May 16, 2008
Is Larry Summers the canary in the mine?
By Devesh Kapur, Pratap Mehta and Arvind Subramanian
Is a liberal international economic order losing intellectual support? Should developing economies be worried? If Larry Summers is the canary in the intellectual mine, his two columns in the Financial Times (April 28 and May 5) suggest that the answers to both questions are yes.
The liberal economic order of the last several decades was premised on two assumptions. First, that the proliferation of prosperity across countries was a good thing. Second, there would be winners and losers but, on balance, a majority of people in both developing and developed countries would benefit. Mr Summers now appears to be questioning both assumptions. He has not stated outright that the proliferation of prosperity is undesirable but his columns do suggest that globalisation creates competition for America.
This is an obvious fact. For the first time since the 17th century the west’s economic pre-eminence is being seriously challenged. But he goes on to draw the disturbing conclusion that the process of globalisation should be attenuated, precisely because it poses potential threats to the US. In doing so he, perhaps unwittingly, presents the rise of the poorer parts of the world (whose standards of living are still a fraction of US levels) more as a threat than an opportunity to the US. In effect, globalisation is justified only when it serves American interests.
The remainder of this column can be read here. Debate from our panel of economists appears below.
Read the debate - contributors so far include Larry Summers .
I am sorry but not terribly surprised to have provoked Devesh Kapur, Pradap Mehta and Arvind Subramanian (henceforth KMS) with my recent columns on globalization and appropriate American policy responses. Their recent response distorts what I wrote in important respects and much more importantly adopts a posture towards globalization that is analytically dubious and politically untenable.
My columns included the assertions that “the policy of withdrawing from the global economy or reducing pace of integration is untenable” and that after stating a number of standard economic arguments for free trade “all of these arguments have the very considerable virtue of being correct arguments…the United States will be better off with than without trade agreements and the world will be a richer and safer place with increasing economic integration”.
I am neither urging protection nor economic nationalism nor US unilateralism only suggesting a domestic stategy that emphasizes inclusive prosperity and an international strategy that calls for more global cooperation to assure that it is still possible to pursue the necessary objectives of social insurance and economic regulation. Why then have I set KMS off? There are at least two points that need clarification.
First, I drew a sharp distinction between the analysis of protectionist policy which is almost certain to hurt most people most of the time and the far more general phenomenon of globalization defined broadly to include the greater economic success of all nations, increased economic integration on all dimensions, and greater competitiveness constraints on the setting of national policies was potentially to threatening to large numbers of workers in the United States and other industrial countries. By conceding that inevitable, desirable and unstoppable aspects of globalization such as the achievement of rapid growth in major developing countries may have adverse consequences for many workers, KMS seem to feel that I have made some kind of profoundly important concession to the forces of darkness.
I am not sure why. Surely the vast majority of international trade models would predict that a large increase in the effective supply of labor abroad along with the enhanced ability of complementary factors to locate abroad would have adverse effects on domestic labor. And surely the last 15 years have been difficult for unskilled and semiskilled workers in most industrial countries. There is room for argument about how large these effects are. I had not previously realized that there was room for argument about their sign.
Perhaps they feel that economists should stick with the mantra “freer trade is good” and not acknowledge in newspapers the implications of their models for fear of emboldening protectionists. This is a dangerous game. It is ethically problematic to withhold knowledge in fear of its misuse. It is likely over time to undermine the credibility of the experts who fail to share all that their science knows. And most importantly as demonstrated by recent debates the strategy of sweeping distributional issues under a rug and simply insisting on various kinds of dislocation assistance has been a political disaster for advocates of freer trade.
Second, KMS see something hypocritical in my arguing for managing globalization at a time when the developing world is doing well and US economic performance has deteriorated. Frankly I cannot really follow their argument. I certainly hold no brief for the intellectual property provisions contained in the Uruguay Round which in important respects are an example of what I had in mind when I attacked globalization strategies directed at benefiting global corporations rather than workers.
The issue of capital account liberalization is best debated another day as the capital mobility effects described in my columns have far more to do with direct investments than financial investments. However, given their skeptical views about finance, I would have expected KMS to endorse my call for global cooperation to prevent races to the bottom in financial regulation.
There is certainly the risk that efforts to establish labor standards become efforts to insist that labor in other countries is priced out of the global market. This is valid concern but hardly a reason to ignore entirely issues around labor in seeking to establish an integrated global market. At a time when a number of developing countries have accepted labor standards provisions in trade agreements and most major businesses operate with higher standards globally than those contained in any agreements, I am not sure what purpose is served by insisting on the absolute separation of trade and labor issues. The debate and the world have moved on.
The real problem with my columns is almost the opposite of what KMS suggest. The description of the globalization challenge is more convincing than my prescriptions. Continuing to assert that protection is bad and that globalization is invevitable and therefore governments should do more to help the losers while at the same time ignoring the challenge that globalization poses to progressive taxation and other policies to assure that economic progress is widely shared is I believe a prescription for failure. True friends of global integration and of the developing world will work to design more ways to insure that a more integrated and prosperous global economy is one from which all will benefit.
Posted by: Larry Summers | May 18th, 2008 at 3:53 pm | Report this comment