Transcript

Transcript of an IMF Economic Forum
Why Globalization Works
Washington, D.C., September 22, 2004

Participants:
Raghuram Rajan, Economic Counsellor and Director of the Research Department, IMF
Martin Wolf, Associate Editor and Chief Economics Commentator, Financial Times
Kristin J. Forbes, Member, U.S. President's Council of Economic Advisors

MR. RAJAN: Good afternoon and welcome to this Book Forum. The speaker today is no stranger to all of us. I think many of us have learned tremendous amounts from reading his column, and I think the book has a very nice biography. I didn't know that you were at the World Bank until I—

MR. WOLF: I tried to keep it a secret.

[Laughter.]

MR. RAJAN: But Martin Wolf has a very impressive career right from the time he—well, he did a master of philosophy in economics from Oxford University, joined the World Bank, left the World Bank to join the Trade Policy Research Center in London, and then joined the FT in 1987 and has won innumerable prizes as a journalist, including the 2003 Business Journalist of the Year Decade of Excellence Award.

Let me turn the floor over to Martin, and he can tell us more about his book, after which we'll have some comments by Kristin Forbes, and then we'll go to the audience for questions. Martin?

MR. WOLF: Thank you. First of all, it is a tremendous honor to be here. There is a theory in the world that international bureaucrats are underemployed and overpaid, and the fact that you're all here this afternoon at least makes the former hypothesis credible. But I am not going to complain. I am very pleased that you are all willing to come and listen to me.

In the days when I worked in the World Bank, I understood that nobody in the Fund would ever be interested in listening to us. So I feel I've made a step up over a long deviation via the Financial Times.

I obviously end up making a lot of presentations about this book, and I try to make them different because, otherwise, it's very boring for me. And so in this case, what I propose to do is not go through what the book is because I think it's perfectly obvious to you what the book is. It's a defense of globalization, which is set in the background of the defense of the market economy, the role of the market economy, the preconditions for it, how markets operate globally, and then a discussion, quite a lengthy discussion of the history of globalization, which goes back a few thousand years. And then there's a very long section, which is the predominant section, which deals with all the critique of globalization.

I thought for a long time of writing—of addressing you mainly about one of those chapters which was on finance and the IMF. And then I decided I had nothing interesting and different to say on that subject, though I'm going to be very happy for you to ask me what I think about the IMF and its role in the past. But what I would like to do instead is to persuade you to think about the conclusions of the book, which I think raise some very profound questions to which—I think they're profound questions, to which I don't have the answers. And the most interesting part of any intellectual pursuit is when you get to the point when you realize this is as far as you can go and you don't have the answer.

I think most of us would be probably—most of you, I imagine, will be reasonably comfortable with the line of argument and the evidence that I've used, though there's some controversies among economists which are important, in the previous parts of the book. But I think the concluding parts raise some broader political and economic questions that I'd like to focus on today, though, as I said, I don't want to preclude in any way your raising questions about other things if you wish.

I may say, by the way, that I thought at the time, and I think it more now, that I was astonishingly kind to the IMF, and so much so that some of my dearest friends, like Jagdish Bhagwati and I won't mention others, all complained about the fact that—Jeff Sachs I should mention, that's a serious one—mentioned that I'd become astonishingly kind. But I had come to the view, after painfully rethinking all the things I wrote at the time, that all the financial crises in the world were not entirely the responsibility of the IMF, some others had contributed to them, though I do not exculpate the IMF entirely. And for this reason, in his review of my book, which you probably—some of you may have read in the Financial Times, Stan Fischer sort of tried to give me a few fairly solid wallops on the head on what I say about the Fund. But I'm happy to come to that.

Okay. My conclusion is called today's threats and tomorrow's promise. The 1980s and 1990s witnessed the collapse of the Soviet Communist tyranny, an unprecedented rapid spread of democracy, and almost universal economic liberalization. East and South Asia, home to more than half of humanity, enjoyed an unprecedented leap towards prosperity. Yet critics of globalization talk of this period of hope and achievement as if it were a catastrophe.

Some do so out of a genuine and understandable dismay over the extent of poverty and misery in a world of plenty, and then reach precisely the wrong conclusions on causes and cures. Others do so because they lament the death of the revolutionary tradition that held sway over the imaginations of so many over the two centuries. Most of these critics compare the imperfect world in which we live with a perfect one of their imagining. It is in their way of viewing what has happened in the world rather than the details of their critique that those hostile to integration are most in error.

What we must do is build upon what has been achieved not, as so many critics wish, throw it all away. In the era after 11 September 2001, this great cooperative task has certainly become far more difficult. For peoples to sustain openness to one another is far harder at a time of fear than at a time of confidence. But the task has also become more urgent. A collapse of economic integration would be a calamity for us all.

I am not about to elaborate a blueprint for a new world order. That would almost certainly be futile and certainly beyond my scope. I wish to focus instead on four big issues.

First, I will consider whether another collapse of global economic integration similar to that of 1914 to '45 is at all likely.

Second, I will emphasize what I consider the core dilemma of our world, the one that arises in trying to reconcile our commitments to national sovereignty and democracy with the desire for universal prosperity and provision of global public goods.

Third, I will consider how far the anti-globalization critique helps us deal with these dilemmas.

And, finally, I will suggest what I consider the main conclusions of my analysis.

So, first, the threats to globalization. As we all know, the international economic integration of the late 19th century went catastrophically into reverse. How likely is it that this present move towards integration, similar in many respects but more limited also in many, how likely is it that it will suffer the same fate? To answer this question, one needs to take account of differences and similarities between these two epochs.

The breakdown last time was, I argue, the consequence of the combined force of international rivalries, economic instability, protectionist or anti-liberal interests—sorry, protectionist interests and anti-liberal ideas. How likely are the same Four Horsemen of the Apocalypse to return? The first international rivalry, the first cause of the breakdown was the collapse of harmonious international relations as rivalries among great powers and the rise of communism and fascism fragmented the globe and fomented war. But today I would argue the situation is different in four fundamental respects.

First, there is for the moment a single undisputed hegemon, the U.S., and it seems to me little chance of a war among great powers in the near future, except conceivably between U.S. and China over Taiwan. But China is not, I believe, powerful enough to be a rival of the U.S. for the next two or three decades.

Second, all the great powers seem to have abandoned the atavistic notion, still very powerful a hundred years ago, that prosperity derives from territorial gains and plunder rather than from internal economic development and peaceful exchange.

Third, all the great powers now share a commitment to market-led economic development and international economic and political integration of some kind.

And, fourth, global institutions and habits of close cooperation reinforce the basic stability of the political order.

All these are indeed powerful differences between the world of a century ago and today's. But against this, we must note one obvious parallel. As I've already alluded to, the breakdown of the early 20th century order occurred in large part because of the pressures to accommodate rising powers in the global economic and political order. The rise of China will in time inevitably create great pressures. If the U.S. remains wedded to notions of global primacy rather than of a shared global order, conflict with a rising China would seem almost inevitable.

In addition to these political pressures, China's rise will force uncomfortable economic adjustment on the rest of the world, and these are indeed already creating protectionist pressures in a large number of countries. It is not, alas, impossible to envisage a spiral of mutual hostility that undermines the commitment to a liberal international economic order.

Today, however, instead of such a breakdown in relations among the world's most important powers, we confront a rather different threat: mega terrorism. Some fear that terrorist outrages on the scale of the attacks on New York and Washington, or still bigger ones in future, will end our commitment to open borders. It is not difficult to envisage the devastating impact on confidence in open borders of some form of nuclear device smuggled into a country and exploded in a container. Closely related fears concern the weapons of mass destruction being developed by regimes hostile to the liberal world order in general and the U.S. in particular. At worse, such regimes might, it is argued, collaborate with terrorists to inflict vast and virtually untraceable damage on civilized states and the commerce on which they depend.

