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Issue Date:  August 13, 2004

By Amy Chua
Doubleday, 256 pages, $26
By Joseph E. Stiglitz
W.W. Norton & Company, 304 pages, $15.95
The perils and promise of globalization


Capitalism has produced amounts of goods and services unprecedented in history. It has also proceeded unevenly. For example, the capitalist system has developed both North America and South America, but one more so than the other. Certain countries and regions became dynamic centers of development while others stagnated on the periphery. Then the process shifted, and once-growing areas stagnated and stagnant ones developed. Development has proceeded cyclically through booms and busts in each country and region.

One of the great economists of the 20th century, Joseph Schumpeter, captures this dynamic process in his concept of Creative Destruction: “The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates. … [These developments] incessantly revolutionize the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

The price of this creation of new products, new jobs, new technologies and new industries is the destruction of the old products, jobs, technologies and industries. Globalization is the spread of capitalist, Western-style economies across the world, with the consequence that indigenous economies and cultures are sometimes overcome by the new system.

In both industrial and poor countries, the creative-destructive process of globalization has created sociopolitical tensions both because of its uneven nature and because of its challenge to traditional values and ways of life. Today this is true particularly in countries with strong Islamic roots and in countries where readily identifiable minorities control the wealth of the society.

Amy Chua’s World on Fire argues that in much of the world, ethnic minorities dominate their respective economies: Chinese in Southeast Asia, East Indians and Europeans in Africa and Spanish descendants in Latin America. One of the main points of Chua’s book is that exporting Western democratic and capitalistic models is not necessary and may even be catastrophic.

Expanded free markets resulting from globalization exacerbate the ethnic disparities in wealth and income, says Chua, resulting in increased social and political instability. In this setting, democracy can become the vehicle for a huge ethnic backlash from the dominated majority, led by demagogues preaching revenge. For example, in Indonesia, indigenous people rose up against the wealthy Chinese elite who controlled the market. During the violence, “terrified Chinese shop owners huddled behind locked doors while screaming Muslim mobs smashed windows, looted shops and gang-raped over 150 women, almost all of them ethnic Chinese.”

Chua, a professor at Yale Law School, was writing World on Fire when the 9/11 terrorist attacks occurred in the United States. In explaining the number of people in poor nations who rejoiced at the attacks, she writes, “The attack on America was an act of revenge directly analogous to the bloody confiscations of white land in Zimbabwe, or the anti-Chinese riots and looting in Indonesia fueled by the same feelings of envy, grievance, inferiority, powerlessness and humiliation.” Even individual countries like the United States can be seen as these “dominant minorities.”

World on Fire is fascinating reading, though depressing, and should be carefully considered by American policy makers.

There are several trends in the world economy suggesting that national economies are polarizing rather than growing closer together. The following seven trends pose a serious challenge to policymakers:

  • Taken as a whole, the world economy is growing too slowly to generate sufficient employment with adequate pay or to alleviate poverty.
  • This has accentuated longstanding tendencies for divergence between developed and developing countries. Moreover, greater gaps between them have been accompanied by widening gaps within the South as a handful of newly industrialized economies have pushed ahead of other developing countries.
  • Finance has been gaining an upper hand over industry, and renters over investors. Trading in existing assets is often a much more lucrative business than creating wealth through new investment.
  • Capital has gained in comparison with labor, and profit shares have risen in developed and developing countries alike.
  • Growing wage inequality between skilled and unskilled labor is becoming a global problem.
  • The hollowing out of the middle class has become a prominent feature of income distribution in many countries.
  • There is almost everywhere increased job and income insecurity.

Some of these trends may be only temporary dislocations associated with a rapid shift toward market forces and globalization. But if these trends continue, there is risk of serious political backlash. Experience shows that growing inequality under conditions of stagnant or slow economic growth leads to socio-political instability. The challenge to policymakers is to keep the destructive forces of capitalist development from overwhelming the creative forces.

A simple-minded policy of free markets and free elections may not advance the welfare of the poor in the world. It must be remembered that the Western world did not develop that way. Development was slow, spread over more than a century. Democracy was limited for a long time, and countervailing policies were enacted to curb the divisive effects of growing inequality.

This is the theme of Joseph Stiglitz’s Globalization and Its Discontents. He argues that globalization has the potential to make poor nations better off, but only if proper policies are used and if each country’s history, culture and economy are taken into account. Poorly designed policies will increase instability and vulnerability to external shocks, reduce economic growth and increase poverty.

Stiglitz served for four years on President Clinton’s Council of Economic Advisors and then three years as chief economist and senior vice president of the World Bank. In his book, he explains the workings of the International Monetary Fund, the World Bank and the World Trade Organization, calling for them to operate transparently and responsibly toward the world’s poor in order to make globalization a positive force in the world. During his time at the World Bank, Stiglitz writes, “Decisions were made on the basis of what seemed a curious blend of ideology and bad economics, dogma that sometimes seemed to be thinly veiling special interests. … Open, frank discussion was discouraged -- there was no room for it.”

The key problem is that globalization policies have not been carefully prepared, nor have they been fair. In fact, they have been wrong-headed, incorporating an insistence upon free market ideology, resulting in a too-rapid implementation of liberalization. The outcome has been increased destitution and social conflict in many poor nations. Stiglitz focuses on failures of International Monetary Fund policies as evidence for his argument. Much of what he argues makes sense. Sometimes his rhetoric is overkill and he fails to distinguish nuances of policy differences when he lumps together economists who, in fact, hold different policies.

However, though he can be critical of its policies, Stiglitz is not against globalization. He says, “Those who vilify globalization too often overlook its benefits,” and goes on to explain how globalization and foreign aid have improved the living standards of millions around the world.

The ambitious agenda of domestic and international economic policies proposed by Stiglitz requires good intentions, clear analysis of the issues and sustained carry-through. All are in short supply in an international economy driven by national self-interest. Even more difficult is the problem presented by Chua. The present style of globalization threatens to generate a whirlwind of political backlash. We need to heed the warning given by James Weaver, economist, Church of Christ minister and social activist, in a talk titled “Globalization With a Human Face:

“I have wondered about which human face represents the globalization system of the future. There are many candidates. One can see the face of John Maynard Keynes at Bretton Woods, N.H., in 1944 working to create a new international political economic order that would prevent another Great Depression and world war. One can see the face of a woman in Vietnam who has gotten a job in a Nike shoe factory. One can see the face of Jody Williams and the [nongovernmental organizations] who got most nations in the world to sign a treaty to ban the use of land mines. One can see the face of an autoworker protesting in Seattle because he lost his job when his factory relocated to Mexico. One can see the face of an AIDS patient in South Africa. One can see the face of Osama bin Laden.”

Charles K. Wilber is emeritus professor of economics at the University of Notre Dame and a fellow at the university’s Kroc Institute for International Peace Studies.

National Catholic Reporter, August 13, 2004

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