Why Globalization Works

Martin Wolf
New Haven, Conn.: Yale University Press, 2004, 398 pp.
Martin Wolf, chief economics commentator at the Financial Times, is
a brilliant journalist and an able economist. Why Globalization Works is
an excellent example of the author’s capacity for examination and analy-
sis. The book is based on a series of articles on globalization that origi-
nally appeared in the FT, and on his Hayek Memorial Lecture to the
Institute of Economic Affairs in London.
Wolf presents a detailed reply to the main arguments proffered by the
forces opposed to globalization, and demonstrates conclusively its advan-
tages—historically, and both in theory and in practice—over all alterna-
tive systems. He presents a splendid survey of the literature about this
topic. He holds not only that globalization works, but also that it is
needed if we are to aspire to extend prosperity and freedom to the whole
planet. His presentation is sophisticated, complete, and comes out
roundly in favor of globalization. It is the best analysis of the subject yet:
a passionate voyage across one of the most vital aspects of cultural, social,
political, and economic life at the start of the 21st century.
Wolf is convinced that the market is undeniably the most powerful
vehicle ever to exist for raising living standards. From this premise, he
analyzes the debacle of the collectivist experiments of the 20th century—
nationalism, communism, fascism—and their profound negative effect
on the wealth and freedom of nations. In the same way, he testifies to the
demise of light collectivism, which was based on the preachings of

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Keynes and was practiced in many states from the end of the Second
World War until the crises of the mid-1970s. The collapse of central
planning was not brought about by the work of a group of fanatical liberal
thinkers; it was a logical result of the inherent contradictions of the
collectivist model, particularly its inability to build viable economic sys-
tems and raise per capita incomes, and its failure to promote democracy.
Wolf ’s critique is rooted in the thinking of Hayek and Mises, with an
emphasis on the insurmountable restrictions on the flow of information
that are inherent to all statist models for running complex societies.
Within this framework, Why Globalization Works is also a cold, ratio-
nal, and convincing defense of classical liberal values. The relationship
between the market economy and individual rights constitutes the base
of all liberal democratic systems; its underpinnings are both ethical and
practical. The survival of such a complex and fragile system of social
organization demands a strong state (an idea drawing on scholars from
Adam Smith to Douglass North), but one which limits its functions to
three areas: first, the provision of public goods (those that markets cannot
provide); second, the internalization of externalities, which can also be
thought of as providing remedies for market failure; and third, to help
people who, for a number of reasons, do worse from the market or are
more vulnerable to what happens within it than society finds tolerable.
Apart from the classic function of the state—the protection of property
rights—Wolf argues that the second and the third have a “facilitating”
role in the Mill sense of the word; in other words, they must be the
subject of constant review, and must be updated, eliminated, or reduced
if the market develops its own solutions. (There is, of course, the question
of whether the provision of certain services by the state determines
whether or not alternative sources of private provision arise, but that is a
separate matter.)
Wolf gives ample evidence to back up his arguments, and his analysis
of the last century and a half is illuminating. He provides an overwhelm-
ing theoretical and practical case to show that movement toward a freer,
more open, and integrated world economy from the middle of the 19th
century to the First World War fostered an unprecedented period of
peace and economic growth. This was the “Golden Age of security and
freedom” so lauded by Stefan Zweig. It is true that this first wave of
globalization was restricted essentially to those states that now make up
the OECD, and therefore had less impact than the current wave. But in
several aspects it was more intense. Specifically, it resulted in massive
migratory flows. Between 1850 and 1914, 60 million people left Europe
for America, Oceania, and the south and east of Africa. Twelve million
Chinese and six million Japanese emigrated from Asia. Until the First
World War, governments operated relatively few restrictions on immi-
gration. This was the determining factor behind the convergence in real
incomes that took place over this period.
After a long upswing of liberalism in the 19th century, there was a
pronounced reaction that began in the 1870s and reached its zenith in the