Fear of what might come across borders must act as attacks on globalization. If countries had to be absolutely sure of the safety of every shipment and person that crosses their borders, much of today's exchange would become almost impossible. That would also hand the victory to terrorists and their sponsors, and at present, happily, it does not appear to be the world's response to 11 September 2001.

To close borders would, of course, only exacerbate desperation in the world's less economically successful countries. Global cooperation to control terrorists and improved security measures seem a more appropriate and effective route. But the danger is a genuine one. It cannot be ignored.

The second danger I mentioned is macroeconomic or economic instability. The decisive event, without doubt, in the collapse of the integrated economy of the last 19th and early 20th century was the Great Depression, and the financial and exchange rate crises that then rolled across the world in the 1930s. In developing countries more recently, financial and exchange rate crises have come with depressing frequency over the past two decades. Substantial financial and exchange rate crises also erupted among other advanced economies in the 1980s and early 1990s—the Scandinavian case comes to mind.

Japan is still struggling with the aftermath of its bubble economy, while the U.S. has also suffered a huge stock market bubble which reached its maximum extent in 2000.

All these are signs of financial instability, yet it is almost impossible, at least for me, to believe that the outcome will be anything like another 1930s. The move to floating rates has significantly reduced the risk of such crises. The woes inflicted upon Argentina by the collapse of its currency board should perhaps be viewed as the end of an era rather than as the beginning of a new one. Its crisis has also had astonishingly little effect on other emerging market economies. The flood of what the great 19th century British commentator Walter Bagehot once called—and I quote—"silly money" in the emerging markets which followed the end of the Cold War has become a trickle. Much of the transfer is now taking place in the longer-term and clearly more sustainable form of foreign direct investment.

For all these reasons, the likelihood of massive waves of financial crises in emerging market economies has, I hope and believe, declined. It is also striking that, despite these crises, no significant country has reversed its commitment to liberal trade or even so far to freedom from exchange controls. As far as I can see, that even includes Argentina.

Today, unlike 70 or 80 years ago, such policies are seen as a dead end, the quickest way to join Castro's Cuba or Kim Jong-Il's North Korea in far from splendid isolation.

The third force underlying the disintegration of the earlier form of globalization is protectionist interests. Yet these two have been shown most clearly in the Smoot-Hawley tariff of 1930. These two have been significantly modified and ameliorated by contemporary economic developments. The rise of the internationally integrated transnational company has reduced the ability and willingness of producers to wrap themselves in national flags. It is no accident that protectionist interests are strongest in predominantly nationally owned and operated industries, such as steel and agriculture. In most modern industries, including services, the largest companies are not in any obvious way national.

Is a Toyota factory in the U.S. less or more American than a General Motors factory in China? Is Goldman Sachs in Frankfurt less or more American than HSBC in New York? The answer to such questions surely is: Who knows? Modern companies have global interests, and the same is true, of course, of many of their most valued employees. Nationalists find the cosmopolitan attitudes of companies and many of their top-level employees particularly objectionable. A significant consequence, however, is the breakdown in the ability and willingness of companies to collaborate with trade unions in the demand for protection.

Developing countries have also been affected by these trends. Inward FDI and intra-industry trade diffuse and limit the effectiveness of traditional protectionist interests. The concept of a purely national business sector has become, thankfully, increasingly irrelevant, and just as in industrial countries, this diffuses protectionist lobbying.

Increasing service sector employment and the decline in employment in manufacturing has, along with the rise of the portion of the population in retirement, reduced the share of the voters whose jobs are directly vulnerable to import competition. Consumers have also—this with off shoring is an interesting question whether that statement I would still make a year later. We can discuss that later.

Consumers have also become accustomed to foreign products. They may complain as workers about imports, but they love the products foreign companies provide. Many in high-income countries express concern about the decline in relative wages and employment opportunities of skill, but for better or worse, the political power of this group of people has, with the general decline of the industrial working class, diminished. Moreover, the consensus of economists, disputed by only a minority of politicians, is that this decline in opportunities for employment has reflected changes in technology, not trade.

In addition, the existence of multilateral institutions, such as yours, and a web of strong international commitments makes it far more difficult for protectionist interests to capture legislatures as they once did. There is too much at stake for countries to reverse the commitments they have made in any easy way. Even the Bush administration, wedded though it is to the rhetoric of unilateralism, has never said or indicated that it should ignore its obligations under the WTO, even though this is without doubt the most binding multilateral economic commitment of the U.S.

The final element of the 20th century collapse, as I explain at great length in my book, began at home with the rise of anti-liberal ideas. There are parallels today—that's why I wrote my book—particularly in the groups united to protest against global capitalism. But this group of protesters is very different and vastly less intellectually coherent than the opponents of liberalism of a century ago. Then the antagonists converged around two ideas—radical socialism and racially defined nationalism. Both groups called for control of the state over the economy and primacy of the collective over the self-seeking individual. Both sought and knew what they wanted to do with power, and this was what made them so extraordinarily dangerous.

The intellectual origins of today's anti-liberal movement are far more diverse. They include environmentalists, development lobbies, populists, socialists, communists, and anarchists. Rosemarie Wright of the London Times argues, correctly, that—and I quote—"The anti-globalization brigade is a hodge-podge of contradictions linking left and right with (?)-ists, protectionists, and environmentalists, nationalists and anarchists, stolid religious charities, and, depressingly, veterans of the heady days of radical chic when Western activists brandished Mao Zedong's little red book while millions were being murdered in the Cultural Revolution.

These groups are united only in what they oppose. They are rooted in no cohesive social force, such as the organized working class. They largely reject party politics. They offer no alternative way of running an economy. They are split in their objectives. Part of what they say, notably on the hypocrisy of advanced countries and the plight of the poor, is valid and important, but a political movement cannot beat something with nothing. A movement that offers only protest is unlikely to triumph.

Yet even though, as I now conclude, history seems unlikely to repeat itself, the danger to our open world economy is not to be ignored. The combination of fears of terrorism, economic instability, protectionist reactions to economic change, and the rise of new competitors—above all, China, and now India—and protesters against economic integration could yet do grave damage.

Nonetheless, it seems plausible that global integration will not collapse as it did in the early 20th century. Let me now move on to what I consider the great dilemma in making this world work better. But it does not mean that it will advance in ways that provide the greatest opportunities for the largest possible proportion of humanity.

So let us step back for a moment and consider the biggest obstacle to a more even spread of global prosperity. That obstacle is neither global economic integration nor transnational companies, as critics allege. It is the multiplicity of independent and vastly divergent in capacities—in their capacities and qualities—sorry. The multiplicity of independent sovereign states vastly divergent in their capacities and qualities. It is not just the failure of states but their existence that creates so many of the problems we now confront.

Think, above all, of global inequality. Inequality among individuals has exploded over much of the past two centuries, not because of increased inequality within countries, of which there has been very little, if any, but because of the divergent growth of different societies. Then over the past two decades, the accelerated growth of a number of very large poor countries—above all, China, and to a lesser degree, India—appears to have reduced global interpersonal inequality. But a huge number of countries, containing at least one and a half billion people, lag ever further behind. The overwhelming probability is that some, though not all, of these countries will continue to do so in decades and decades to come.

What then lies behind these massive divergences? A large part of the answer is cumulative historical forces that go back centuries. As some countries have grown richer, they have become better able to afford high standards of education, health, and public services. As their citizens have become better informed and more prosperous, they have insisted on and obtained higher standards in public life. There is a notable positive correlation between income levels and the absence of corruption. At a certain point, economic growth has become a routine. A positive cycle of reinforcement has gone from the economy to polity and society and back again.

