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Finance & Development
A quarterly magazine of the IMF
March 2006, Volume 43, Number 1

Book Reviews

Public goods and public bad

Moisés Naím

How Smugglers, Traffickers, and Copycats Are Hijacking the Global Economy

Doubleday Publishing, 2005, 253 pp., $26.00 (hardcover).

By now it is a cliché to say that globalization has both good and bad aspects to it—or, shall we say, assets and liabilities. In recent years, opponents and proponents have debated each other in academic writings, conferences, and official meetings and have even clashed in the streets where real or presumed problems created by globalization have, at times, led to violent demonstrations. Economists, policymakers, and bankers have, more often than not, defended globalization. Union leaders, workers, and some intellectuals have been critical of it.

This book, by Moisés Naím, adds a significant element to the liability side. The book provides a gold mine of information—some of it statistical, some of it anecdotal or impressionistic—that indicates that, especially in the 1990s and the first half of the current decade, various illicit or criminal activities went global and grew at a very fast pace. According to Interpol, "trade in counterfeits has grown at eight times the speed of legitimate trade." Other sources claim that money laundering comprises between 2 percent and 5 percent of world GDP and that the number of slaves in the 21st century is larger than in the previous four centuries combined.
If true, these are extraordinary figures.

In the 1990s, many illegal activities lost their provincial or even national character and went global. This globalization was facilitated by various changes taking place in the world. Some of these changes were political, such as the breakup of the Soviet Union. Others were technical, such as the reduction of transport or transfer costs for people, goods, and the exchange of information. Yet others were facilitated by new policies, such as the opening of frontiers to goods, capital, and, to a large extent, even people. We learn that 170 million people now live in countries other than those in which they were born. And, of course, hundreds of millions of people every year cross borders as tourists or workers or for other reasons.

Global integration has made it easier for some countries (China, India, Vietnam) to grow rapidly. However, it has also created a world market for illicit activities (activities prohibited by governments) while simultaneously increasing incentives to produce or provide these activities, with technology playing an important role in facilitating their production and distribution. This is well described in the book and is one of its strongest points. Naím argues that national borders have contributed to this proliferation because they encourage fragmentation of the supply chain that produces the final illegal product or service, thereby raising the profits derived from illicit activities. Fragmentation has also made it harder for national governments to punish those who supply illegal goods and services.

Kill demand, not supply

Governments—especially the United States—have attempted to fight the growth of illicit activities by going after supply rather than demand. According to Naím, this approach has not been successful and is not likely to be successful, regardless of how much the United States or other governments spend on it. He thinks the fight should also include the demand side.

The book's most important contribution is the detailed information it provides on illicit activities. Criminal or illicit activities that receive exhaustive treatment include trade in weapons, including material for nuclear devices; the drug trade; current versions of slavery (trade in people); the stealing and unauthorized use of intellectual property; the laundering of money; and the growing trade in human organs.

These chapters, full of interesting material presented with flair, also estimate the size of illicit activities. But although no one should doubt the scope of illegal activity, estimates of this kind are often no more than guesses and should be taken with a large grain of salt, especially since they are often made by agencies that can justify budgetary requests by inflating the figures.

I want to conclude with an issue that has worried me for some time and that is central to this book. Globalization has made most markets, including those for illicit goods, global. But governments have remained national. Thus, the dream of Catholic philosopher Jacques Maritain for a global government remains just that: a dream. Yet global "public goods"—or more often global "public bads"—have become progressively more important, as Naím makes clear.

One could argue, as I have done in the past, that international organizations could be proxies for the nonexistent global government. But, as we also learn in this book, the United States—the hegemonic state at this historical time—has not shown much enthusiasm for delegating relevant powers to these organizations or to international agreements. It would be interesting for Naím, perhaps in his next book or in a revised edition of this book, to tell us what the end game will be if current attitudes and trends do not change. The last two chapters of Illicit are interesting but do not go far enough in addressing this important question.

