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Finance & Development
A quarterly magazine of the IMF
December 2006, Volume 43, Number 4

Book Reviews

Globalization as virtual reality

Daniel Cohen

Globalization and Its Enemies

MIT Press, Cambridge, Massachusetts, 2006, 192 pp., $27.95 (cloth).

Since neither the proponents nor the opponents of globalization are ready for a truce just yet, the pile of books on this fascinating topic just keeps growing. So why should we want to read Globalization and Its Enemies? The answer is that Daniel Cohen manages to take a broad swipe at many commonly held, as well as emerging, clichés of globalization in a highly provocative yet unpretentious manner.

To Cohen, the cliché that we live in a borderless, globally interconnected world is just that—a cliché. The much-vaunted image of a "new closeness between nations" is only virtual, not real, he argues. Although in previous phases of globalization, people moved physically, they now move virtually. And while there is no denying that merchandise is being traded across borders, people of rich countries encounter people of poor countries only during a few precious vacation weeks. Poor countries are essentially left to their fate.

At the same time, Cohen dismisses the contention that rich countries exploit poor countries. Globalization is a source of frustration for many "because of what has yet to happen, not what has already taken place," he writes, adding that "it is difficult to be an actor but easy to be a spectator" in the current phase of globalization. Cohen agrees that yesterday's industrialization in the North is responsible for much of today's poverty in the South, but he cautions that the deindustrialization of advanced economies "will not by itself create tomorrow's prosperity in the developing world." The developing countries must become centers of growth in their own right. This is an uphill battle. When a high-speed train connects two cities, "it is the less populated city that will suffer the consequences"—the falling costs of transportation and communication do not promote wealth but instead favor its polarization.

Cohen sees wealth creation as depending on the operation of a series of levers. The first lever is human capital (education and professional experience), the second is physical capital (machines and equipment), and the third is global efficiency (technological progress). The tragedy of the poor countries is that they want to participate but that the world essentially ignores them. Institutions must be created to facilitate their entry into global capitalism, he argues, dismissing the work of existing international institutions as "merely repetitions of colonial style." But he also reminds poor countries that they must decide "whether they will jump out of the protectionist frying pan into the globalist fire."

Cohen does a good job of demystifying the contemporary phase of globalization. He is right to say that the poor image of globalization is due to the fact that "it has altered people's expectations more than it has increased their ability to act." His diagnosis of poverty as manifested by the lack of levers rings true. If the book has one failure, it is that it ultimately provides little in the way of workable solutions.

Caf Dowlah
Professor of Economics
City University of New York

Converting uncertainty into risk

Hilton Root

Capital and Collusion
The Political Logic of Global Economic Development

Princeton University Press, Princeton, New Jersey, 2006, 352 pp., $35.00 (cloth).

Writing a book with sweeping claims about meta issues, such as the source of global wealth creation, is an inherently difficult endeavor. Hernando de Soto's highly praised Mystery of Capital showed that the lack of property rights is a fundamental constraint on unleashing wealth. In a similar spirit, Hilton Root's Capital and Collusion is an ambitious attempt to argue that the key to turning poor countries into rich ones is creating public institutions with an ability to convert "uncertainty" into "risk."

Root defines uncertainty as imprecise knowledge about potential future events, whereas risk is uncertainty that can be systematically assessed—that is, measured, priced, and, most important, shared. When uncertainty is high—for example, when two parties lack information about each other and the valuation of their goods—there is a tendency to make suboptimal choices. This might include a bias toward low-cost, short-term transactions (running a cash-only business or keeping your savings under a mattress) over longer-term, potentially higher-return options (using credit or investing in stocks or bonds). If one multiplies this inefficiency by millions of daily decisions—voila!—the result is a poor society with a massively underperforming economy.

Root develops this distinction between uncertainty and risk into a broader argument: institutional intermediation is necessary to create instruments and incentives for more efficient choices by firms and individuals that will lead to greater economic activity and national wealth. Financial markets, a standard mechanism for trading risk, are weak in many countries. Root points to U.S. history and comparisons of several Asian economies to claim that the public sector plays an essential role in developing such markets and the institutions that underpin them.