Meanwhile, at the opposite end of the spectrum of success, a few societies—not that few—have become stuck in a powerful vicious cycle. Low standards of living have meant correspondingly limited ability to provide any of the necessary public goods that underpin economic growth. Education remains inadequate and illiteracy rife. Economic activity remains extremely unsophisticated. Ambitious people too often view politics as a way to extract the wealth unavailable in normal economic activity. The result is corruption or, still worse, civil war and disorder.

Among large states, the United States may be seen as an exemplar of the first kind of societies. It's not difficult to think of exemplars of the second.

The forces at work in our world do not, fortunately, only cause divergence. There are also forces for convergence. The accumulated know-how and markets of the high-income countries offer opportunities for catch-up, but the evidence strongly suggests some societies are far better able to exploit these opportunities than others.

Natural resource abundance seems to have been a particular handicap for a host of reasons, not least the opportunity it gives for rent seeking by politicians. In contrast, labor abundance seems to work rather well, though, of course, only in the right policy environment, not least because it creates a direct connection between effort and reward. And in an economy's whose wealth is based on the efforts of its citizens rather than on riches that come out of the ground, a government's ability to extract resources while failing to provide valuable services in return is inevitably limited. The mutual dependence of the citizens and the state forms the basis of a functioning social contract. If the state breaks that contract by extortion, the economy fails to grow or even retrogresses. None of these constraints seems to work quite as effectively in resource-rich countries.

But my conclusion is that far and away the most important source of inequality and persistent poverty is the fact that humanity is locked into almost 200 distinct countries, some of which are prosperous, well governed, and civilized, while many others are, alas, poor, mal-governed, and, at present, apparently incapable of providing the basis of a tolerable existence.

Since the success of the economy depends, as I argue at length in the book, on the quality of the state, this inequality in the quality of states guarantees persistent inequality among individuals. The globe's political fragmentation is a big obstacle to the achievement of many of the objectives the critics of globalization hold dear. Only a few lunatics—the localizers—believe that the prosperity of the citizens of existing countries will be enhanced by fragmenting the integrated markets of contemporary national economies into self-sufficient village or manorial economies.

But the world economy is fragmented, notwithstanding the progress made towards exploiting at least some of the potential gains from integration. And for that reason—for that, the principal explanation is political fragmentation, and getting around the consequences of that fragmentation is, I think, the principal challenge in development.

Now let me move to the third subject I wish to discuss: learning from the critique.

How are we to reconcile the reality of a world divided into unequal sovereignties with exploitation of the opportunities offered by integration? How far, in turn, do the critics of market-led globalization help us answer this question? The answer is hardly at all, partly because of the divergence of opinions they offer. Yet some of the points the critics have made do need to be taken into account, and I wish to list here the things on which I think they have some significant points to make.

There is a reasonable case for permitting some form of infant industry promotion, though not protection, in developing countries. There is a reasonable argument—indeed, an overwhelmingly powerful argument which they make—for higher-income countries to open their markets in favor of the exports from developing countries.

We need to be fully aware—and by now I think we are—of the risks of mismanaged liberalization of capital controls in getting the timing and sequencing of that liberalization right.

We must understand the risks that international institutions might be captured by special interests, as was unquestionably the case for the Agreement on Trade-Related Intellectual Property in the Uruguay Round.

We have to accept the case for international regime that deal with the provision of global public goods. Environment is an obvious example.

And we need to set the argument for international economic integration consistently and persistently together with those for sound public finance, macroeconomic stability, financial stability, adequate investment in education, health, and infrastructure, encouragement for innovation, and, above all, the rule of law. Integration is a good. It is necessary, but it is not sufficient for prosperity.

These are all legitimate concerns, but the most hysterical complaints of the critics of integration are nonsense. Transnational companies do not rule the world. Neither the WTO nor the IMF can force countries to do what they would very much prefer not to do, as I'm sure you know. Crises do not afflict sound financial systems. Global economic integration does not render states helpless, nor has it created unprecedented poverty and inequality. The critics represent the latest and least intellectually impressive of a long series of assaults on the market economy.

Now let me talk finally—and this is the very end of my presentation—on my main conclusions. What precisely should we be trying to do? What are the broad lessons I would draw from the experience I analyze in the book? And my suggestions come in what I called, presumptuously "Ten Commandments of Globalization."

First, the market economy is indeed the only arrangement capable of generating sustained increases in prosperity, providing the underpinnings of stable, liberal democracies, and giving individual human beings the opportunity to seek what they desire in life.

Second, individual states remain the locus of debate and the political debate and legitimacy. Supranational institutions must remember always that they gain their legitimacy and authority from the states that belong to them.

Third, it is in the interest of both states and their citizens to participate in international treaty-based regimes and institutions that deliver global public goods.

Fourth, such regimes do, however, need to be specific, focused, enforceable, and limited.

Fifth, of those regimes, the WTO, though enormously successful, has strayed far too far from its primary function of promoting trade liberalization and should be brought back firmly to that specific aim.

Sixth, there is a case for regimes covering investment and global competition, but it would be best to create such regimes among fewer countries and forego the attempt at universality, thus ensuring that they have reasonably high standards.

Seventh, it is in the long-run interest of countries to integrate into global financial markets, but they must do so carefully in full and proper understanding of the risks.

Eighth, in the absence of a global lender of last resort, it is necessary, as the Fund has been arguing, to have a specific and explicit system to coordinate and organize standstills and renegotiation of sovereign debt.

Ninth, though official development assistance is very far from a guarantee of successful development, the sums now provided are so small and the resources of some countries so inadequate that the case for increases in aid are, in my view, very strong. If we don't take the risk of expanding what we're doing on assistance, we are pretty well guaranteeing that a large part of the world will continue to fall ever further behind.

Tenth—and this is perhaps the most difficult—countries should always be allowed or almost always be allowed to learn from their own mistakes. But we also need the capacity, the will, and the wisdom to intervene where it is evident that states have permanently failed.

All these commandments matter, but the first two about markets and states are the most important. The view that states and markets are in opposition to one another has been the great error of the last century of thinking. It is the obverse of the truth. The world needs more globalization, not less. But it will only have more and better globalization if it has better states. We must recognize that inequality and persistent poverty are the consequence not of the limited integration of the world's economy, but of the nature of its political fragmentation. If we wish to make our world a better place, we must look not at the failures of the market economy but at the hypocrisy, greed, and stupidity, and worse, that so often mar our politics in both developing and developed countries.

Thank you very much.

[Applause.]

MR. RAJAN: Kristin Forbes has kindly agreed to discuss the book, and she has been at the Council of Economic Advisers since October, approximately the time I came here, and we have a joint pedigree, having done a Ph.D. from MIT. She graduated in 1998 and then has spent some time at MIT before coming here. She was the Deputy Assistant Secretary at the U.S. Treasury in charge of—it seems a strange combination—Quantitative Policy Analysis and Latin American and Caribbean Nations. She is a faculty research fellow at the NBER, and in 2003, she was named one of the Global Leaders for Tomorrow as part of the World Economic Forum at Davos.

Kristin Forbes.

MS. FORBES: Thank you.

When I was asked to participate in this session, I was actually halfway around the world in a hotel room in Beijing. And I opened my e-mail and had this invitation to participate in the session. I was simultaneously e-mailing someone at the office. I had just sent some documents. I was also simultaneously on my cell phone with a person in the office, and they had received the e-mail I sent almost imminently. And then just at the same time, to add another layer of communication, this person was about to fax me something which I was going to receive in my hotel room halfway around the world in a matter of minutes.