Vito Tanzi
Inter-American Development Bank

Indulging in political rhetoric

Joseph E. Stiglitz and Andrew Charlton

Fair Trade for All
How Trade Can Promote Development

Oxford University Press, Oxford, 2006, 304 pp., $30 (hardcover).

Stiglitz and Charlton set out to answer some of the nagging questions that have brought protesters to the streets of Seattle and Cancún and might yet sink the World Trade Organization's (WTO) Doha Round. How can the world trade system best contribute to promoting development? What is "fair trade"? And what are the implications for the WTO negotiations? Unfortunately, far from clarifying the debate, this book will further confuse it.

Two themes run through the book and underlie its conclusions. The dominant theme is that the asymmetry of power between North and South has produced a system of international trade that disadvantages, even victimizes, developing countries in virtually all respects. Though the North has cloaked the Doha Round in altruistic garb, the reality is that the negotiations have so far been just as self-serving as in the past. "Fairness" requires deemphasizing reciprocity and empowering developing countries. The authors propose that WTO commitments be based on detailed and independent analysis of the benefits and costs in terms of development, and take into account each economy's specific circumstances.

No doubt, countries pursue their own interests in international negotiations, and it is not difficult to find examples of questionable, even harmful, trade policy practices. But such examples can be found in both developing and developed countries. In persistently driving for a supposed North-South divide, the book fails to address reality, indulging instead in political rhetoric. As for the authors' practical proposals, it requires a dose of idealism to expect that economic analysis would redress existing asymmetries of power—short of trade negotiators undergoing a bout of moral catharsis. International trade rules are negotiated, not centrally designed.

What about government failure?

The book's second theme is that economic theory and empirical studies have so far been unable to establish the benefits of open trade, especially those associated with liberalization (a process that carries adjustment costs). Given this indeterminacy, as well as the heterodox success stories of East Asia and the industrial countries' own muddled past, the book argues for "policy space" to allow developing countries to experiment with industrial policy. Those that do liberalize should receive substantial amounts of assistance under a "principle of compensation."

One would have expected greater intellectual rigor in this complex debate. Although much is made of market failure, government failure comes off rather lightly in view of past experience with industrial policy. The authors stress that most benefits of trade are dynamic but sidestep the central role of competition in that context. Without much explanation, trade between North and South is viewed negatively while South-South free trade agreements (with China in manufactures? Brazil in food products?) are encouraged. The authors themselves can't really seem to make up their minds. Rather incongruously, after almost 200 pages of taking proliberalization arguments to the cleaners, the book states that "the net effect of reductions in Most-Favored-Nation tariffs could be summarized as being positive and significant for most industries in most countries." Policymakers in developing countries must be wondering what
to do.

The authors could be forgiven for occasionally simplifying, but they cut corners far too often in this book. One of its most obvious weaknesses is its shabby editing. Different sections, probably written at different times, are thrown together with little regard for the logical flow. Though purporting to inform negotiators ahead of the WTO's Hong Kong ministerial meeting at the end of 2005, vast amounts of ink and firepower are devoted to pulverizing the Doha agenda on competition and investment policy—which was scrapped in 2004!

There is much argument about the perils of subjecting least developed countries (LDCs) to liberalization and costly WTO rules—with the authors seemingly oblivious to the fact that LDCs are largely exempt from such obligations in the Doha Round. Sections start out promising solutions but merely state problems. One section, on competition, is entitled "what should not be on the agenda" but only delivers arguments for why it should be. The book's one original contribution, a proposal for countries to commit to unrestricted imports from all countries with both a smaller per capita and smaller absolute GDP, is introduced out of the blue and then forgotten. The book is repetitive ad nauseam, with the same illustrations and whole passages constantly reappearing, often word for word.

In the end, one cannot help but wonder whether the authors took their task, and their audience, seriously. This book is political grandstanding in search of scraps of intellectual support.

