in the EU’s sphere of influence. They may also help to keep neighbour governments stable and potential migrants at home. And they stir up less controversy with anti-globalisation protesters than negotiations at the WTO.

Economics is a bigger spur, however. Thanks to its bilateral deals, the EU is an export and investment hub with preferential access to markets in a great many spokes. That helps European exporters corner foreign markets. They have an edge not only over the Americans and the Japanese, but also over firms from “spoke” countries, since, for example, South Africa and Mexico do not enjoy privileged access to each other’s markets.

Poor countries, however, often lose economically from their deals with the EU. Consider the South African agreement. Undeniably, some South African firms can now sell their goods more easily in the EU. But their farmers, who are highly competitive, cannot, since “sensitive” agricultural products, such as cereals, are excluded. This gives them a perverse incentive to switch to making goods that the EU allows in more freely.

South African consumers get a raw deal too. Import prices are unlikely to fall, since South Africa is only lowering its tariffs to EU firms, who may well respond by raising their prices. But the Europeans will gain market share from the Americans—and Africans too—who still incur high tariffs. And they have stamped out some local competition by insisting that South Africa stop describing some of its products as grappa and ouzo, spirits that the EU says can be made only in Italy and Greece.

The biggest losers from all these sweetheart deals are the countries they exclude. Yet the deals create their own infernal logic, whereby those who are discriminated against seek their own preferential deal. The EU is well aware of this: it sought a deal with Mexico because its exports to that country have slumped since Mexico joined NAFTA.

The US has suddenly woken up to this European attempt to carve up world markets. The Business Roundtable, a big-business lobby group, warned in February that the US was “falling behind” in the race to sign new preferential deals. The Bush administration has taken note and given new impetus to plans to extend Nafta throughout the Americas. He aims to conclude the Free Trade Area of the Americas (FTAA) by January 2005.

Latin America is still to play for. And the scramble for Asia is now on. The big question is whether East Asia will manage to cobble together a regional hub of its own. A group that included China, Japan and South Korea plus the ten members of the Association of South-East Asian Nations, among them Singapore, Thailand, Indonesia and Malaysia, would be a heavyweight in international trade.

The creation of such a regional hub is no longer inconceivable. East Asians are still smarting from the high-handed way that they feel they were treated during the world financial crisis in 1997-9. They are offended by western crowing at the demise of the once-lauded Asian model. And they are furious that the US slapped down proposals for an Asian Monetary Fund. They have reacted by setting up a regional system of currency swaps to help them deal with future Asian crises. And they have made tentative steps on the trade front too.

To be sure, powerful obstacles remain. There is immense antipathy between many East Asian countries. Many see their neighbours as rivals rather than partners. Just as the EU would find it hard to admit Russia, so China’s neighbours would find it difficult to throw in their lot in with such a giant. Clearly, there is still an opportunity for the US, on which most of the region relies for its security, to carve up markets for itself in East Asia, as the EU is doing in eastern Europe, the Middle East and Africa.

This headlong rush for advantage is unlikely to lead to outright hostility between rival trade blocs. Fears about a Fortress Europe, for instance, have so far proved unfounded. But regionalism does end up making everyone worse off. A maze of preferential agreements, with differing tariff rates, rules-of-origin requirements and health regulations, distorts trade and creates huge new administrative burdens, not to mention opportunities for corruption. It is a lawyer’s heaven, and an economist’s hell.

The spread of regionalism would not be so worrying if global trade was getting freer. Privileges granted to a few would soon be eroded by better access for all. Regional hubs might turn out to be building blocks of a genuinely global economy. But since 1997, moves towards freer global trade have stalled. Efforts to launch a new WTO round in Seattle were a spectacular failure. Might there be a breakthrough in Doha?

The omens are not good. Most countries pay lip-service to the desirability of a new WTO round. Their rhetoric has taken on a new urgency since September 11th. But they show few signs of making the necessary compromises. The EU is not willing to make politically painful farm reforms. Its latest tactic is to seek guarantees that freeing farm trade would not harm the environment - this from the same EU that subsidises the pesticides that pollute our rivers and poison our wildlife. The Bush administration refuses to reform its iniquitous “anti-dumping” laws that allow it to keep out imports that it deems too cheap.

