Interview with Martin Wolf: The Globalisation Game

ETHOS Issue 02, Apr 2007

In your book Why Globalization Works, you argue that the world needs more global markets. What do you think is the proper role of governments in pursuing economic integration on the one hand and, on the other, ameliorating the negative effects of economic liberalisation?

There are tremendous economic gains to be had from integration with the world economy. In the post-Second World War period, every successful economy has had, as part of its success, the exploitation of international economic opportunities. This has been dramatically true of the Asian success stories, including Singapore.

First, it is quite clear that the necessary condition for successful exploitation of these opportunities is a supportive government. Government support is required in a whole range of dimensions. Success clearly requires a sensible policy; it requires the provision of basic rule of law and property rights, security, infrastructure, education, as well as support for the productive and investment sectors. There is a whole range of things that governments have to do.

Second, the ability of governments to do these things is very variable. One of the reasons is because many governments try to do more than possible and things become worse as a result.

Third, it really does depend very much on the opportunity a country has. In an export-led growth pattern which starts with labour-intensive manufacturers, the involvement of government does not need to be very extensive. Trade only has to be allowed to proceed and it will, to some extent, evolve naturally. When you start thinking about financial integration or the successful exploitation of mineral wealth, much more is demanded of government. Financial integration demands a high quality regulatory regime or the ability to import such a regime from abroad through foreign direct investment (FDI) in the sector. In the case of minerals, there are huge dangers of corruption, waste and so forth. So again, a very high quality of government is required.

Finally, it is obvious that globalisation creates great opportunities for some in society and not for others. Yet there is a need to preserve a degree of social harmony. You want people to feel they are all potentially part of the economic project of society. That means that governments do have to think about the education and training of the young, so that they can participate. They have to find ways to compensate the losers in the system. That means raising taxes for that purpose, which becomes more difficult as tax revenue itself comes under competition. However, a well-run country can still raise enough money to do this if its policies are targeted.

The underlying point is that markets need governments and governments need markets. There is a very profound relationship between the two and the argument for globalisation is certainly not an argument against government. It is an argument for sensible and good government.

In the post-Cold War era, the US has been the most forceful advocate of trade liberalisation and the globalisation agenda. But now there is pressure in the US to become protectionist, with more inward-looking measures. How do you see the role of the US evolving over time as the chief advocate of globalisation?

In a very deep sense, modern globalisation was ultimately a US project that goes back to the years after the Second World War. It is a logical consequence, if not an intended one, of the post-war system. Throughout the 1960s and 1970s, they pushed the idea that developing countries should liberalise and integrate into the world system. So eventually everybody did, including the Chinese, the Russians, and the Indians. In my view, this was incomparably the most successful foreign policy project of the US and, indeed, of any great power.

There are many, many American winners from globalisation. The United States continues to possess and is likely to continue to possess for quite some time the world's most innovative companies, the world's centres for innovation. For this reason, it attracts many of the brightest people from all over the world, and it has many of the world's most successful multinational companies, financial centres and businesses. All these winners have a huge interest in making globalisation work in the US, and they are very influential in politics.

Of course, there are also some losers. Those who used to work in relatively high-waged unionised basic industries, such as steel and auto-production, are relative losers in the current situation. The trade unions mostly represent them. They are only about 7% to 8% of the labour force but they are very important for the Democratic Party.

The right way of thinking about what is happening in the US — which is also happening in the UK and most other Western countries — is to ask: are there aggregate gains? In the US case, there is no doubt that there are aggregate gains. The economy's growth is partly a reflection of the large gains from globalisation. I do not expect the role of the US corporate sector, university sector, innovation machine to disappear in my lifetime; I expect it to remain dominant in these areas.

So the US is a divided community. There are very big winners in the US, permanent winners. Of course there are also some losers. How will this play out? Up to now, the winners have consistently been more powerful than the losers. In all probability, that will remain the case.

One of the most important things that has happened in this respect is that as companies increasingly become multinational, their interest is no longer with their domestic workforces. They have a global workforce, that is how they think of themselves, so they are not going to go for protection against imports. Therefore there will tend to be friction. Globalisation divides societies. The tensions will exist but I think they will be managed.

What do you think are the implications of China's entry into the global world? Do you think it strengthens globalisation or undermines it?