And then this e-mail arrived asking me to talk about globalization, and it made me stop for a minute and think how globalization has so fundamentally changed the world we live in. And we take it for granted. Before the e-mail, I wasn't even thinking about how remarkable it was that I was communicating with someone halfway around the world through three different modes of technology.

Globalization has just fundamentally changed how we do business, how we're integrated with different countries, how we can obtain information. And it has fundamentally shrunk the importance of distance and borders in terms of integrating the global economy. It's truly remarkable.

But at the same time, globalization, you can see how it creates apprehension and concern since it has so quickly changed the fundamental ways that we do business and the ways we interact. It's not surprising a number of people are very concerned about what's next and how globalization will affect their lives.

And so this book is truly very deserved and very timely in the sense that it addresses many of these concerns about how globalization is changing the world.

And so I just want to start with an initial thought, a thank you to Martin Wolf for writing this book. These concerns about globalization have grown into a very powerful anti-globalization movement, and this movement has collected quite a bit of support, it gets quite a bit of attention, and there's very vocal critics of globalization. And very few people have actually taken the time to defend globalization and to discuss the benefits and to address many of these concerns that the people in the anti-globalization movement bring up.

To be honest, I'm not sure why people haven't done a better job of defending globalization before this book. Maybe it's that economists are not particularly good communicators. Maybe it's because economists see it as so self-evident that globalization benefits people that they haven't seen the need to make the case and explain to people who are concerned that globalization may not have those benefits. So this book is long overdue, and I thank you, Martin, for making this case so cogently of the benefits of globalization and why it's important to move forward and not move back.

What I'll do in the next few minutes is first talk about what I think is particularly done well in this book; then talk about what I wish was done, a few things I wish were added to the book, or hopefully the next book; then talk about a few points that I would have done differently and a few disagreements with the book; then a few final thoughts.

So, first, what is done particularly well. It would be easy to stand up here and reiterate many of the arguments in the book and reiterate many of the arguments that Martin just made. But instead I will just talk big-picture about what I think the book does particularly well, and hopefully encourage you to read the book yourself.

Most important, this book is a superb defense of globalization. It pulls together a range of criticisms of globalization, and it clearly rebuts each of the invalid arguments one at a time. But it takes each argument seriously. It's not a blatant "No" to all the criticisms of globalization. He takes each argument very seriously, talks through the strengths and weaknesses, and he does give credence to some of the very valid concerns about globalization and the changes that globalization can bring and what we do need to worry about. So I think this is a superb, very comprehensive defense of globalization, which is also very balanced, which is rare in this literature.

There is an impressive breadth and diversity of topics and issues. He only touched on a small sample of them in his comments, but just to give you a sense of some of the different topics covered in the book, here's a few others.

He obviously talks quite a bit about the relationship between politics and economics, talks about the relationship between states and markets, talks about the history of economic growth and globalization. He talks about the different forces driving integration and holding it back. He talks about the theory of the firm. He talks about the inherent flaws in a planned economy. He talks about corruption. And then he even gets into details in some section, technical, statistical details, such as how differences in the household survey versus national income accounts affect poverty and inequality measures. So that's just a small sample. There's a huge range of issues touched on in this book, and I think this book will become a classic reference on globalization and related issues.

But I think Martin says it best in what this book does overall. It's not academic scholarship in the sense that it's not a technical, theoretical model of how the world works or how trade affects wages. Instead, it's persuasion. It takes a whole host of arguments, pulls together a whole host of literature, summarizes models, summarizes arguments, and just pulls it all together into one coherent whole, without resorting to some of the equations and theoretical models that many economists rely on. And he does it very well.

Which leads to the style of the book. He includes a whole—not only touches on a diversity of topics, but uses a whole range of approaches to address each of the topics. He pulls on not only economists but also historians, politicians, and philosophers. He has quotes from everyone from Adam Smith to Stan Fischer to Jean-Jacques Rousseau to John Locke to Vaclav Havel to Friedrich Hayek, just a whole host of sources he draws on, some of which, I'm embarrassed to admit, I haven't thought about since I was in college and had the luxury to study philosophy and psychology. But he pulls from all these sources into this book to make this coherent case for globalization.

And the book is just very well written. I'm sure you could gather that from Martin's comments, but it's delightful to read, especially for those of you who spend a lot of your time reading economics. Just to give you a sense of some of the fun he has with words, here are the titles of five of his major chapters: Incensed about Inequality, Traumatized by Trade, Cowed by Corporations, Sad about the State, and Fearful of Finance. And this is someone who clearly enjoys words and has fun with words to express vivid ideas.

But despite the fact it's very well written, he still does make extensive use of facts and references, so this book, again, will be a wonderful reference for anyone doing work in this area.

Now, I could easily compliment him all day, but now I'd like to go on to some differences of views, and in particular some things that I wish were covered in more depth in the book. I think the biggest area where I wish there was much more done was in his chapter Fearful of Finance. In this chapter, which is right at the end of the book, he spends quite a bit of time talking about the benefits of capital account liberalization and free movement of capital and integrating capital markets with the global economy. And this is an area where, of all the topics he covers, there's probably the most substantial disagreement among economists.

I do agree with his bottom line. His bottom line is that countries should liberalize, open up their economies to capital flows, but they do need to be aware of the risks. But he doesn't go into that in too much more detail. And there is, in particular, a number of areas where it would have been good to have a lot more detail, especially, I know, the IMF has spent a lot of time on these issues.

For example, he talks about the importance of sequencing the capital account liberalization, but then just mentions what's important early on is transparency in regulation, which I think everyone would agree on, but then doesn't address a lot of issues which many countries today are struggling with. For example, do you need to strengthen your banking system before opening up your capital account? Do you need to build derivatives markets and exchange markets before you open up your capital account? These are two issues that China is struggling with today—very important issues but aren't really touched on.

Similarly, he mentions that capital controls have costs, but there's been a lot of work recently done on how pervasive the costs of capital controls can be and on the differences between different types of capital controls—controls on inflows or outflows, again, something that's not really touched on.

In the chapter there's also a quick mention that a large accumulation of reserves is good. I think many countries would agree some reserves are good to help protect countries against financial flows. But Asia today has built up massive accumulation of reserves that some countries have hundreds of billions of dollars of reserves just sitting in the banks. Is this a good use of resources? How much is too much for reserves? Another very interesting question which isn't really touched on.

Also, the chapter mentions something which I know the IMF has done a lot of work on, and that's the very weak empirical evidence that capital account openness is good for growth. And there is a whole host of reasons why it's not surprising that empirical work looking at how capital account openness might be good for growth is very hard to prove empirically. There's just a list of some of the problems that these studies have to struggle with. But many people right off, since the empirical evidence isn't very good, claim that, therefore, capital account liberalization may not really be that good for growth, maybe it's not such an important goal for different countries. That's a very strong critique of the benefits of capital account liberalization, which really isn't, again, fully fleshed out.

And here I think it's useful to pull on some of the historical evidence with how trade might benefit growth. It took economists years to actually show empirically that trade is good for growth, something that now most economists take as fairly evident. And I think the empirical work showing if opening your capital accounts is good forth growth is in a similar stage. It's going to take a while to show this empirically.

Stan Fischer actually recently wrote on this in his Richard Ely lecture published in the AER. He wrote that, "With regard to empirical evidence on capital account liberalization, I believe we are roughly now where we were in the 1980s on current account liberalization. Some evidence is coming in, but at this stage it's weak and disputed." And this is a very interesting debate, very important to people who promote opening capital markets around the world, something I wish there was more discussion of in the book.

Another topic in this chapter on Fearful of Finance I would have liked to see much more discussion on is the Tobin tax. At the very, very end of this last major chapter in the book, it quickly mentions the Tobin tax is not a good idea. But I think this is something worth rebutting very carefully and hope you give as much weight to as some of the other criticisms which you have whole chapters on. Although many economists don't think the Tobin tax is a good idea, it is constantly being raised.

