Saturday, May 26, 2007

How Not to Make the Case for Globalsiation

One of the best things about debates about globalisation in recent years is that some of them have tended to move away from simplistic arguments for and against, and instead to do two things:

1. To disaggregate the phenomenon, discussing it's separate components rather than the entity as a whole.
2. To start considering optimum levels of integration rather than assuming that either localism or complete integration are the way to go.

Not everyone has achieved this state of nuance though; in a recent 'essay' for the Cato Institute's website Johan Norberg manages to regurgitate a whole bundle of pro-globalisation platitudes. What's worse though is the subtle dishonesty of the piece.

Norberg's essay can be summarised as such.

Sweden was, once upon a time, very poor. Sweden integrated into the global economy. Sweden is now very rich. Sweden is typical: studies (specifically by the World Bank and Sachs and Warner) have shown that countries that integrate into the global economy the most grow fastest. And globally poverty is decreasing really rapidly. Therefore Globalisation is good.

Sigh. How warming. Just like a fairytale with a happy ending.

The trouble is, it's not that simple.

Let's start from the beginning, Norberg writes:

In 1870, Sweden was poorer than Congo is today. People lived twenty years shorter than they do in developing countries today, and infant mortality was twice as high as in the average developing country. My forefathers were literally starving.

But reforms for liberalization at home and free trade abroad changed all of this. A trade agreement with England and France in 1865 made it possible for Swedes to specialize. We couldn’t produce food well, but we could produce steel and timber, and sell it abroad. For the money we made, we could buy food.

In 1870, the industrial revolution began in Sweden. New companies exported to countries across the world, and production grew rapidly. The competition forced our companies to become more efficient, and old industries were closed so that we could meet new demands, such as better clothes, sanitation, health care and education.

By 1950 — when the Swedish welfare state was no more than a glint in the social democrat’s eye — the Swedish economy had quadrupled. Infant mortality had been reduced by 85 per cent and life expectancy had increased by a miraculous 25 years. We were on our way to abolishing poverty. We had globalized.

Setting aside for the moment he fact that the Swedish welfare state, like that in New Zealand, had it's origins in the late 1800s / early 1900s, the trouble with the Sweden Globalised story is that it conflates globalisation with technological change. This is not to say that Sweden didn't benefit from international trade over the period of time that Norberg details (trade no doubt helped) but rather that the big gains came from technological innovation. Not just in industry but also in medicines and health care. The reasons for all this innovation are complex and still debated, but one thing is for sure: they weren't solely the product of trade. The British, for example, became free traders in the 1860s but this was after the industrial revolution had been steaming along in that country for over 100 years.

Having given us his um, slightly unorthodox, view of Swedish development, Norberg then turns his attention to the rest of the world, writing:
But when we look at the poor countries with good institutions, and which are open to trade, we see that they are making rapid progress, much faster than the wealthy countries. A classic study by Jeffrey Sachs and Andrew Warner of 117 countries in the 1970s and 1980s showed that open-developing countries had an annual growth rate of 4.5 percent, compared with 0.7 per cent in closed-developing countries and 2.3 percent in open industrialized countries. A recent World Bank report concluded that 24 developing countries with a total population of 3 billion are integrating into the global economy more quickly than ever. Their growth per capita has also increased from 1 per cent in the 1960s to 5 per cent in the 1990s (compared to a rich country growth of 1.9 per cent). At the present rate, the average citizen in these developing countries will see her income doubled in less than 15 years.This points to the conclusion that globalization, the increase in international trade, communications and investments, is the most efficient means in history of extending international opportunity.
The trouble with this part of the fairy tale is that both the Sachs and Warner study and the World Bank one have been discredited in recent years [PDF]. One would think that Norberg might know this, given that he spends his time writing about globalsation. Apparently not (I'm being charitable here).

Right about now, a wise reader might choose to stop reading. A man who doesn't know the history of his own country nor the current state of empirical evidence on the subject he is employed to write about probably isn't worth wasting the next 15 minutes of your life on. But if you're a masochist for this sort of stuff there is more, much more.

Norberg's up to his neck in statistics now and loving it.

