Jagdish Bhagwati: Globalization Has a Human Face

I am no fan of China. I have for years been on the Academic Advisory Board for Asia of Human Rights Watch and have advocated an “open mouth” policy in which we citizens here freely criticize China’s egregious human rights violations and its lack of democracy, which I also consider to be an important human right today. After all, the Chinese leadership is neither Stalinist nor Fascist; and ensuring that “they do not get away with it” brings pressure, however small, to get them to change their ways; and it provides moral support to the nascent growth of dissent in China.

But the spectacle of China-bashing on their currency, which is now fashionable on Capitol Hill, is sad. Support for politicians who indulged in it was confined to a fringe set of “think tanks” that are known to “go along to get along.” I did not think that this variety of China-bashing would gain respectability in scholarly circles, especially as some of the most profound international macroeconomists today, chiefly my colleague Robert Mundell and the Stanford economist Ronald McKinnon (both of Canadian origin, like the inimitable Ken Galbraith), see nothing wrong with the Chinese exchange rate policy. 

But sadly, my remarkable MIT student Paul Krugman has joined the ranks of the China-bashers, many of them among the Democrats and the labor unions (especially the AFL-CIO leadership), which are notoriously anxious about foreign competition and will therefore embrace any argument that advances their anti-trade agenda. 

The exchange rate is of course like the hands in your watch; what matters rather is the underlying mechanism, the “fundamentals.” So, make a mental experiment. Let us wish with the China-bashers that China disappears into the ocean. Will that cure the American deficit? Hardly. For, as long as we continue our excess spending, our deficit with China will simply spill over into deficits with Japan, India, Brazil, etc. The problem lies within us: Scapegoating China as the source of our payments afflictions is not for serious scholars.

On the fundamentals, furthermore, Ben Bernanke had floated the thesis that China’s huge net savings had reduced world interest rates which then led our financial institutions to take excessive risk. He has now abandoned this argument. Anyone who has analyzed the complex ways in which the financial crisis unfolded, and the interaction of ideology and interests, and of private and public (e.g. consider the role that Fannie Mae and Freddie Mac played in subprime mortgages) errors that contributed to the onset of the crisis—see my World Affairs article on the subject last October—would be hard put to blame the Chinese savings as a cause of what happened.

Far too much is also made of the huge Chinese surpluses now, as indicative of their perfidy; and that these indicate that they run an undervalued exchange rate. But, as the eminent Australian international economist W. M. Corden has pointed out, the surpluses after 2005 were an inadvertent result of post-2005 domestic factors, rather than a deliberate result of a Chinese decision to grab foreign markets with an undervalued exchange rate. Again, he has argued that these surpluses were “parked” in U.S. treasuries until the Chinese figured out more remunerative ways to invest them.

That is exactly why we can predict that the Chinese will spend these surpluses increasingly on domestic infrastructure which has lagged dramatically behind the phenomenal Chinese growth rate, and where the social returns are much higher.  As that happens, the Chinese excess of savings over their investment will reduce. At the same time, our firms like Caterpillar will also  benefit from the construction of roads, ports etc. 

This applies also to Indian spending of its surpluses: Indian growth rates have been high, though below China’s, and the demand for infrastructure spending is quite strong now.  Conversely, the United States’ excess spending will have to come to heel as the President eyes the future and does not wish to preside over the descent of the U.S. further into quicksand. The prospect of a hanging clears one’s mind beautifully.

So, these “global imbalances” are likely to reduce; they are not immutable.

In my own youth, I saw the dollar shortage disappear. My Oxford teacher in the late 1950s, Sir Donald MacDougall, brought out a huge volume titled The Long Run Dollar Problem only to find that the problem had disappeared by the time his book saw the light of the day. Are we so sure that the current global imbalances, even if we decide to deplore them, will be everlasting?

The tragedy in Greece is out of character. It is premature: Dionysia, the traditional festival that is popular for its performance of Greek tragedies, is at the end of March. Besides, a Greek tragedy brings a great figure down, thanks to his own mistaken action. But here, the Greek mistakes on fiscal policy are bringing down the euro, and distressing the big European players, Germany and France.

In the ultimate analysis, of course, the bigger EU nations that masterminded the euro are not entirely blameless: They overlooked the fragility of a common currency if a tight control of fiscal policy is not accompanied by a zealous monitoring system. We all know that several German economists predicted what has just happened; and that a fiscally handicapped nation like Greece would bust the fiscal discipline, and then threaten the euro.

