Where's the value in globalization?

Peter Schott: Let’s start by defining “globalization.” The most operational meaning I can think of for globalization relates to trade costs, the cost of doing business across borders. When things like tariffs and policy barriers, as well as more general costs of communications or operations, get lower, that’s more globalization.

Arvind Subramanian: One could broaden it and say that globalization is the ease with which goods and services flow across borders. That includes the movement of people, the flows of capital — which, of course, have been very relevant in the current crisis — as well as technology, information, and, more broadly, ideas and culture.

There’s a book by Salman Rushdie where he says, “We’re all leaking into each other.” There’s a sense in which the ease with which we can all leak into each other in many dimensions is globalization.

Ken Scheve: For political scientists, there’s some ambivalence about the term — it’s sometimes considered too vague to be of much use in analytically describing anything. However, I think once you start to break it down into its individual dimensions, it starts to become more helpful. Those dimensions that are important, at least for political science, are economic, cultural, and what I would describe as political. The political dimension of globalization includes the extent of military networks and connections across borders, and also the extent to which the nation-state is not the only arena of governance. Through international institutions, there’s real governance taking place across borders.

Miguel Centeno: Another important point is that globalization is not a new process. People refer to the beginning of globalization in 1989 or 1945 or 1870. But this is actually a very, very old process. You could argue that the first globalization goes back to the peopling of the world 100,000 years ago. There was a very strong economic connection between the Roman Empire and the Han empire across the Silk Road. The Mongol empire was a form of globalization. What occurs after 1492 and the onrush of imperialism from Europe is part of globalization.

What distinguishes globalization today is the tightening and the complexity of it. Where before you had one or two flows, from one or two societies, moving at relatively slow speed, globalization today is a complex, adaptive system. It’s almost an ecological system, with massive interlocking between its various parts across all sorts of vectors, whether it’s economic, political, migration, cultural, linguistic.

So you have all these links between all these various players, and the links, at least through August of last year — we don’t have data on what’s happened since — were rapidly increasing. So you have this rapidly tightening, rapidly increasing, complex web of connections.

To expand on Rushdie’s idea of leaking into each other, it opens up the possibility of drowning each other. As the world has seen, for example, with the interlocking between mortgage banking in Nevada in 2007 and the collapse of large parts of the global economy.

Subramanian: In a recent New Yorker, there’s a piece on the slums of Mum­­­­bai. These very poor boys make a living out of selling scrap. And the price of scrap has plunged; the price of a stack of water bottles has gone from 25 rupees to 10 rupees because of the global crisis. There’s less demand for the scrap. It illustrates how location seems to matter less and less for your economic fortunes.

Centeno: Another obvious example would be the Obama election. I spent last year on sabbatical in Spain, and every single day the newspaper seller or a colleague or someone at the store would ask me about the elections. I think you can find a lot of that awareness of each other’s politics. So it’s not just about economics. We know each other’s business much more.

Subramanian: Can I pose a question to the political scientist, to Ken, following up on that? Does sovereignty get undermined because people in the West are able to see the ill treatment of people in Zaire, or Rwanda, or Burundi? On the one hand, the flow of information increases our sense of connectedness, but it also makes it legitimate to act at the global level rather than to allow people to determine their own destinies.

Schott: Let me add to that question before Ken answers. We’ve mentioned several dimensions of globalization, and the question that popped into my mind is, if you think about the last few decades, are all of these dimensions correlated?

In terms of the definition I gave, trade costs and transport costs are generally going down. But you have all mentioned other dimensions. Have they also been going in the same direction over the last few decades?

Scheve: At the same time that we see all these greater connections, we also see how “sticky” local identities can be, whether they are geographic or religious or otherwise. Those local identities are perhaps even enhanced in this setting, in which we have more connections but also greater uncertainty.

Subramanian: On the other hand, when we talk about human rights, it no longer seems defensible for a dictator to say, “What goes on within my borders is my business.” That universalization, that threat to sovereignty, as it were, is facilitated by globalization, isn’t it?

Scheve: Absolutely. In fact, I would say it’s very much related to the point I made earlier about the political dimensions of globalization. In the same way we might want to think about pooling sovereignty in an institution like the European Union, your point is that there’s almost a pooling of sovereignty that’s taken place because of the adoption of common ideas about human rights.