On the whole, official statistics from governments, the UN and the World Bank all point in the direction that mankind has never before seen such a dramatic improvement of the human condition as we’ve seen in the last three decades. We have heard the opposite view repeated so many times, that we take it for granted, without examining the evidence.

During the last 30 years, chronic hunger and the extent of child labour in the developing countries have been cut in half. In the last half century, life expectancy has gone up from 46 to 64 years and infant mortality has been reduced from 18 to 8 per cent. These indicators are much better in the developing world today than they were in the richest countries a hundred years ago.

In a generation, the average income in developing countries has doubled. As the United Nations Development Programme has observed, in the last 50 years global poverty has declined more than in the 500 years before that.

The trouble with these numbers is that, with the arguable exception of of the figure of hunger and child labour (based over the past thirty years), he is talking about data from a period of time (past 50 years, half century, generation) that includes not only the current 'era of globalisation' (which started in the mid 1980s) but also the post WW2 years, which were characterised by the Bretton Woods exchange system, considerably less trade integration than prior to the great depression or at present, and state led development policies. And it was these post WW2 years which in many developing countries saw the most rapid improvements in wellbeing.

Norberg's welcome to argue the case for more rapid global integration but it would be nice if he didn't muster as evidence statistics that are due in part, at least, to progress made in a period of time when a completely different approach to development and trade was being followed.

Norberg continues in a similar vein writing:

The number of absolute poor — people with less than $1/day — has according to the World Bank been reduced by 200 million in the last two decades, even though world population grew by about 1.5 billion during the same time.

Even those encouraging findings, however, probably overestimate world poverty, because the World Bank uses survey data as the basis for its assessments. This data is notoriously unreliable. It suggests that South Korean is richer than the Swedes and British, for example, and that Ethiopia is richer than India.

Furthermore, surveys capture less and less of an individual’s income. The average poor person at exactly the same level of poverty in surveys in 1987 and 1998 had in reality seen her income increase by 17 per cent. Former World Bank economist Surjit S Bhalla recently published his own calculations supplementing survey results with national accounts data (in the book Imagine There’s No Country, Institute for International Economics, 2002). Bhalla found that UN’s goal of lowering world poverty to below 15 percent by 2015 has already been achieved and surpassed. Absolute poverty had actually fallen from a level of 44 percent in 1980 to 13 percent in 2000.

Urrgggghhh! Norberg is correct when he says that the World Bank's numbers are unreliable; they certainly are. But, if anything, they show an overly optimistic trend owing to the way that they calculate purchasing power parity (for technical discussion of this see here; for a user freindly explanation see here). As for a the point that 'surveys capture less and less of an individuals income'. This just isn't true; it's correct that there is an increasing disparity between GDP and household survey data, but it isn't at all clear that this is because, for some strange reason, the poor are under-reporting their income (actually it's consumption but anyhow...) to a ever greater extent. Sujit Bhalla chooses to report on GDP related data rather than household survey data for the same reason that Noberg chooses to cite him: because the figures suit their argument. Not because there's any plausible reason to believe that they are accurate.

What's more most of the gains in global poverty reduction that have occurred in recent years have been the result of rapid development in a few Asian countries (China being the biggest). International trade has played a the development of these countries but - and this is the critical point - the have engaged in international trade on their own terms, integrating strategically. On the other hand those countries in Latin America and Africa who have globalised in the simplistic manner that Norberg advocates have tended to stagnate or, in some cases, get poorer.

International trade (which is the element of globalisation that Norberg primarily writes about) is a necessary condition for economic development (just look at Korea, or the impact of sanctions on Iraq for evidence of what the alternative might look like) but it is not a sufficient condition. Successful economic development is a very complex process that involves institutional (political and social) change as well as improvements in human and economic capacity. And if international trade is to help this process then it needs to be something we look at with regards to context and trade offs, not as a cure all.


sagenz said...

you imply that techological progress can be widely distributed without trade. So the Swedes would have commercialised electricity and Maori would have the standard of living they have today without trade.


Terence said...

Hi Sage,

You're conflating trade with international trade, but setting this aside, sure trade is a component of successful technological progress, but it's not the only component. That's the point of my whole post really.