With the milk spilt, however, the overriding question that is keeping the EU, most economists, and all the media busy is: What can the EU do?

There is no dearth of unworkable prescriptions. For example, the American economist Martin Feldstein, often very perceptive, has suggested in the Financial Times that Greece should be allowed to opt out of the euro, set its house in order, and then be allowed to re-join the euro. Unfortunately, this is not like sending a naughty student into the corner and then letting him return to his desk later. There would be huge transactions costs, and attending disruptions, in making the currency changes.  

But should the EU step in with support funds, while imposing draconian fiscal conditionality that it deems is in order? There are two reasons why this would be imprudent. The EU can be sure that Greek populist anger will be directed at the EU for the austerity that the EU would impose. Equally, Germany (if not France, as well) will find that its citizens will object to the EU funds transfers to Greece to ease the transition to necessary fiscal prudence: In contrast with the frugal Germans, the Greeks treat themselves better on issues like retirement age and pensions.

The only sensible solution, therefore, is for the EU to have Greece turn to the IMF for liquidity assistance, and for the IMF to impose the necessary fiscal conditionality. The fact that Greece is part of the euro does not require that the EU assume the role of the IMF for EU members. When an IMF member nation finds itself in a crisis, like the one Greece has brought upon itself, it can turn to the IMF for help. Let the IMF do its job, take the opprobrium of imposing conditionality as it often does, and bring Greece back into fiscal responsibility. This may not please President Sarkozy who cynically remarked that he would rather use German funds to finance Greece and bring glory to France. However, another distinguished Frenchman, Mr. Strauss-Kahn, managing director of the IMF, would be glad to have yet another client.

It is good that President Obama saw the Dalai Lama. Human Rights are important today and the Chinese systematically violate them; even the lack of democracy is regarded by many of us as deplorable and unacceptable in a decent society.

True, sometimes governments, particularly ones like ours which have worldwide interests, must balance off human rights against realpolitik considerations. But no one seriously believes that the Dalai Lama is engaging in seditious activities. So, to surrender to Chinese demands not to see him would have been unjustified, even if the Chinese go beyond bluster and try to seek retribution.

After all, India correctly gave asylum to the Dalai Lama and the Tibetans, with strict injunction against political activities, even though this created further tensions with China. Asylum is a very important principle; and I admire India for having stuck to it despite Chinese anger. If India did the right thing, why not the United States, which is immensely more powerful, both economically and militarily?

Western governments must stick by important post-Renaissance values and not simply accept foreign demands that violate these values. This is why I was an admirer of the Danish Prime Minister Rasmussen when he refused to censure the Danish cartoonists despite riots in many Muslim countries, and the threatened retribution against Denmark.

I believe that most of our newspapers behaved extremely shabbily, including The New York Times. They, too, should have printed these cartoons, but alongside they should have published cartoons focused on other religions (of which there is no shortage, especially against Catholics and Hindus) to emphasise that we did not suppress cartoons against any religion. In doing this, we should have firmly asserted that freedom of speech was one of our most important values and that we were going to defend it; and that there was nothing anti-Islamic about the Danish prime minister’s stand. Instead, they all ducked and behaved in a deplorable fashion, and even many Western governments let Denmark take the heat. Prime Minister Rasmussen stood tall, as did the Danish newspaper that published the cartoons. We were the pigmies.

The announcement by President Obama on February 13th that he had appointed a Muslim aide, Rashad Hussain, as his special envoy to the Organization of the Islamic Conference (OIC), reminded me of the time that, some years ago, I spoke about regionalism on a panel at Davos with former presidents Obasanjo of Nigeria and Musharraf of Pakistan. I believe I was included because I wrote, and continue to write, (critically) on bilateral and regional free trade agreements. I said that I would talk as an intellectual rather than as an economist (which prompted Strobe Talbott, the panel moderator, to wisecrack that he was delighted that I made that distinction).

I argued that, in our foreign policy, we ought not to deal with organizations such as the OIC, which were built medieval-style on religious principles. Did it make sense to have foreign policy organized by “Christian” states today? Would we want then-President Obasanjo to organize pan-African organizations or the NEPAD process, or would we want to discuss foreign policy with an international forum of Yorubas? Would not the formal recognition of institutions that organized foreign policy, as does the OIC (whose meetings and activities are almost always handled by the foreign ministries of its 57 member states), simply encourage a return to the Middle Ages and beyond? I was struck by the approval expressed by many in the audience when the panel ended.