Hans Peter Lankes
Trade Policy Division Chief
IMF's Policy Development
and Review Department

Out-of-control international bureaucrats

Michael Barnett and Martha Finnemore

Rules for the World
International Organizations in Global Politics

Cornell University Press, Ithaca, New York, 2004, 256 pp., $17.95 (paperback).

Once regarded as centerpieces of the liberal world order, international organizations are now often portrayed as incompetent, self-interested, or scandal ridden. Scholars have either admired them as facilitators of cooperation or dismissed them as insignificant actors in a world of powerful states. Michael Barnett and Martha Finnemore view international organizations differently: as consequential, potentially malign, and increasingly powerful actors. As a result, they emphasize the dangers of organizational autonomy and expansion and warn against the role of organizational culture in producing "dysfunction" and "pathologies."

Three case studies underpin their argument. The first is a broad-brush history of the IMF's conditionality. Barnett and Finnemore emphasize the role of IMF staff in developing economic models that support conditional lending and more intrusive oversight of national policies. Dysfunction emerges, they contend, in goal proliferation (mission creep) and in an unwillingness to consider alternative solutions to payments imbalances (such as policy change in countries with surpluses or oversight of "reckless behavior in global capital markets"). At the same time, the authors downplay the critical role of the U.S. government in initiating conditional lending and ignore the influence of an evolving economics profession on IMF staff's thinking. The complexities of IMF decision making are instead transformed into a story of bureaucratic aggrandizement in the guise of economic expertise.

The second case study describes a shift within the Office of the United Nations High Commissioner for Refugees (UNHCR) away from resettlement and asylum toward a policy of repatriation that risks violating the rights of refugees. In an excellent, fine-grained account that illustrates the dynamics of bureaucratic behavior, the UNHCR's treatment of Rohingyan refugees in 1994 is presented as the result of an emerging "culture of repatriation" within the organization. Barnett and Finnemore carefully document the progress of this altered view of the organization's purpose through shifts in influence within the UNHCR bureaucracy. Once again, however, the role of member states is too quickly set aside in favor of their chosen explanation: bureaucratic culture. That culture developed within tight constraints imposed by member governments adamantly opposed to resettlement and asylum.

The influence of member governments in setting boundaries for bureaucratic culture is also highlighted in the third and most disturbing case study: the United Nations and the Rwandan genocide of 1994. Barnett and Finnemore attribute bureaucratic pathology to the UN Secretariat and the Department of Peacekeeping Operations (UNPKO), exemplified in the organization's unwillingness to acknowledge a planned genocide rather than a civil war despite desperate reports from the field. The rigid definition of peacekeeping endorsed by UN headquarters figures clearly in this tragic failure of international action. That reversion to an older and narrower view, however, was the result of negative member state reaction to earlier expansions of the peacekeeping mandate, particularly in Somalia. A rapid shift from enthusiastic acceptance of mission expansion to recalcitrant refusal of the same in Rwanda is difficult to attribute solely to bureaucratic culture.

Barnett and Finnemore wisely urge us to examine international organizations as agents that define their interests as bureaucratic actors. But their more controversial arguments regarding dysfunction and pathology rest on only three cases. Even if the charge of pathology is accepted, how representative are these cases? Their portrait of global politics as increasingly dominated by expansionist international bureaucracies is even more dubious. The IMF claims fewer than 3,000 employees, UNHCR 6,500, and UNPKO 4,500. In contrast, the city of Phoenix has a bureaucracy of 14,000, and the state of Illinois 160,000. In the game of bureaucratic influence, these organizations are hardly leading contenders.

Rather than elicit alarms over bureaucratization, these three case studies should instead prompt us to ask why these organizations were not more responsive to stakeholders outside their organizations: poor countries, refugees, victims of genocide. The answer to that question may lie within international organizations as the authors claim. But one suspects after reading this provocative book that answers will also be found elsewhere—in those more potent bureaucratic organizations, national governments, and private corporations.

Miles Kahler
Rohr Professor of Pacific
International Relations
University of California
San Diego