Just this week at the UN, there was another serious discussion of some sort of Tobin tax, which is a tax on financial transactions as a way to raise money to finance development and to fight global poverty and global hunger.

This is a discussion which the Tobin tax gets quite a bit of weight and quite a bit of discussion, and it's another aspect of globalization that merits very careful consideration and discussion.

Even at the IMF, there has been quite a bit of work on the Tobin tax, a nice paper by Habermeier and Kirilenko, who show that Tobin taxes have negative effects on price discovery, they make prices less than formative; Tobin taxes have negative effects on volatility, i.e., Tobin taxes raise volatility; Tobin taxes have negative effects on liquidity, i.e., reduce liquidity; Tobin taxes have negative effects on volume, i.e., reduce volume; so Tobin taxes reduce overall market efficiency and lead to a misallocation of resources.

These are the sorts of arguments I would have like to see laid out in much more detail on: What are the pros and cons of a Tobin tax? Should the anti-globalization movement be pushing for a Tobin tax to help address some of their concerns?

Another topic which I wish was addressed, although possibly it wasn't as big a public topic at the time he wrote the book, is outsourcing or off shoring. It would have been great to have a whole chapter on outsourcing. There's a long list of claims that have been raised by the anti-globalization movement on why outsourcing is bad and why we should be concerned. And it would be great to have all these claims addressed and have a serious discussion about whether these critiques are valid or not. You could include it as just an extension of the discussion of structural change in economies over time, how production has moved — [tape ends].

T1B — how outsourcing fits in that. I ideally would have enjoyed a stand-alone chapter, but hopefully in your next book.

Next, one thing I wish I had seen a little more of, especially in the half of the book which defends against the criticisms raised by the anti-globalization movement. You do an excellent job taking each of the criticisms one by one and defending against them, but I wish more often you would not only defend against the criticisms but then go on the offensive. Instead of just taking the criticism that already exist, then bring up some independent arguments, not only showing that the criticisms are flawed or valid, but bring in some other arguments that aren't even part of the anti-globalization debate.

One example is you have a very nice chapter talking about FDI, foreign direct investment, and the benefits of FDI. And there's a whole host of criticisms raised by the anti-globalization movement against FDI. You take each of these, defend them one by one, and in its defense, you often do raise some benefits of FDI.

For example, the anti-globalization movement argues that FDI means lower wages in other countries, and you show that, no, FDI actually often leads to higher wages, not lower. Then you talk about the critique that FDI often means worse working conditions in other countries, and you discuss the evidence suggesting that actually FDI leads to better working conditions.

But then it would have been great to go another step further and talk about the benefits of FDI, all those areas that the anti-globalization movement doesn't even talk about. For example, FDI can provide capital for investment, can provide access to advanced technology and skilled management for developing countries, can lead to increased tax revenues, can have spillovers that benefit domestic companies, can lead to address to international networks and local networks, can increase productivity—a long list of the benefits of FDI which you just ignored because you focused on just rebutting the criticism. And it would be nice to sometimes go one step further, go on the offensive.

Then, finally, something I struggle with in my current job in the White House, you raise a number of very important political problems with why it's hard to gain support for globalization. You do an excellent job suggesting discussing the problems, but I was still left wondering how can we solve these problems. And you do discuss the issue of fragmentation, but I would have loved some more concrete suggestions on how we can have politicians think about the good of the whole instead of just the good of their own district; or when you're talking about countries, how you can get countries to think about what's good for the world instead of just what's good for their country within their borders; or how can we have politicians think more about the long run when all they often care about is getting re-elected, which is a short-run issue. And many of the benefits of globalization do take many years to be felt, so how can we have politicians focus more on the long run instead of the short run?

Similarly, globalization, although there are often benefits later on, the transition before you can reap those benefits can be difficult. So what specifically can be done to help ease that transition to reap the benefits of globalization and thereby gain more political support? All things that are touched on, but I'm still left without a real coherent answer—probably because there isn't one, but some important issues.

Finally, what I would do differently, and I will admit I had to work very hard to find areas where I actually disagreed with anything in the book. I fundamentally agree with almost all of the arguments, but here are a few points of disagreement.

First, you have an excellent discussion of inequality and poverty, which you just touched on briefly at the end. You talk about how what's really important is reducing poverty around the world, that some people focus on inequality, but maybe it's not right to focus on just inequality per se. For example, if inequality increases, maybe that's not such a bad thing if inequality increases because everyone's getting better off, but the wealthy are getting better off slightly faster than the poor, who are also getting better off but just not at as rapid a rate. So it's important to break down why inequality is increasing. Also, as you mentioned, the importance of looking at differences in inequality across countries versus individuals.

But what I think is very important and left out of the discussion is mobility. For some countries, what is most important isn't necessarily what situation you're born into, but if you have the opportunity to work hard, get an education, and improve your well-being and move out of poverty to be middle class or upper class. And I think that's a very important distinction across countries: Is it a static situation of poverty and inequality, or is there mobility and people feel that they have the ability to improve their lifestyle? And that's critical to this debate.

One area where I did disagree a bit is you imply—though you didn't touch on it today—natural resources are a curse and you prefer a development strategy based on exports of labor-intensive manufactures. And this leads to a number of questions. What about comparative advantage? You can't have all the developing and emerging markets producing labor-intensive manufactures. That could be quite difficult. And is the problem really that countries have natural resources, or is the problem that they have weak institutions that leads to problems related to natural resources? Therefore, I'd rather have countries work on improving institutions and not necessarily say natural resources are a curse. And I think there's also many counter-examples which you do mention—the U.S., Australia, Canada, Norway, New Zealand, which have done very well starting their development heavily reliant on natural resources.

One just quick mention of something which jumped out at me of particular interest to the IMF. You do avoid talking about exchange rate regimes very much, another very controversial topic. You make one claim which I do agree with: Most, though not all, economists would now agree that the combination of more or less managed floating exchange rates, with some form of inflation targeting central bank, is the best policy for relatively large countries that are also relatively closed to trade or trade heavily with more than one currency bloc.

But then what probably a number of people would disagree with is small open countries, particularly those with flexible economies or with a dominant trading partner, do best to either adopt that currency—their own, or set up a currency board. Maybe a topic people can ask you about.

Finally, you have a very optimistic conclusion that protectionism will wane, and you went through the list of reasons why. I hope you're correct, but based on my job at the White House, I'm not so sure. We're now dealing with a rapid rise of large emerging markets that are affecting the global economy and creating quite a bit of dislocation and change. And even though we are now in this web of international agreements and although at least we in the White House are doing our best to enforce them, getting agreement through Congress to enforce them is another whole challenge.

So, finally, "globalization" is such a loaded word with so much connotation. I just propose maybe it's time to think about a new word so we can avoid some of the criticisms and misunderstandings you discuss in a book. We did some surveys in the administration, and it was amazing when you interviewed people, many people in the general public support protectionism, because everyone likes to be protected, it makes you feel safe. But almost everyone is opposed to isolationism, because no one wants to be isolated. But to many economists, those two words mean basically the same thing. But it does remind you how important word choice is and how much is tied up in the choice of words. And, unfortunately, that's happened to the word "globalization."

And, finally, you spend quite a bit of time in the book discussing the drivers of the anti-globalization movement. You focus on how some of it is driven by self-interest, such as steel companies wanting protection. But I think what comes clear in your book is what drives a lot of this movement is a misunderstanding. So your book has done—is a great accomplishment in directly addressing this misunderstanding, and hopefully thereby reducing some of the power behind this anti-globalization movement.

Thank you.

