Globalization and Its Discontents: Navigating the Dangers of a Tangled World

Richard N. Haass and Robert Litan

From Foreign Affairs, May/June 1998

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Summary:  The crises of globalization will be solved by neither a super-IMF nor an unfettered market. Herewith, a third way.

Richard N. Haass, Director of the Program in Foreign Policy Studies at the Brookings Institution, is the author of "The Reluctant Sheriff: The United States after the Cold War." Robert E. Litan, Director of Brookings' Program in Economic Studies, is co-author of "Globaphobia: Confronting Fears about Open Trade."

The period immediately following the Second World War, which produced the Marshall Plan, NATO, and the U.S.-Japan security treaty, is rightly regarded as foreign policy's golden era. But it also saw the birth of comparably successful economic institutions -- such as the International Monetary Fund, the World Bank, the General Agreement on Tariffs and Trade -- designed to promote long-term prosperity through stable exchange rates, worldwide development, and open trade. Today these institutions are increasingly subject to criticism. The IMF, for instance, has come under attack for imposing drastic conditions in its "rescues" of Mexico in 1995 and Asia today. The World Trade Organization, formed in 1995 as the result of American calls for a body to resolve market-access disputes, has been attacked in this country for usurping America's sovereignty. And doubts abound about the role of development banks in an era of massive direct foreign investment.

The gap between the legacy of Bretton Woods and the economic and political demands of the modern world is growing. Much of this change is driven by rapid advances in, and thus lower costs of, communications, information flows, and travel. Official policy, much of it American, has played its part by reducing barriers to the movement of goods and capital across national boundaries. The result has been more intrusive and intense economic interaction -- including the explosive growth of world capital markets, which led to the demise of fixed exchange rates -- between a large and growing number of entities outside government control, a phenomenon that has come to be called "globalization."

But globalization has its problems. In some quarters it is seen as having caused the rapid flows of investment that moved in and out of countries as investor sentiment changed and were behind the Mexican and Asian financial crises. In the United States it is blamed for job losses, increasing income inequality, and stagnant or deteriorating real wages. Domestic discontent with globalization thwarted the passage last year of legislation that would have granted the president "fast track" authority to negotiate trade arrangements that Congress could not modify.

Globalization has become a target. Its dangers must be navigated successfully or the United States and others may be compelled to backtrack, diminishing the free movement of goods, services, and capital, which would result in slower growth, less technological innovation, and lower living standards.

FREE-MARKET FOREIGN POLICY?

In this new world, poor economic policymaking, corrupt banking practices, dishonest accounting, and unrealistic currency alignments can have an impact on societies far removed. Although the United States, with its vast internal market, is considerably less "globalized" than other industrialized countries, millions of American jobs and billions of dollars are tied to economic developments elsewhere.

If there is consensus on the diagnosis, there is none on the prescription. There are at least three fundamentally different approaches to addressing the problems of the global economy.

The first embraces the free market and would abandon IMF-like rescue packages. It is motivated by the belief that the IMF ...

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