I think that’s an important part of the phenomenon, and we see it formally, in international institutions, but perhaps more informally, in what the norms and expectations are in how states react to the domestic politics of other states.

Centeno: I’ve been gathering data on this stuff for a few years, and the data that is almost of the same quality as trade data is international phone calls and travel. And for those two measures, the slope is pretty close to that of trade. So this isn’t just a question of selling each other things.

There’s been a huge debate over the last 15 years about whether the state is going away, and I have my doubts. My favorite stock response, when anybody says that the state is going away because of globalization, is to ask, if they really do believe that and if they have an American or EU passport, why don’t they give it up? If the state is going away, go get Salvadorian citizenship. The state is still very important as a preserver of, if not your emotional identity, certainly your legal one.

Scheve: I think it’s also still very much the way people see themselves. The biggest project in international cooperation over the last fifty years has been the European Union, and if you ask people in the EU how they see themselves, they still see themselves primarily as citizens of the member states, and at best as both European citizens and citizens of the member states. Very few individuals primarily see themselves as European citizens.

Schott: Short of the state going away, is it fair to say that the state has become less important or in some dimensions less all-encompassing than it has been in the past?

Centeno: One of the problems for globalization, and the credit crisis is a perfect example, is that we have a paradox of governance. We have enforcement mechanisms, we have regulations, that are 99.9% territorially based. They come from a state. Yet increasingly our interactions, whether it’s economic interactions via contracts, social interactions, or political interactions, are between those states.

And so we have a way of governing society and maintaining rules that is largely based on territory. But the action is occurring somewhere else now, and there is no equivalent governing body. If one state doesn’t regulate one part well enough, then there’s this contagion effect, yet nobody’s willing to give up the territory-based authority to create globalized enforcement mechanisms.

Schott: We’ve been talking about these different conceptions of globalization, but are they all equally salient in the minds of people?

For example, the rise of relatively inexpensive goods that are available at Wal-Mart is a function of the fact that production costs have been lowered in part by off-shoring, and so for me, seeing those low prices means globalization. But among the other things that you’ve mentioned here, I’m thinking people may find it much more salient that they know exactly what’s going on in East Timor, that they might hear much more about global news than they did before, and that may be the dominant manifestation of globalization for them. Do you think that they’re all equally salient?

Scheve: My view is that people’s everyday interaction with globalization mostly is as a consumer, but it’s a consumer of both goods and services — those cheap goods at Wal-Mart but also cultural goods, and that includes the news, movies, music, and so on. I think the public opinion data bears this out — when people are talking about what’s good about globalization, they see the benefits in what they consume.

Another area which is important to them is as a worker, or a participant in the labor market — that’s another way in which I think globalization for at least many people can be a salient part of their everyday life.

Centeno: I think when you’re trying to figure out how people feel about globalization, you have to find out which country they live in, and which sector of that country they live in. So the upper middle class of the rich countries, I expect, sees globalization positively. Our consumption opportunities have increased. Our access to air travel has increased. But you have to look at all the other boxes — the working class in the rich countries, the working class in the poorer countries, and so on.

I think one of the things that’s been very bad about the public discourse on globalization is the prevalence of these Thomas Friedman-style abso­lutes. It’s a good thing or it’s a bad thing. It really depends very much where you’re standing.

Moreover, we forget that for a significant part of the globe, globali­­za­tion has had a relatively small effect. If you look at the percentage of trade that’s accounted for by the poorest countries and you take into account internal inequalities in a place like India or China, a significant part of the global population has felt globalization at most as a small breeze. They will have a huge Chicago Bulls t-shirt, or a second cousin of a friend of theirs might have gotten a job in a factory somewhere, but let’s not assume that this is something that’s being felt on the same intensity by six and a half billion people.

Schott: It’s not clear to me that it’s easy to tell who’s been affected by globalization. For lower income people in the United States, for example, the cost of living has gone up less than the cost of living of people who are higher and middle income because what they consume is disproportionally made by countries that have low wages.