[Applause.]

MR. RAJAN: Let's turn it over to questions. Kristin, I wonder if you're an under worked, overpaid civil servant. I'm sure Martin would like to take you along as his personal discussant everywhere he goes.

[Laughter.]

MR. RAJAN: That was a wonderful discussion.

But let me turn it over to the audience for questions first, and then perhaps in answering those questions, maybe Martin can answer some of the questions that Kristin also raised. But I want to get some—if there are any critics of globalization here, let's hear you, because we've had a lot of praise for globalization so far. Maybe I shouldn't put you on the spot. Any questions here? Peter?

QUESTION: Are there pointed differences between you and Jagdish Bhagwati?

MR. WOLF: He would mainly criticize me on the same points as Kristin has done, but from the opposite point of view. In fact, the funny thing about today, I've been engaged purely by accident in two such discussions of the book. The other was at the Cato Institute, and the discussant there was Arvind Panagariya. And Arvind takes the Bhagwati view, that is to say, liberalization of capital controls is a profound mistake. So not only would he regard, he does regard—and Arvind has written this in the review of the book in Foreign Affairs—my position on this as anarchic neoliberalism. And Kristin, of course, is complaining that I'm not strong enough in defense of capital account liberalization. That's one difference.

The other difference with—the only other difference that we have is—there were two other differences perhaps. One is an attitudinal one. Jagdish wishes to be kind and cuddly towards NGOs, and I rather dislike them. This is an emotional thing. And the feeling is, I'm sure, mutual on their part.

[Laughter.]

MR. WOLF: So the tone of the book is somewhat different in that way, and I'm more of a liberal in the classical sense and he is more of a social democrat [inaudible].

The other thing is there is a definite different—a bit of a difference—oh, you have to go and we can share it ourselves?—on trade liberalization. They're a bit concerned with my discussion of the hypocrisy of developed countries on trade liberalization and fear that this will be—Arvind and Jagdish—that this will be used as sort of an excuse by developing countries not to liberalize themselves.

I re-examined my chapter, and perhaps there are a few sentences I might have changed, but I don't think that's really a fantastically big difference. I think the hypocrisy is obvious, and I think it is—the chapter does still have a pretty big discussion of the costs of developing country protectionism.

Can I just add one thing on what Kristin said, which is an absolutely marvelous example of a superb discussant, a wonderful discussant, and it reminds me of the famous comment of somebody on a book manuscript. The person starts by saying, "You know, this book is much too long and you really must cut it. And the problem is there are at least ten topics you haven't included."

[Laughter.]

MR. WOLF: So there is a reason—the reason I didn't include all these wonderful topics is actually terribly simple, as is so often the case in life. I contracted with my publishers to write a book of 80,000 words, and by the time I had finished—and leave aside entirely the 20,000 or 30,000 words of footnotes and reference—it was 130,000 words, and I thought that was enough. And if I had written the chapter that you rightly say should be written on finance and rightly say that should be written on the politics of trade liberalization, that would have actually added, at the rate I was going, another 20,000 to 30,000 words. And I thought it was enough.

So I'm very, very happy to leave you the task of writing that book. It is also quite clear that you are better qualified to do so.

One final thing. There was only my wife—who's not an economist but an academic, and is very interested in reading and is the only person who read the whole book in manuscript—told me—and she's a non-economist—there was only one chapter she wished I hadn't written at all because it was so boring, and that was the chapter on finance.

[Laughter.]

MR. RAJAN: Okay. Could you speak into the mike when you ask your question?

QUESTION: I also regretted the absence of a discussant from the other side that would actually, you know, defend some of the critiques of globalization. And I certainly wouldn't characterize myself as one of the anti-globalization movement, but I would like to kind of channel them today, if I might.

One thing that Oxfam has said, for example, is that they're all in favor of free trade, but the reality is that many of the industrialized or developed nations do not practice it, that they have closed, for example, imports of steel and citrus and textiles and so forth, and the current administration here in the U.S. also had some issues in that regard.

The second thing they might mention is, you know, you're advocating free movement of capital, but yet there's no free movement of labor. And, in fact, there are increasing restrictions to immigration, and there are also problems with unionization or organization of labor in many of the developing or emerging countries. So that also precludes their ability to negotiate higher wages and so forth.

The third issue they probably would mention is the issue of outsourcing, which, as Kristin mentioned, is very much in the debate nowadays, and especially in terms of highly skilled jobs that are now being outsourced, you know, to India and to China and so forth. And I don't know if you would care to expand on your comments on that issue.

And, finally, I confess I haven't read the book so I'm kind of at a disadvantage, but also many of the critiques of free trade administrations expand on the issue of environment and the possible environmental consequences of some of the free trade agreements. For example, they mention the case of NAFTA and the maquiladora industry on the border. So I don't know if you would care to comment on that as well.

Thank you.

MR. WOLF: All but one of those topics is discussed at some length in the book, and I think in all those cases fairly carefully.

First of all, I actually agree with the Oxfam critique, and I cite it at length. There's a very long section on—in fact, I just mentioned it—the hypocrisy problem. I don't think—I do argue and would argue, of course, that the trade barriers of others are necessarily—indeed, they're probably almost never a good reason for being protectionist oneself. The famous quote on that, which I think I cite, is a quote by that famous left-winger, Joan Robinson—you probably know it—which is if other people throw rocks into their harbors, it's not a good reason for you to throw rocks into your own as well. And the argument is pretty clear.

But it is a very real problem, and I do make a very strong argument for the liberalization of the trade barriers of developed countries in their own interests and in the interest of development.

Unfortunately, on balance, the globalization movement, anti-globalization movement in Oxfam is a distinguished exception, that on balance the anti-globalization movement in developed countries has been protectionist, not liberalizing. Indeed, it's one of the ways in which the anti-globalization movement, so-called—sometimes they call themselves the global justice movement. It doesn't matter really. The movement is deeply split and Oxfam is a distinguished exception.

On the environment, I discuss that at great length, and I just basically make the pretty obvious point that if you wanted to construct an efficient environmental regime, protectionism wouldn't even be your tenth best policy instrument. In fact, it's pretty clear—and I discuss that at great length—that under many plausible, indeed, live actual situations, protectionism makes environmental problems worse and liberalization makes them better. But, in general, the point is quite clear. The problem is a byproduct of the failure to internalize costs, internalize externalities. What you need to do is to have regimes that do that. That's a very, very tricky thing to do. I don't deny that. But it has really nothing to do with trade liberalization either way.

On balance, I argue, in and of itself trade liberalization is more likely to improve the environment than not. But there could be conditions in which it doesn't. But I discuss that at great length.

The free movement of capital and labor is a very important point which I discuss—of labor, I discuss at great length. And, in fact, I make the point that one of the most obvious respects in which the world is not as integrated as it was—in which it is not unprecedented integrated is, in fact, exactly in this area. The labor market is clearly more segmented than it was before.

Now, I take this to be a byproduct of the thing I talked about in my speech, namely, that we have divided our world into sovereign states. A sovereign state simply consists in essence of a territory and a people attached to it. Even if they move more than they did, still overwhelmingly people remain in their own country. The number of migrants in the world as a whole is quite small. Only about 3 percent of the world's population is living outside its country of origin.

So we have divided the world into states, for better or worse. I simply say that's a reality. I take it as a reality. It's a huge problem, but it's a reality. But we know as economists that there's more than one way to skin a cat, and if labor is fixed or semi-fixed, free trade, free capital movements, and free movement of knowledge are substitutes. So that's one good reason for being in favor of the others.