The uncomfortable truth is that neither the US nor the EU particularly wants a new WTO round. They can take it or leave it: they don’t need access to others’ export markets as much as others do to theirs. Why face down the powerful coalition of protectionists and protesters opposed to freer global trade when the status quo will do fine?

Perhaps the current terrorist crisis will concentrate minds enough to fudge the launch of a new WTO round. But meaningful liberalisation is another thing. Tightening the screws on regional preferences isn’t even on the agenda for Doha. We look set to continue living in a not-so-global economy.

Dump those prejudices

Many on the left obsessively loathe the World Trade Organisation, in the way Tory Europhobes hate the European Union. Just as Brussels-bashers peddle lies about the EU, so Naomi Klein, Noreena Hertz and others slander the WTO. That is a pity. The left has warmed to the EU. Now it should reconsider its opposition to the WTO. Believe it or not, the WTO is not against social democracy.

The worst charges against the WTO are these four. First, that it does the bidding of big global companies. Second, that it undermines workers' rights and environmental protection by encouraging a "race to the bottom" between governments competing for jobs and foreign investment. Third, that it harms the poor. And last, that it is destroying democracy by secretly and unaccountably imposing its writ on the world.

Undeniably, some companies have undue influence over governments. More should be done to separate money and politics. But companies are constrained by competition and regulation - both of which the WTO bolsters. Freeing trade curbs domestic giants by exposing them to foreign competition.

Take BT. For international phone calls, where there is competition, it is just one provider among many. For local calls, where there isn't, it can hold customers and the government to ransom, most recently by delaying the roll-out of broadband internet. The only reason companies like Shell heed protests is that they face competition: if Shell had a monopoly, it could safely have ignored Greenpeace's Brent Spar campaign.

Competition is not a cure-all. Often, governments need to regulate too. And they can. It is a terrible irony that the left has lost faith in government. Governments are not impotent. The WTO itself is merely governments acting together to regulate global markets. Brussels has just blocked General Electric, the world's biggest company, from taking over Honeywell. Labour has imposed the utility windfall tax, introduced the minimum wage and ramped up petrol duty.

So much for the race to the bottom. As the fuel protests showed, the main constraint on government is public opinion, not globalisation or corporate power.

If globalisation is forcing governments to slim down, how come the average tax take in rich OECD countries has risen from 35% to 38% of GDP since 1985? Corporate taxes are a bigger share of government revenues than 20 years ago. Surveys show that skilled workers, good infrastructure and nearby customers determine where companies invest far more than low taxes and regulation.

Labour and environmental standards are generally rising, not falling. An OECD study found that workers' union rights had not got significantly worse in any of 75 countries since the early 1980s. In 17 (including Brazil, South Korea and Turkey) they had markedly improved. The same study found that pollution havens are a myth. If anything, competition is bidding up environmental standards.

Developing countries are attracting investment not by lowering their standards, but because they are making the best of their comparative advantage. This does not spell doom for British workers. Provided people are equipped with skills to find another job and are protected by a decent welfare system, we can all gain from globalisation. It makes no sense to protect yesterday's jobs at the expense of tomorrow's.

Nor is it fair. How else are the poor going to get richer? It is a funny kind of socialism that stops at national borders. Surely international solidarity means buying t-shirts from Bangladesh as well as demonstrating for debt relief. The fact that seamstresses in Bangladesh are paid less than in Britain does not necessarily mean they are exploited. They earn more than they would as farmers. And however awful conditions in a Nike factory may be, they are usually worse in a local sweatshop.

Poverty is terrible. But globalisation can help. While GDP per person fell by 1% a year in the 1990s in non-globalising developing countries, it rose by 5% a year in globalising ones. The WTO is a friend of the poor. Its rules protect the weak in a world of unequal power. Unlike the United Nations, WTO rules apply to everyone - even the United States. Costa Rica challenged US restrictions on its underwear exports at the WTO - and won. Of course, the WTO is not perfect. But it is better than the law of the jungle, where might equals right.

The worries about democracy are more well-founded. Democracy remains rooted in local communities and nation states. So it is difficult to work together internationally - on global warming or trade, at the EU or the WTO - without leaving voters feeling out of touch. But abolishing the WTO is not a solution. As we learned from the 1930s, beggar-thy-neighbour policies end up making beggars of us all. Nor are world elections to a world parliament and a world government realistic. Sixty million Britons would not accept 1,300m Chinese outvoting them. So the best option is to reform the WTO.