If you want to think about the six and a half billion people in the world, and how they’ve been affected by globalization, just look at the ubiquity of cell phones. That’s been influenced by both the spread of technology and their declining price.

Let’s move on to the whole question of how governments react to globalization and its costs and benefits. Is globalization beyond our control? Can we shape it?

Subramanian: Globalization has come about because of two things: technology, on the one hand, and government policy, on the other. So the question of what to do about it very much depends upon how much you think this is an inevitable, exogenously trade-technology-driven process as opposed to a policy-driven process. If you think policies still matter, which I’m sure they do, then nations retain some degree of control in terms of influencing the extent of connectedness. And countries will have different attitudes towards different kinds of globalization.

For example, when it comes to allowing in some forms of hot foreign capital — money that comes in quickly and leaves quickly — some countries will draw the lesson that more is not necessarily better, and we have to try to regulate it. I think that there will continue to be a big debate about what forms of globalization are good or bad, and how we may want to regulate them.

Schott: When it comes to the questions of good and bad, I have a pretty clear view of what the economics are. That’s a big part of the debate. But in terms of the dimensions that are important to political scientists, I’m not as sure.

Scheve: Well, I suspect some of them are quite closely related. I think we need to start by thinking about whether economic globalization is good for a particular country, and if we come to that assessment, then we have to think, also, about who it is good for within that country. The distributional issues that these connections generate for particular countries, certainly including the United States, have, I think, been too easily dismissed in the public debate. We can, while recognizing the aggregate benefits, think about exactly who is being benefited by this engagement with the world economy, and about ways that the government can respond through the fiscal system to make the gains from engaging in the world economy more widely shared in a particular nation-state.

Everyone’s aware of the patterns of inequality over the last several decades; if you’re even in the middle class in the U.S., you’re thinking to yourself, is the set of policies that have allowed these increases in connections good for someone like me? We need to think about other government policies that can allow the aggregate benefits to be shared more widely among citizens. That was an important political issue before the economic crisis, and is even more so now.

Subramanian: I agree with that completely, but I’m not willing to concede even the aggregate question. Even before you get into the question of distribu­tion of gains within a country, there’s still a question about whether some forms of globalization are even good in the aggregate. That’s why I think the distinction between trade and capital is an important one, because I certainly don’t buy the view that all forms of foreign capital benefit, even in the aggregate.

Take the context of the current crisis, for example. There is the China model, as it were, and there is the India model. China has not been letting in foreign capital, so it isn’t globalized in financial capital terms, but it is pretty highly integrated on the trade side. And so China didn’t feel the impact of the financial crisis very much. But now on the trade side, it is being felt quite a lot. India is more closed to trade, but more open to finance, and so the financial impact was more severe, but the real impact, because it’s less integrated in trade terms, is going to be more muted.

Centeno: But I’m not so sure that on a systemic level, and certainly for an indi­­­­­vidual country, that there is the potential of being able to pick and choose. The difference between trade and capital flows is a pretty clear one. Places like Chile and Malaysia, for example, have been able to have one without the other. But in general, I think it’s very hard for individual states, and even on a systemic basis, to say we’re going to have the water rushing at high speed in this particular sector, but at medium speed in this one, and at low speed in this one.

The problem, as everyone’s been saying, is about the aggregate versus the local. All of the evidence I have seen suggests that the effects in the ag­gregate over the last 20 years, in terms of health, in terms of education, in terms of consumption — let’s leave environment aside — seem to be pretty positive. The problem, of course, is that politics are local. And there are particular sectors that either have not benefited or perceive themselves as not having benefited.

Schott: When I teach this stuff to my students, I get to a stage where it’s pretty clear from economics that if you have aggregate gains in trade, even those who may be worse off should be okay because you can just take some of the gains of those who are doing really well and give them to the guys that didn’t do as well, and everyone’s better off. And then I joke that now we can leave economics behind; now we have to talk about politics, because politics is all about those distributional questions.

However, in class I never get to turn to a political scientist and ask, okay, so what about those distributions? Ken, why is it so hard to talk through these distributional fixes that the economists say should be so easy to put in place?