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first half of the 20th century. The combination of collectivist ideas, pro-
tectionist interests, war, monetary disorder, and economic crises had
converged to discredit the assumptions, beliefs, policies, and practices
that had underpinned the liberal economic regime. Laissez-faire capital-
ism seemed to have ended. The great powers created economic systems
that reinforced their own dominance and shielded them from their rivals.
Multilateralism was replaced by bilateralism, free trade by protectionism,
capital freedom by exchange controls, the gold standard by fiat money,
and free movement of labor by powerful restrictions. This was the new
world, the collectivist paradise so lauded by the new millennium’s anti-
globalization forces.
A key lesson of Wolf ’s book is that the damage caused by the collapse
of liberalism in the early 20th century—war, hyperinflation, worldwide
depression, mass unemployment, and tyranny—was brought about under
an assault of assorted collectivist forces. Between 1870 and 1913, global
GDP per capita grew 1.3 percent, while in the years 1913–1950 it grew
at just 0.9 percent. The liberal market economy had produced the fastest
increase in living standards ever known. The collectivist era, by contrast,
was the worst period for growth in living standards of the past 130 years.
The previous collapse of the liberal global economy seems incompatible
with Wolf ’s claim that “in the very long run, where the long run consists
of many centuries, the trend toward globalization is almost certainly
irreversible.”
After the Second World War, the United States initiated the long
march to restore the liberal global order. Globalization, the movement in
the direction of greater integration, proceeded as both natural and man-
made barriers to international economic exchange began to fall. This
process had three key goals: first, the promotion of economic growth and
the raising of living standards; second, an extension of prosperity in the
world in order to check communist expansionism and third, the adoption
of a liberal democratic institutional framework. It is noteworthy that the
postwar system was both an economic and a political program. The
proliferation of liberal democracy was seen as possessing international
utility. Experience shows that it is the only system of governance where
harmonious and cooperative interstate relations are a natural outcome.
The prosperity of a liberal nation derives not from the size of territory, its
military power, or population under its direct control, but rather from the
combination of internal economic development with international ex-
change.
From the 1950s, the roots of globalization were to be found in a steady
attack on the barriers to the movement of goods, services, and capital, but
far less opening took place in the free flow of individuals. The liberal-
ization began with trade between high-income countries and spread
gradually to capital flows. (Many European countries liberalized their
capital accounts only around 1990.) This opening spread to much of the
rest of the world in the 1980s and 1990s in the form of trade and capital
flows. However, the degree of international integration remains limited

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today. It is true that high-income countries are more open to trade and
capital flows than ever before, but they continue to protect labor-
intensive, inefficient agricultural activities and operate tight controls on
inflows of immigrants. In so doing, they inflict substantial harm on de-
veloping countries.
Many of these developing countries remain more closed to trade,
capital, and movement of people than they were a century ago. Poverty
is the price paid for these deficiencies. Wolf observes that “globalization
is not rampant. It remains remarkably limited.” There is wide consensus
that the prevalence of obstacles to the free movement of goods, services,
capital, and people is damaging the poorest nations. Globalization rep-
resents an enormous opportunity for these countries. Our failure is not
that there is too much globalization, but rather that there is too little.
However, for Wolf, economic international liberalization is not
enough. He rightly devotes considerable attention to the vital role that a
healthy state can play in promoting prosperity. This is important, given
that the poorest nations are often failed states. Economic integration will
bring benefits to no one unless states guarantee the security of property
rights and the rule of law. If not, the potential benefits of globalization
disappear in the short-term or accrue only to a small and corrupt ruling
class, rather than to the general population. The market economy needs
not only good economic policies and open markets but also good gover-
nance and a credible, predictable, transparent, and consistent institu-
tional framework, both over time and across activities. The state exists to
serve its citizens and is duty-bound to protect them from harm, including
from itself. We will only have more and better globalization if we have
better states, Wolf notes.
The intellectual clash between liberal capitalism and its opponents is
the chief theme of the book. It focuses largely on the arguments ad-
vanced by those who want to halt or reverse market-driven globalization
and destroy the international institutions that promote and oversee it.
These members of “[Link],” in Wolf ’s words, fall into two
groups: on the one hand, old-fashioned interests—farm lobbies, trade
unions, protectionist interests—and, on the other hand, and more im-
portant today, single-issue NGOs, often with mass memberships. They
are the “new millennium collectivists.” Included with the latter is a more
traditional assortment of old-fashioned socialists and neo-Marxists and,
probably far more dangerous in the long run, mercantilists, nationalists,
and anti-liberal groups of the right that played a substantial role in bring-
ing down the liberal order of the late 19th century. The antiglobalization
forces are united only in what they oppose. They offer no alternative way
of running an economy but rather sentiments, emotions, and protests.
They are split in their objectives. The reality is that all these groups seek
a post-enlightenment form of tribalism. As ideas matter, this ideological
Molotov cocktail is dangerous for the survival of an open society.
Why Globalization Works takes apart point-by-point the arguments
against globalization. Wolf concludes that only a few of the claims can be