By and large, China has been a responsible player at the globalisation game. It has liberalised its imports dramatically, more effectively than Japan ever did, in fact. This has been crucial to its growth, integration with the world system and global engagement in China's development. It liberalised access to FDI in China. So FDI in China is enormous, in relationship to gross domestic product (GDP), whereas in Japan and Korea, for instance, it remains very small.

So China has chosen to be much more open to the world economy than, say Japan or Korea. I sometimes joke that if you look at the statistics, China looks like a gigantic Hong Kong, since it is so open. It has a much larger trade now than Japan in gross terms, even though its GDP remains only half of Japan's. This is remarkable and the decisions to open China in this way were very bold and have established broad vested interest in China's success from corporate sectors globally. This is a source of great stability for the world.

Now, has China been fully sensitive to the recent emergence of these large current account surpluses and their associated dangers? I think this explosive increase in foreign currency reserves and surpluses happened quite suddenly, rather than as a matter of policy. Up to now, the surpluses have been manageable. The problem is that they are already very big and may get much bigger. Challenging adjustments to this new problem will then have to be made in future. They are aware of it and I think they will try to resolve it over the next four to five years.

The world can accommodate China's rise economically — provided China remains open, its imports grow as fast as its exports and its policies are seen to be fair and reasonable. But since it is such a huge shift in global economic power, adjustments are not going to be perfectly smooth. On the whole, however, the Chinese have handled all these challenges pretty well.

How do you see this geo-political and economic relationship between US and China play out in the long term? How will it affect other regional players?

This is the biggest single question about the future of the world geo-politically. All you can say is, big shifts in relative power have always created problems — new relationships have to be formed and that is difficult.

Second, China and the US are very different civilisations and different countries in a deep sense. The US has a tremendous influence on contemporary China — culturally and in terms of economic thought, for instance. The reverse obviously is not true. The history of China (over the last two to three thousand years) and its contemporary political system makes it very different from the US on questions like democracy, human rights and the way foreign policy should be conducted. The potential for friction as a result of these different attitudes and values is also very deep.

You can now see this emerging quite significantly in China's foreign relations: China and Sudan, China and Zimbabwe, China and Iran — these are all potential trouble spots. Add to these differences a natural power rivalry, and the fact that culturally the US and China have little sympathy for each other. The US really dislikes the way China is run. The way the US is run is clearly not the one the Chinese have chosen for themselves. So presumably they are rather doubtful about it. These differences are profound. Here is the largest rising power in the world and it is not anything even close to a democracy. This is another source of conflict.

Third, China is imposing economic changes upon the world and upon the US which are very difficult to cope with. So there is plenty of potential for trouble.

The upside is that the Chinese particularly, but the Americans too, as Bob Zoellick¹ pointed out very well in a speech about a year ago, have invested in a mutual economic relationship which has become so deep, and engaged the interests of so many important players on both sides, that clearly both would suffer enormous damage if it broke down.

At this stage in China's history, challenging the US head-on is pointless. China will rise and naturally change the balance of power, so they do not need to push it. It is not as if this is a temporary window of opportunity. China has more to lose in the breakdown of relationships now than the US has. They are certainly not a military rival in any way. They need American technology; the reverse is not true. They need access to American markets. They have a poor relationship with Japan already and certainly don't want the US using Japan against them. So I think the basic Chinese solution to this problem is to lie low and to be cooperative as far as they can. In most issues, they are.

I think that given all the problems the US has in the world and given the mutual interest and also Chinese policy, this will probably be a manageable relationship. However, there are factions in the United States that would quite like it to break down — people who are either suspicious of China or just feel that the US could do with an enemy.

At the moment, however, the US has enough enemies, which is another factor. Attention is diverted to the Middle East. What would have happened without Al Qaeda is quite an interesting question. The enemy of one's enemy is one's friend. On that principle, the Jihadists have brought some very unlikely countries together.

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This article was extracted from a discussion between Donald Low, Director of the Institute of Policy Development and Mr Martin Wolf on 14 September 2006, after Mr Wolf delivered his New Insights Lecture on "Global Imbalances: Why They Matter" at the Civil Service College in Singapore.

NOTES

1. Zoellick, Robert, "Whither China: From Membership to Responsibility?" (Remarks to the National Committee on United States-China Relations, September 21, 2005, New York City), http://www.ncuscr.org/articlesandspeeches/Zoellick.htm (accessed 29 March 2007).