The labor unions, well, I won't go into that. I do discuss that at length. The only issue that I don't go into—and that is for a very interesting reason, and Kristin mentioned it as well—the outsourcing debate is that at the time I finished this book, which is now well over a year ago, this was not a big issue. The literature on that had just started to explode at about that time. And so basically I would have had to start again. And in this situation it's better to finish the book than not.

As a matter of what I think the outsourcing debate is really about, it's very simple. The outsourcing debate is about the fact that somewhat more of our economy than before is becoming tradable. There's nothing new about that. It's consistent with—it's just another way of saying that transport costs are falling. In and of itself, one would expect falls in transport costs and increased tradability of GDP to make people better off. So I don't think it changes the arguments fundamentally in any way. But the detailed empirics of this is something that economists, I think, are only beginning to come to grips with, only the sort of very early papers on this, and it would be quite difficult to do a rigorous discussion of it on the basis of the evidence so far, but the underlying theory I think is pretty clear.

MR. RAJAN: Let me take the privilege of chairing this session to ask a question just on what you said. There is one sense in which outsourcing is changing the debate because there are far more jobs being put at risk because of this technological change, and that's creating a change in the political constituencies in countries like the United States that support trade. So the non-traded jobs, the accountants, the doctors, the economists, used to support free trade very strongly because it benefited from the lower goods prices but didn't face the risks. And I think this changed the political equilibrium somewhat.

Now, certainly it is the same pattern of transaction costs falling, but it's falling in a dramatic way and, therefore, may change the constituencies more, and especially this vocal constituency, which used to be vocally for free trade in the past. I think if you look at surveys, the surveys show that this particular constituency is much affected and its opinion has changed considerably in the last few years.

More questions? The person in the blue shirt first.

QUESTION: I'd like to take you to two points that you made, one at the beginning and one at the end, Martin. The point that you started out on when you said that you thought one of the greatest challenges before us all was the connection between the pursuit of economic prosperity on the one hand and the increase in the provision of public social goods. No doubt you meant both breadth and depth.

And then near the end you—and I think quite rightly—focused on the necessity of states to take on the brunt of the responsibility for many of the things that you were talking about, but I took that to be including the challenge that you outlined at the beginning.

My question is this: When you are faced with a situation where some states, or indeed a lot of states are not able to produce one or other of those arms, either the growth in economic prosperity but perhaps more for my interest, not able to provide public social goods, what role do you think should and ought—should and could be played by supranational organizations and indeed, in particular, economically based ones as opposed to the socially based, the UN, the ILO, et cetera?

Thanks.

MR. WOLF: What responsibility—let me make sure I understand it. What responsibility does the IMF have to ensure that the social welfare of the countries that it is dealing with is protected and preserved? Is that what your—okay. Let's get—none of this evasion and political correctness. Let's get down to it.

Well, I won't get into all aspects of this, but I did stress it in my talk, and it is where my books ends, and it does seem to me the big issue. One of the major parts of my book—which, again, because of the outsourcing debate, may now come under attack—is the argument that at least in developed countries, I am deeply unpersuaded by the proposition that globalization means any significant erosion of their capacity to continue to provide what their peoples regard as reasonable levels of social welfare spending. To my surprise—but I think the evidence is pretty strong; I'd be interested in Peter's view on this—the fear is that globalization would necessarily lead to significant erosions of the tax base and so forth seemed to me to be wrong, and wrong, I think, for quite powerful and durable reasons, which may, of course, turn out to be wrong, false. So I think for the developed countries this is not the sort of problem that it is often alleged to be, and that is an important chapter of the book.

In developing countries, the problem is more severe, partly because capital flight tends to be a more severe problem, partly because tax regimes are weaker and, above all, because they're simply so desperately poor.

Now, I don't think—I'm not going to get into the sort of question of the sort of old debates on how far IMF conditionality should or should not seek to protect particular expenditures and the nature of the discussions between the IMF and governments at the time of crises and budgetary stringency which seek to protect particular expenditures, because I think the difficulty that you raise is more profound and more long term. It's not related to crisis situations.

The reality, as I've suggested, is this: If you believe that the capacity of individuals and of societies to generate prosperity depends in very profound ways on the education levels and health of the population, the infrastructure of the country, the quality of its legal and other institutions and services, then very bad conditions breed very bad conditions over long periods. You get deep, embedded, sort of vicious spirals. And the big problem is pretty obvious, that in large parts of the world, that's where we are. How do you change that?

I threw this out as a challenge because I don't honestly know the answer to it. And the reason it's a challenge is multiple. First, the resources, where are they to come from? Aid? Is that it? Second, how in precisely these situations do you ensure these resources are properly used? How do you ensure that institutions through which you want to use these resources operate in a reasonably effective way? Frank Fukiyama has just got a new book out on this state-building question, nation-building question, which is very, very good and comes to pretty pessimistic conclusions.

The honest answer—I am going to be completely honest—is I don't think we have an answer. And because we don't have an answer at the world level, we are going to get quite certainly ever increasing problems. And the dilemma derives from the existing conditions of massive inequality, as I said, among states and in their resources, and the cumulative problems that creates, along with our acceptance of the fundamental primacy of the sovereign state, which is, I think a deep, deep condition of our global order. And the basic truth is this doesn't look to me like a very workable combination.

But I don't think we have an easy way out of it. I don't believe that the World Bank, which is predominantly responsible for this sort of thing, knows what to do about it. Our attempts at rescuing, quote-unquote, failed states or failing states have been pretty well uniformly unsuccessful. It's a huge mess, and it's the biggest mess. But if the book does no more than make people shift from what I think is a non-problem, namely, the way international integration works, to what is a real problem, namely, this, then I personally will feel quite happy.

QUESTION: You support foreign aid. Of course, we are all supposed to be kind. But the problem is the econometric or statistical studies of foreign aid are not terribly encouraging. We've seen the work by David Dollar, there's the big piece by Easterly in the Journal of Economic Perspectives last summer, and there's a new one in the Southern Economic Journal that most recently arrived, a big econometric treatment, that show that foreign aid does not accelerate growth; and to the extent that there's any relationship between receipts of foreign aid and growth, it's inverse, that foreign aid pays countries to fail and, therefore, they don't feel much reason to cease to fail. We've all seen cases like Tanzania under Mr. Nyerere where because he got all that foreign aid, miserable policies were kept in place, where without the foreign aid they would have fallen apart of their own weight far sooner.

It's pretty hard to get people to agree to pay a lot of taxes for foreign aid when the statistics and econometrics come out that way.

MR. WOLF: I was with you until the last sentence in the sense that I think there are also some reasons why it may be difficult to get people to pay taxes for foreign aid. But I cannot believe that even in this highly educated country it's because of the citizens' awareness of the results of the econometric equations.

[Laughter.]

MR. WOLF: I'm being a bit unfair. I apologize for that. And I also would stress, of course, that the amount that—though the United States bears many burdens, the foreign aid budget is not a large component in the nearer term in the budget, as you know. I think it's running at about 0.1 percent of GDP. You can correct me if that's wrong, but it isn't far off.

My reading of the—I don't discuss the aid at length. If, in fact, somebody other than Kristin had been my discussant, that person would have certainly said, "Why didn't you discuss aid more and say how we can solve that problem?" And, indeed, in my book I say quite clearly that one of the reasons I left the World Bank is that I became very convinced of the critique you make.

I think my reading of the literature on this, which is not completely up-to-date—I'm not up-to-date as of the last year—is that there is some reason to believe that aid can work in reasonably good circumstances, and it's certainly clear, even from my own personal experience, that there are lots of heavily aided countries which actually grew very well. The Republic of Korea is a very striking example.

I can remember a time when I was at the World Bank, Spain was a recipient of World Bank money. It does seem to have survived the experience somehow.