The author, a professor of economics at Pitzer College and a former U.S. Treasury official, writes as if bursting at the seams to explain his ideas. The reader can clearly sense Root's enthusiasm for the subject matter, so it is easy to allow him some latitude when he occasionally wanders off on (interesting, but not always relevant) tangents. Such asides should not, however, detract from the book's valuable contributions to several ongoing debates, such as the relative importance of capital versus institutional change (he leans heavily toward the latter) or the threats to progress posed by inequality (which he believes are underestimated).

Root's most important insight is to force a political economy perspective into the growing literature on public institutions and their central role in promoting economic development. As he rightly argues, much of the literature on institution building is politically sterile. The book takes his arguments about risk management further by also looking at the reasons poor country governments so often act in ways that seem to defy economic logic—and why the donor record on promoting institutional reforms is so disappointing: decision making is almost always driven by political exigencies that point in the other direction. Hence, Root's "conundrum of growth in the developing world" is that "the very people who are in a position to transform uncertainty into risk are those who benefit from the current regime."

Political elites often benefit from restricting access to information and maintaining barriers to more efficient outcomes. Politicians can use their control over key information or decisions to maintain loyalty and to extend the scope of their power and the longevity of their rule. In this environment, firms may also simply seek political connections to receive rents and commercial advantage even if it is a second-best (or worse) option. This, of course, helps explain the persistence of patronage and corruption in so many places.

Put another way, the incentives political and commercial elites face in many countries are to disrupt reforms that may benefit the country as a whole. This is relevant for donors since external assistance may then unwittingly discourage reform because it helps ruling coalitions maintain power and, even when it comes with strong conditions, rarely has a transforming effect. This conclusion in itself is hardly novel. But it is a message that is still only slowly getting through.

Todd Moss
Senior Fellow, Center for Global
Development, Washington D.C.

In their own words

Padma Desai

Conversations on Russia
Reform from Yeltsin to Putin

Oxford University Press, New York, 2006, 383 pp., $45.00 (cloth).

In this book, Padma Desai, Professor at Columbia University and Russia specialist, presents interviews, conducted between 1999 and early 2005, with 11 Russians and 6 Americans who were either directly involved in or close observers of the reforms that started in the Soviet Union in the late 1980s.

The interviews should be interpreted in the light of the subjects' natural tendency to defend their past actions or statements and to position themselves optimally for the future. Anatoly Chubais and Yegor Gaidar (deputy prime ministers in the 1990s), for instance, express few regrets about what happened when they were in positions of authority. And Mikhail Kasyanov—prime minister in 2000–04 and who might well be running for president in 2008 against President Vladimir Putin's preferred successor—contends that, although reforms ceased after his departure, he knows how to accelerate them.

Desai poses many questions, but two big ones underlie them all: What should have been done differently in the 1990s, and where is Russia going under Putin? The answer in her introduction (a fifth of the book) to the first question is that more attention should have been paid to institution building and the politics of reform. On the latter, she says, the adverse distributional consequences should have been cushioned, not least by preventing a small number of people from stealing some of Russia's major assets. Some interviewees (for example, leading policy analysts Sergei Rogov and Nodari Simonia) agree, but Chubais insists that the destruction of the communist institutions had to be the top priority. No one explains how it would have been possible to build new institutions overnight as the old ones disappeared.

There is little discussion of the role of the outside world. Philanthropist George Soros and Strobe Talbott (U.S. deputy secretary of state, 1993–2000) regret that the United States did not provide more money in the early years of the transition, though Gaidar does not think that was a problem. Gaidar and Soros say that the IMF was not the right instrument to manage large loans to Russia because of the constraints imposed by the organization's operating procedures. Sergei Dubinin, the central bank governor at the time, criticizes the pressure from the IMF to liberalize capital inflows, an action that Desai calls a colossal mistake. Neither mentions that the Russian government insisted on the liberalization of capital inflows to reduce the cost of financing the budget deficit. Neither the World Bank nor the European Bank for Reconstruction and Development is mentioned in the interviews.