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taken seriously, and he shows remarkable patience in responding to

those. The core of the book is a series of chapters that look in turn at the
charges that [Link] levels against the international market
economy: first, that worldwide economic integration has worsened in-
equality and poverty everywhere; second, that free trade undermines
prosperity and thwarts development; third, that globalization only serves
the interests of predatory multinational corporations; fourth, that finan-
cial liberalization is a threat to economic development; and finally, that
integration undermines democracy, sovereignty, the welfare state, and
environmental regulation, creating, instead, a headlong race to the bottom.
As Wolf demonstrates, global poverty and inequality actually rose until
about the early 1980s. Since then, inequality among individuals has de-
clined as a result of the rapid growth of Asia: above all, China and India.
In the supposed period of globalization since the 1980s, the number of
people in extreme poverty fell. There are discrepancies, but only about
the dimension of the decline. All research shows substantial declines
between 1990 and the end of the decade. The World Bank calculates a
9.5 percent decline over 9 years; this compares with Sala and Martin’s
estimate of 13.1 percent over 8 years, and Bhalla’s of 25.6 percent over
10 years. And inequality? A very impressive indicator is the rise of the
middle class. Bhalla has a particularly telling way of illustrating this. He
defines the global middle class as those earning between $3,650 and
$14,600 a year at PPP in 1993 prices. By his analysis, in 1960 some 60
percent of all middle-class people in the world lived in the high-income
countries. Today, this is down to 17 percent, with 51 percent living in
Asia, the Middle East, and North Africa, up from just 6 percent in 1969
and 16 percent in 1980.
What about human welfare? It is obvious that it has improved in recent
decades. In the developing world as a whole, life expectancy rose from 55
years in 1970 to 64 years in 2000. In 1950, average life expectancy in
developing countries was two-thirds of the levels in high-income coun-
tries. By 2000, it was 82 percent. Adult literacy, growth in food produc-
tion, and other indicators have improved dramatically. Wolf turns to what
has become one the most controversial indicators of the alleged exploi-
tation induced by globalization: child labor. On this issue, the facts speak
for themselves. The proportion of children ages 10 to 14 in the labor
force has, according to the World Bank, fallen from 23 percent in all
developing countries in 1980 to 12 percent in 2000. The fall in Asia,
which has been astonishing, is from 26 percent to 8 percent. In sub-
Saharan Africa, the decline has been less impressive, from 35 to 29
percent. This disparity reflects the fact that the countries’ economies that
have done well in the era of globalization have been the ones in which
parents have subsequently chosen to withdraw their children from the
labor force. In Wolf ’s words, “[d]eveloping countries are reaching higher
levels of social progress at lower levels of income than the high-income
countries of today. But, as one would expect, social progress has been
greatest where incomes have risen fastest. It remains the growth, stupid.”

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The power and malevolence of large corporations is another touch-

stone of those who oppose globalization. In Wolf ’s words, “this is their
Satan.” Again, the facts speak for themselves. Multinational corporations
are no more powerful than the states they operate in, and they do not
dominate the world by dint of their brands. The author reminds us of two
very interesting points: First, in 2000, the top hundred international
companies generated only 4.3 percent of global GDP; second, the gap
between the power of states versus that of companies is enormous, with
the latter dependent on the former for the protection of their property.
In the 1970s, the world’s biggest oil companies watched weak develop-
ing-country governments seize their assets. Since their own governments
chose to do nothing, they were unable to help themselves. It also is not
true that corporations have used their alleged power to exploit workers in
developing countries. The evidence that international companies pay
more and treat their workers better than local companies do is over-
whelming. The reason is clear: they can do so because their superior
know-how makes them more efficient and productive, thereby more
profitable.
The [Link] adherents argue that predatory market forces
are making it impossible for kindly governments to shield their people from
the beasts of prey that lurk beyond their borders. As Wolf proves, this claim
is nonsense. If integration is chosen, it is impossible to argue that it renders
states impotent. However, it is true that globalization constrains them in
important ways and so makes them better able to serve the (properly
defined) long-term interest of their citizens. But the severity of con-
straints should also not be exaggerated. In some high-income countries
and in many developing nations the constraints have not worked, and
governments have persisted in illiberal economic policies.
However, as long as a state provides services that the residents wish to
enjoy, it can continue to tax, regulate, and intervene. As the experience
of the northern European welfare states shows, it is possible to sustain a
high measure of distributive taxation and social insurance in an open
economy. The ability to raise taxes to sustain high ratios of public expen-
diture is contingent on electoral opinion than on globalization. Interna-
tional integration merely tends to make policy more transparent and
government more predictable—both are desirable. Also it is true that a
regime that “wants” its people to be fully engaged in the global economy
cannot prevent them from gaining access to an extraordinary range of
information, including about their own country. This makes despotic and
inefficient regimes unsustainable or unstable in the long term.
Another familiar cry of the antiglobalization community is that global-
ization is inimical to protection of the environment. This proposition, says
Wolf, is wrong. The relations between globalization, growth, and envi-
ronmental quality are positive. As people become richer, for example,
they insist on a cleanup of local environmental damage. Alan Krueger and
Gene Grossman of Princeton University argued that this generally hap-
pens when a country’s GDP per capita reaches $5,000, and that after