So I would be a little less pessimistic. If multilateral institutions or aid donors can be reasonably discriminating in their granting of aid, I think it can help because—and it isn't, I think, almost uniformly corrupting. It's like the famous argument—the famous point is that the fact that all insurance creates moral hazard doesn't mean—isn't a reason why we would close down the insurance industry. And, similarly, the fact that people have fire stations isn't a sufficient—and therefore encourages people to be a little sloppy about fires isn't a sufficient reason to close down the fire stations.

So I would be happy to have—I think there is a case for considering it. But there is a deeper point to make, which comes back to the previous question, which is this: If you assume that the only cases in which aid is likely to be a help in countries with tolerable institutions and tolerable governments which roughly know what they're doing and reasonable policies, which is, I think, the strongest case you can make, that happens to leave out all the really interesting disasters. And so what do you do about the Congo? Because it clearly doesn't meet these criteria.

The conclusion of your position, with which I don't disagree, is in essence that we are going to live for the definite future in a world characterized by desperate poverty and with the poverty problem almost certainly getting worse again, and all the social—global social problems that that will create. It's a very, very uncomfortable position we end up in.

QUESTION: I'd like to ask you, Martin, are you familiar with the ILO's new study on the social dimension of globalization?

MR. WOLF: I wrote a column about it.

QUESTIONER (Continued): Yes. What's your view on the critics in that document?

MR. WOLF: I would recommend you read my column. I have to say—how do I put this gently? I was astonished that a significant economist like Joe Stiglitz put his signature to it. I don't think I'm going to say any more.

It does address why I think it's really a very sloppy piece of work, and perhaps part of it—it's a little thing—is this exclusion notion. I just don't think it's a helpful way of thinking about what's going on.

COMMENT FROM AUDIENCE: I would also like to second what the gentleman said earlier, that it would have been interesting to have a speaker from the other side, or a discussant who would have pointed out, you know, with a bit more fervor what the critiques of globalization were. I'm not one of those people, so I'm not going to do that.

But we have an opportunity where you're flanked by the chief economist of the IMF and someone from the U.S. Treasury to take on the three questions that you raise as the valid criticisms of globalization, which are that the rich should open their borders, that there is the (?) of a lead capture of the international financial institutions, and that the sequencing of liberalization, in particular capital accounts, is something that needs to be thought about hard and designed properly. So I'd like to know what the IMF and the Treasury are doing about this, and then I'd like to hear from Martin as to whether this would be enough to satisfy the anti-globalizers or not.

MR. RAJAN: Well, we're trying not to be captured by the elite.

[Laughter.]

MR. RAJAN: Seriously, I think there is a lot of debate about governance reform in the IMF, and I think it's an ongoing debate. And I think there is a very serious question if the international institutions—not just the IMF, but the UN, the OECD and so on—do not undertake appropriate governance reform, whether they will continue to be relevant in a world where the power distribution, the economic power distribution, as well as the political power distribution, has changed. So I think this is a question that many organizations are facing and are doing their best to react to.

The issue of sequencing of liberalization, I think that is an issue we are paying a lot of attention to. We certainly recognize some of the dangers of uncontrolled liberalization. However, I wouldn't go as far as many economists seem to have gone and seem to write off financial sector liberalization or capital account liberalization completely, because I think that there are benefits there that, as Kristin said, we still have to document this much better, but I think at this point it's a debate without strong evidence on either side.

We do know that uncontrolled liberalization without building appropriate institutions, at least some modicum of institutions, can be dangerous. But at the same time, you have to recognize the opposite problem, which is if you don't liberalize, is there pressure to build those institutions, or do you have a permanent state of status in the institutional framework?

So, again, there we are certainly paying more attention, and we are doing a lot of study, and we have changed our advice from what it used to be in the past. The IMF is a learning institution.

Kristin?

MS. FORBES: First, just to clarify, I'm actually at the White House. I started at the Treasury years ago. But, in any case, a couple of the topics which you raised are actually things which we have thought about and written about in the Economic Report of the President last year. There is a whole chapter on moving towards free trade where we do talk about the progress being made and the White House is acting very aggressively to open markets abroad and in the U.S. in areas that have not been liberalized in the past. In particular, we've been working very hard to have progress in the Doha development round, which would include liberalization of agriculture, to some degree, which is discussed, and also all around liberalization, including more liberalization in services and other areas.

We also have a chapter in the report where we do discuss movement toward free capital flows and opening up capital accounts, and our approach is that in the longer term it is certainly in the countries' best interests to move towards the free movement of capital and open up their capital accounts. Getting there is obviously the tricky part. There are risks as you open up your capital account, and it gets into a lot of technical details of how you best manage those risks. And some of the steps are strengthening your banking system, strengthening institutions, improved transparency, improved prudential regulation, monitoring currency mismatches—a long list of issues. But it's a very important topic, and we certainly don't have the last word, either. We can raise a lot of important issues, but as Raghu said, it's something we're all still really learning about, but certainly focusing on.

With that, Martin?

MR. WOLF: Is this adequate? We've learned a lot. Unfortunately, we've learned a lot at the expense of other people, poor people on the whole. So I actually do think the '90s were a pretty dismal period in this regard, and it was a comprehensive failure of the major institutions, of which the IMF was no doubt a part, and I discuss that in the book.

I happen to come to the view that the IMF has a legitimate role. I'm not one of those people that propose its abolition because it's very existence creates moral hazards, and as I said, I regard moral hazard as something one has to live with.

I think it's perfectly obviously that its governance is going to have to change. Its present governance arrangements and particularly the voting weights in the IMF Board are ludicrous. There's no other word for it. And, clearly, and above all, the role of Europe is far too large. The historic role of Europe in choosing the MD is absurd. The same, of course, applies to the World Bank. The situation in which the Americans and the Europeans can carve up the world is at an end. And I presume sooner or later—in fact, later, by which I mean at least 20 years too late, even the Europeans and Americans will realize this. The point will no doubt be when the Chinese and Indians come together and say, "You want to appoint X as MD? Over our dead body. Goodbye." And so that will change.

On the really big question, I think this financial liberalization question is very important. The point I made and where I think probably Kristin and I agree is that if you look at India and China—take India and China. It is pretty obvious to anyone—China is the most egregious case of this—that the growth of the country and the welfare of this country is being significantly impaired by really grotesque misallocations of resources going through the financial system. And part of the reason for that is the fact that it is a sealed system and, therefore, a politically manipulated system. And I think the same is true, though to a lesser extent, in India.

One of the most astonishing things about the United States is how much growth this very rich country is able to get with such a low investment rate. And one of the reasons for that must be simply that the financial system is so effective. As I joked in the conference I just attended, the really astonishing thing about China is, given how poor it is, how much labor and highly mobile labor it is, and the fact that it's investing 45 percent of GDP, what's astonishing is how terribly low its growth rate is. It's ludicrously low. And I'm not joking. This is absolutely seriously. So getting the financial system to work is essential, and I have come to the view exactly as was said here, that if you leave an inward-looking, protected, classic developing country banking system exploited and manipulated by governments and by a few favored industrial interests, you cannot get a good financial system.

And so it does have to be opened, and they have to know they're going to be opened, and then they will have to fix it. But I would like it to happen in such a way that you don't generate these monstrous crises in the process if you can avoid them. But I have really no doubt, though I didn't present all the evidence, that this is a direction that countries should be trying to go, and you can see that in some cases developing countries have created pretty decent financial systems. Hong Kong and Singapore were, after all, developing countries. And they've done pretty well with it.

So I think the IMF's present path is the right one. All power to them.

MR. RAJAN: Well, on that kind note, we shall call this meeting to a close.

[Laughter.]

MR. RAJAN: Martin will be signing books back there, outside, and, again, thank you very much for coming. Let's give both participants a hand.

[Applause.]