The reversal of political reforms and the concentration of power in the Kremlin under Putin are generally criticized, although many interviewees note that Putin remains popular. As Desai explains it, Russians are ready to settle for a mild dose of authoritarianism in exchange for stability, economic growth, and containment of the oligarchs. American historians Martin Malia and Richard Pipes note that Russia has no tradition of democracy and that it is unreasonable to expect it to take root quickly. Although most of the interviewees are optimistic that authoritarianism will not go too far, there are mixed views about whether economic reforms will suffer from the growing authoritarianism. Grigory Yavlinsky (opposition politician and economist) thinks that a successful market economy requires political freedoms and democracy, but others say that markets can coexist with an authoritarian regime, as in China and Augusto Pinochet's Chile.

The book serves up many other interesting comments, for example Talbott's description of the close relationship between Boris Yeltsin and Bill Clinton; the belief of Anatoly Vishnevsky (a leading demographer) that the sharp decline in life expectancy was the result of Soviet, not post-Soviet, policies; and Yeltsin's explanation in 2003 of why he picked Gaidar's team, which he called "a kamikaze crew," in 1991 and Putin ("intelligent," "self-controlled," "not a maximalist") in 1999.

Desai also interviews Oleg Vyugin (chairman of the Securities and Exchange Commission), Boris Jordan (U.S.-born Russian financier), and Jack Matlock (former U.S. ambassador to the Soviet Union). The interview format has its limitations, notably repetition and answers that cry out for probing follow-up questions. And the introduction is somewhat disjointed, perhaps because it is an expansion of a journal article, with material and views that do not always relate to the interviews. Nevertheless, anyone interested in Russia's economic and political transition will find much useful material in this book.

John Odling-Smee
Director, IMF European II Department, 1992–2003

Well prepared for an accident

Fernando Cardoso

The Accidental President of Brazil
A Memoir

PublicAffairs, New York, 2006, 312 pp., $26.95 (cloth).

There is a joke in Brazil that goes something like this: when Fernando Henrique Cardoso was a little boy, he set out to become president of Brazil. But just in case he failed, he also set out to become pope. The joke betrays the resentment of those who do not want to admit that Cardoso probably was the best-prepared man to ever wear the presidential sash in Brazil. A PhD in sociology, Cardoso was at one point invited to replace Jürgen Habermas at the University of California, Berkeley. A well-traveled cosmopolitan, he was fluent in three languages besides Portuguese. His political accomplishments included being a senator and a foreign relations and economy minister. So why did he entitle his memoirs "the accidental president"?

The answer is in the book, prefaced by his good friend Bill Clinton. Cardoso claims he was "tricked" into becoming economy minister by his predecessor, Itamar Franco. As for the presidency, he thought he would never stand a chance against Luiz Inacio Lula da Silva, the current president of Brazil and the favorite in the 1994 presidential elections. As it was, Cardoso won over Lula both in 1994 and in 1998.

As economy czar, Cardoso launched the real plan, which killed the hyperinflation that had choked off Brazil's economy since the early 1980s. He carried out an ambitious privatization plan that ushered his country into modernity, tried to foster a new concept of state—leaner, smaller, more efficient—and created the country's first regulatory agencies. Cardoso also had to weather the largest number of international crises, from Mexico's debacle in early 1995 to Brazil's own meltdown in 2002, which was caused in part by investors fearing Lula's leftist program. In fact, Lula not only preserved, but also deepened, Cardoso's conservative economic model when he was finally elected in 2002.

The Accidental President makes for pleasant and entertaining reading as the reader becomes privy to Cardoso's bonhomie and good humor. It is intentionally light on sociology and political economy yet still offers a sophisticated analysis of key moments of Brazil's history. The book is a condensed version of a heftier, 700-page volume launched in Brazil, The Art of Politics—The History I've Lived, in which Cardoso recounts his trajectory with much more detail, even dedicating a chapter to his presidency's intense relationship with the IMF. In yet another surprising twist, The Art of Politics quickly became a best seller when it was launched in Brazil in early 2006, all 700 pages of it.

Andreas Adriano
IMF External Relations Officer