It is already more democratic than you think. All agreements are reached by consensus. Every country has a veto - unlike at the UN, where only big powers do - and WTO agreements are ratified by parliament.The organisation is held to account mainly through government, but also through contacts with MPs, trade unions, business and NGOs, through the media, and through its website - on which most working documents appear rapidly.

Even so, the WTO should be more open. Government should develop better procedures for informing MPs and voters about its work at the WTO and MPs could hold public hearings to reconnect the WTO with voters. If you hate capitalism, you will probably never support the WTO (although Fidel Castro does). But if, like most people, you believe in markets tempered by government intervention, you should think again about the WTO.

Free trade works in favour of the poorest

One of the enduring myths about globalisation is that it is bad for the poor. Yet the facts suggest otherwise. Freeing trade increases economic growth, because new technologies, such as the internet, spread faster and foreign competition spurs domestic companies to become more productive. This faster growth, in turn, reduces poverty.

For evidence that free trade is good for growth, just compare the Thirties with the second half of the 20th Century. When governments resorted to protectionism in the Thirties, trade spiralled downwards. That turned a world recession into the Great Depression. Over the past 50 years, as governments have torn down import barriers, world trade has risen 17-fold. This has multiplied world output by seven, trebling living standards in developed and developing countries.

More rigorous proof that trade boosts growth comes from a study by Jeffrey Sachs and Andrew Warner of Harvard University. They found that developing countries with open economies grew by 4.5 per cent a year in the Seventies and Eighties, while those with closed economies grew by 0.7 per cent a year.

Clearly, trade is good for the economy as a whole. But critics of globalisation claim that it only benefits the rich, while the poor lose out. Not so. Openness to trade benefits the poor as much as it does the whole economy, according to a new study by David Dollar and Aart Kray of the World Bank. Crunching data from 80 countries over four decades, they find that the incomes of the poor generally rise as fast as overall growth.

True, in the short term, some people lose from trade liberalisation. Although some losers are fat cats grown rich from cosy deals with governments, others are genuinely poor. Their pain can and should be eased with welfare benefits and job retraining. But the temporary losses of a few should not prevent the country from reaping the gains of free trade. Lower fuel bills for pensioners, for instance. The means to spend more on health, education and social security because freer trade makes the country better off. And higher incomes for everyone, as capital and workers are employed more productively.

One world? Don't blame globalisation

Europe is finally reforming. Governments are starting to liberalize. European Union leaders have pledged to nurture the new economy. Germany's parliament has approved radical tax reform. France's finance minister is talking about tax cuts too. Amazing. But is globalization forcing their hands?

Many people think so. They reason as follows:

Globalization is breaking down walls between national markets. Countries, like companies, increasingly compete for capital and workers. So if governments set high taxes to fund socialized medicine and generous welfare schemes, people and firms will exit. If they impose costly labor and environmental standards, jobs and investment will flee abroad. Inexorably, globalization is stripping the "social" out of the social-market economy. Europe is being forced to reshape itself in America's image.

This conventional wisdom delights some free marketers and distresses some Europeans who believe their model is fairer than America's. But it should worry liberals too. America's vibrant economy is enviable, but there is more to life than maximizing GDP growth. Europeans should be able to choose social democracy if they are willing to pay for it. If globalization stops governments from doing what the people want, then it might not be such a good thing, however much it boosts growth.

But conventional wisdom is wrong. Globalization is not forcing Europe to jettison its ways. For one thing, the extent of globalization is greatly exaggerated. Yes, labor, capital and products cross national borders more easily than before. But the world economy is still more of a ragged patchwork than a seamless web.

European bankers may jet around the globe without impediment, but Indian computer programmers struggle to get temporary European work visas. Only around 1.5% of the world's labor force worked abroad in 1993. Even in the EU, with its free movement of labor, just 2% worked outside of their homelands in the last year. For all the surge in global foreign direct investment, to $827 billion last year from $50 billion in 1985, domestic investment dwarfs it eight times over. And, despite 50 years of trade liberalization, many barriers remain, not least in agriculture and services, which together account for two-thirds of the global economy.