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about $8,000, local pollution starts to improve substantially. In addition,

capitalism has been far less environmentally damaging than socialism.
The former Soviet Union was responsible for some of the greatest envi-
ronmental catastrophes in history. Many of the harms to which the “red-
greens” point are not related in any significant way to globalization but
rather to poverty and bad government. Deforestation is driven not by
trade liberalization but by land-hunger and poverty, or by the indiffer-
ence of dictatorships to political and social pressures. Of course, there are
real environmental problems, but the rational policy to deal with those,
says Wolf, is through cost-internalization and here it is possible to use
market solutions.
One of Wolf ’s most controversial positions is his defense of capital
account liberalization. His case is prudent. Emerging-market economies
have tried to integrate into world capital markets. “The gains,” says Wolf,
“have been questionable and the cost of crises enormous.” But it would
be wrong to conclude that the simple lesson is not to liberalize. It is in the
interest of all countries to integrate into global financial markets—the
advantages are evident—but they should do so carefully. Developing
countries will have to rethink domestic regulations, laws, and behavior in
such areas as the role of banks, the role of foreign financial institutions,
deposit insurance and other guarantees, bankruptcy regimes or exchange
rate policies. They will also have to be careful about exposing their
economies to large-scale foreign currency borrowing. Wolf believes that
the IMF did not do a wonderful job in the 1990s, but he also does not
think that the world would be better off without the IMF. “If this insti-
tution did not exist, countries would not be left alone to sink or swim.
They would be subject to even more confused outside pressures. If crises
hit, they would have to deal directly with the U.S. Treasury. That would be
no improvement.” For Wolf, the IMF is a necessary, second-best solution.
Wolf says that “global economic integration will not collapse, as it did
in the early twentieth century.” The question is why? The combination of
fears of terrorism, economic instability, protectionist reactions to eco-
nomic change, and the rise of new competitors and protesters against
economic integration could yet do great damage. Wolf ’s answer for en-
suring that the forces of economic convergence overwhelm those of
divergence is a magic bullet: jurisdictional integration, a worldwide fed-
eral state.
But this ignores the fact that the liberal order did not collapse in the
19th century because of political fragmentation, but rather because of the
triumph of ideas and interests opposed to liberal democratic values. Ideas
matter, and bad ideas are always the main risk for freedom and prosperity
surviving. The old collectivists were perhaps more demonstrably danger-
ous than the new, because they knew what they wanted to do. On the
other hand, it is easier to combat a regular army than a guerrilla force.
The new collectivists are characterized by a hodgepodge of contradic-
tions that make confronting their ideas that much more taxing. Their

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contradictions grant them a comparative advantage because they can

attack from all directions.
Why Globalization Works is an excellent defense of globalization and
an intelligent rebuttal to its critics. Wolf’s message is unequivocal: “The
sight of the affluent young of the West wishing to protect the poor of the
world from the processes that delivered their remarkable prosperity is
depressing. So too is the return of the old anti-capitalist clichés, as if the
collapse of Soviet communism had never happened. We must, and can,
make the world a better place to live in. But we will do so only by
ignoring these siren voices. The open society has, as always, its enemies
both within and without. Our time is no exception. We owe it to posterity
to ensure that they do not triumph.”
Lorenzo Bernaldo de Quirós
Free Market International Consulting, Madrid

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