Scheve: I don’t think we have a good solution to the question of why politicians choose inefficient policies to distribute goods, but the short answer is mostly that they’re politically efficient. A politician’s problem is how to stay in office. And providing very narrow benefits to particular industries through various types of trade protection or subsidies is an effective way to drum up interest-group support. So it is politically efficient to protect particular industries rather than coming up with a large social safety net or a sensible fiscal approach to the distributional problems raised by trade.

In fact, if you look at advanced capitalist countries, those countries that have more insurance for workers, like Scandinavian countries, have much more support for engagement with the world economy. That’s true even with rather large countries — if you compare the German public with the U.S. public, for example. So it seems that in those countries where the social safety net is just a little bit stronger, it has a big effect on support, because they’re redistributing the gains more broadly across the population.

Subramanian: But the new dimension is that the openness can actually undermine the ability to have the social safety net. For example, if capital is mobile, your tax base gets eroded. So to have open economies you need bigger government, but the very openness undermines the ability to have bigger governments.

Centeno: Living in Spain for a year, I saw evidence of the extent to which the degree of immigration there is undermining the support for the welfare state. What you’re beginning to see in Spain is that as the recipients of the welfare system are seen as no longer co-nationals, people’s willingness to pay taxes in order to support those welfare systems goes down drastically.

Schott: This brings us back to the question of whether to get globalization, you need more globalization. Is what we need now a world government or world identity?

Subramanian: Here’s an example of globalization facilitating globalization. In the old days there used to be a lot of antidumping complaints in the U.S. against European steel. But the physical steel plants in the U.S. are now 30% or 40% foreign owned. So the incentive and the ability to have anti­dumping action actually gets attenuated because of greater globalization, as it were.

Schott: That brings another example to mind. The Japanese auto manufacturers that came over to the United States in the ’80s were pretty strategic about placing plants geographically around the country so that they could maximize Congressional representation. So now you have people in Congress who are somewhat sympathetic to foreign owners and foreign capital because jobs in their districts are associated with this foreign country. You’re making me think that it’s not necessarily world rule that you need, but that globalization itself begets that kind of change.

I’m going to end by asking you to make a prediction about how globalization will be affected by current events.

Subramanian: Let me foolishly be the first person to go. I certainly think that the globalization of finance is going to suffer a setback. But I doubt whether the globalization of trade is going to suffer a serious setback.

I think there may be some period where we get kind of low-grade protec­tionism here or there, but hopefully nothing as virulent as happened in the ’30s.

Centeno: I have to second that. I think we’re going to see nastier politics. I suspect that one of the biggest effects of this is going to be a rise in a kind of atavistic nationalism, in this country represented by someone like Lou Dobbs. The question is, will that point of view be so popular as to begin dismantling this integration that we have created?

Globalization is very strong in the sense that, certainly in the manufacturing sector, I don’t know of a single industry that can survive autarkically.

I suspect that any kind of manufacturing in the United States has some element, at least in the first and second degree, that comes from somewhere else. So I can’t even imagine how you would reduce connections on the purely input-output level.

Scheve: I agree. I think it looks more like the 1970s than the 1930s on trade. In the ’70s, you certainly got a protectionist backlash as a response to the crisis, but because the degree of integration of firms with the world economy was so much greater than it was in the ’30s, there was lobbying both for more protection and to resist that protection.

Schott: I agree that in general there might be brushfires about protectionism breaking out in the short term, but not anything serious. I also agree that in a sense, things are too far gone. Another way of characterizing the difference between the ’30s and now is that countries were trading a lot with each other in the interwar period. But now we’re not only trading with each other, but the production process itself has been exploded, and so now it occurs across borders.

What’s certainly going to happen due to the drop-off in demand is that trade flows will decline. You’re already seeing that Japanese trade is down and Chinese trade is down, and U.S. trade exports will be down.

Subramanian: I wouldn’t be surprised if we start seeing finance in more
sinister terms, with the financial oligarch treated politically like the oil oligarchs of the late 19th century in the U.S. This could be a kind of Rockefeller trust-busting moment for finance.

Centeno: The paradox is that financial globalization may be the form that’s the hardest to police. Stopping container ships and stopping people at borders is one thing. Stopping electronic transfers is a very different one. I think some of the firms might take a less global stance, but stopping the integration of finance is going to be practically impossible.