Moreover, new barriers are forever cropping up -- even in cyberspace. Witness the EU's data-privacy directive, which discriminates against foreign firms. Consultants at McKinsey reckon only a fifth of world output is open to global competition in products, services or ownership. Even if all trade barriers were abolished, many services would still not be traded. The market for haircuts, for instance, will remain local.

More importantly, the European model can survive, however much the economy opens up. Competition between models of capitalism is a bit like competition between different types of car. The American model is like a pared-down sports car: it accelerates quickly and turns easily, but the ride can be bumpy, crashes spectacular, and it's a bit flashy for some. The European model is more like a station wagon loaded with extras: it feels safe and comfortable, but it's cumbersome and slow off the mark, and a bit boring for some.

In a competitive market, there is no reason why one model should drive out the other. Tastes differ. If all you care about is winning the race, you'll probably choose the sports car. If you prefer to travel safely and comfortably, you'll doubtless opt for the station wagon. And who knows, the station wagon may even end up ahead if the sports car comes a cropper.

Europeans can continue to cough up for extras such as a generous welfare state if they wish. Some extras, such as good state-funded schools, are actually a competitive advantage. Others, Europeans may decide, are, like tailfins -- costly and redundant. But even then, that will be their decision. Globalization does not force them to dump them. Indeed, even Europeans who want Europe to become more American are unlikely to vote with their feet. A Frenchman is hardly likely to emigrate to America, leaving behind family, friends and, more importantly, cafes, just because he thinks the government should spend less on health.

Still not convinced? Consider the facts. If globalization is forcing governments to slim, it is doing a pretty poor job. For all the surge in international trade and investment over the past 15 years, the share of taxes in national income has edged up in most countries. The average among OECD members is up to 37% from 34%. In Britain, despite Margaret Thatcher's efforts, the state still gobbles up two-fifths of GDP. Moreover, the spread between low-tax and high-tax countries is as wide as ever. The U.S. and Japanese governments still take less than a third of GDP in tax, Germany's around 45%. If anything, countries have more sharply diverged: Italy's tax take has shot up to over 46% of GDP from 38%, and France's has risen to over 50%. Importantly, Germany's reforms and France's mooted ones don't alter this big picture.

Fears that competition for FDI will force European governments to slash taxes and regulations are also misplaced. The share of corporate tax in OECD governments' revenues has remained constant at 9% since 1965. The reason why is simple. Taxes and regulation are rarely crucial in companies' location decisions. Surveys show that a skilled workforce, good infrastructure, proximity to market (and good golf courses) are usually far more important. Look at high-tax Sweden. It attracted $78 billion in foreign investment last year, more than any country except the U.S.

Moreover, good regulations, whose benefits outweigh their costs, are actually a plus. Prudential financial regulation, for instance, may deter crooks while attracting honest investors.

Politicians boast about bonfires of regulations, but there is no evidence of a "race to the bottom" by governments eager to attract foreign investment. A new OECD study finds that firms rarely shift operations to take advantage of lower environmental standards elsewhere. Pollution havens are a myth. In fact, competition for foreign investment often raises environmental standards. Governments want to attract clean, knowledge-intensive industries. Multinationals often find that higher standards cut costs and enable them to charge a "green premium." Skilled staff prefer living in cleaner places. "Policy competition has raised standards [of environmental protection] across much of Europe," the report concludes.

The evidence on labor standards also belies the conventional wisdom. In an OECD study of 75 countries that account for virtually all of world trade and investment flows, researchers found huge differences in labor standards among countries. Most non-OECD countries significantly restricted workers' freedom of association, while no OECD countries other than Mexico, Turkey and South Korea did. Yet freedom-of-association rights have not deteriorated significantly in any of the 75 countries since the early 1980s, despite the explosion in overseas investment. In fact, they improved significantly in 17 countries, including Brazil, South Korea and Turkey.

"Whatever you do, blame globalization" is the maxim of modern government. It is short-sighted because it feeds a misguided backlash against openness. There is no evidence that globalization threatens the European model. Perhaps the real reason social democrats are worried is that governments often fail to deliver what people want. They often mismanage the economy, tax needlessly, spend wastefully and regulate perniciously. Such domestic failings may turn voters against social democracy. But don't blame globalization for its demise.