And now President Obama is doing just what he should not do. Yes, deal with the states that have Muslim majorities and are often theocratic rather than secular: Intellectuals can shun those they deplore, but foreign policy must deal with what is there. Do we really want to promote foreign policy negotiations with nation states grouped around religion?

I also see from the newspaper reports that Mr. Rashad Hussain worked on the president’s speech on Islam that he delivered in Cairo on June 4, 2009. This speech was acclaimed by many as reaching out to Islam abroad. Yet, it fell short because it showed President Obama as historically ignorant and therefore as currently inapt. Clearly, Mr. Hussain and other speechwriters had failed to tell him that Islam had nearly 500 years of tolerant Muslim rule in Andalusian Spain, after Abd al-Rahman, the Umayyad who had escaped from the slaughter in Damascus, had crossed into Spain in 755. The tolerant rule had occasionally been interrupted by the intolerant Berbers; the tolerance was far greater for the “people of the book”—the monotheistic Jewish and Christian religions. But there is no question that Andalusian Spain was witness to Muslim toleration at its best. What is remarkable is that this Muslim toleration was laid to rest with a vengeance by Isabella of Castile and her Aragonese consort when the last of the Moors surrendered at Granada in 1492. It was these Catholic monarchs who tore up the agreements of capitulation, which promised continued toleration of Muslims and Jews, and expelled the Moors and the Jews.

The speechwriters should have asked President Obama to say: “Muslims have been both tolerant—as in Andalusian Spain—and intolerant. But then so have Catholics—think of the Inquisition. So, when we ask you to reach out for tolerance, we are appealing to what has been a part of your own tradition, just as we ourselves have to remember not to revert to the intolerance of our own past.  So, let us unite in our efforts to return to our respective tolerant traditions. For that is the need of the hour. Salaam alaikum.”

Toyota’s sudden collapse, with recalls multiplying and engulfing its best cars, has implications for Tom Friedman’s 2005 thesis that The World is Flat. It is yet another example of why Friedman is wrong.

Friedman had essentially argued that comparative advantage—or what might simply be called competitive advantage—has disappeared and that one could produce anything at the same cost around the world: in India and China, as in the United States. Friedman is a pro-globalization intellectual who probably meant this as a wake-up call for the United States to shape up. But it ironically served to alarm several of his readers into thinking that the United States was doomed by open competition from abroad, that the Chinese and the Indians would now, like Russell Crowe’s Roman legions, march in lockstep across this flat world and vanquish us.

Writing almost 10 years before Tom did, I had in fact noted in The New Republic (“Fear Not: Why the Global Economy Shouldn’t Scare Americans”) that we were in a “new epoch,” in which several factors had led to the erosion of “thick” margins of comparative advantage and many producers faced intense competition. In economic terms, I was arguing that we now had “kaleidoscopic” comparative advantage—what we call in economic jargon, "knife-edge" specialization—so that specialization would shift among countries with small changes in cost conditions.

The factors that had produced this situation were several, e.g. interest rates were less unequal across countries with integrated capital markets; technology used by multinationals located in different countries became more available across nations; the spread of technical education also meant that many in India and China read the same textbooks as Americans and Europeans; and so on. So, with kaleidoscopic (or "thin" or "knife-edge") comparative advantage in many activities, we were now confronted with volatility in, not the end of, comparative advantage.

Where Tom went wrong was to argue instead that we are now at the end of having comparative advantage. In fact, it is easy to find reasons why countries still have differences, often due to politics and due to culture, that make the world not flat. Thus, China’s authoritarian politics has undermined the development of software: The PC (personal computer) and the CP (the Communist Party) do not go together! But India has a noisy democracy where software has thrived; and, until recently, it has had bad autarkic policies that have undermined hardware production (which has thrived in China).

As for cultural sources of non-flatness, the Japanese tradition of artisanship, with its careful and measured meticulousness, gave Japanese industry comparative advantage vis-à-vis the U.S. in product design and innovation; but they lagged behind for decades on finance, where quickness of response was the key requirement. Toyota’s misfortunes underline the perils of expecting modern information technology to perform multiple tasks in cars without flaws. But more than that, Toyota’s misfortunes also reflect how the company’s slow attempts to fix its safety problems were simply out of touch with the speed of the modern world’s demands. So, the meticulous and measured artisanship that conferred comparative advantage on Japanese industry may reverse itself unless the Japanese industrial culture adapts in the same way as the Japanese financial culture has finally begun to do.