Freeman

ARTICLE

Economic Growth and Freedom in the Coming Millennium

Globalization Is a Great Liberalizer

APRIL 01, 2000 by CHRISTOPHER LINGLE

There are many reasons to believe that the year 2000 will usher in a period of rising living standards and greater overall freedom. This positive outlook is supported by the experience of emerging economies in Asia and Latin America, as well as the transition economies escaping from the disasters of authoritarian socialism and communism.

What has been learned is that globalization has been the most effective liberalizing process in the history of mankind. Such a claim might cause Karl Marx to roll over in his grave and induce apoplexy in his diehard disciples. But history speaks for itself. International capital flows and greater trade integration over the past three decades have lifted nearly half a billion people out of poverty, mostly in Asia.

Global trade and capital flows are forcing governments to be more accountable to their people, who wish nothing more than to be able to prosper. Where markets are most open, the productive instincts of their people have been unleashed, allowing entrepreneurs to create wealth and new jobs. Despotic governments in Indonesia and much of Latin America have given way to more democratic leadership that is embracing the formula of market economics.

Skeptics should note that globalization is a phenomenon that empowers people by giving them another voice. In some settings a vote is of little use, especially in one-party states. For some there is the option to migrate, or “vote with their feet.” But only the best educated, the healthy, or the wealthy are normally able to emigrate. With fully liberalized financial systems, all citizens can “vote” by moving their savings or capital assets into the most attractive currency or country. As such, global capital provides another way for citizens to communicate their preferences to their leaders.

But some governments, such as in China, seek to introduce market reforms while holding back political reforms. Time will tell whether this is a disastrous course. There are those who insist that China’s approach to reform has been more successful than Russia’s. But this assessment is likely to be reversed within a decade or perhaps less.

Russia can be expected to make considerably more progress toward prosperity while China begins to lag behind. This is because leaders in Moscow have reached a point where they must begin providing institutional structures to pull out of a deep economic malaise. To become integrated into the global economy Russia must introduce (at last!) private property rights and a system of law to enforce them. Abiding by the rule of law under the eyes of an independent judiciary will provide support for a “contract culture” that is the basis of modern market-based economies.

In the case of China, there are two entrenched “institutions”—the People’s Liberation Army and the Communist Party—and these are unlikely to give up their obstructive powers. China’s biggest problems are the entrenched inefficiencies and distortions introduced by central planning.

Unrest in China

Heavy industry in China’s economy is mostly state-owned and highly inefficient. These factories receive funds from state banks that are disguised as loans. As a result, nonperforming loans are at least one-fourth of all loans. If this continues, there will be a banking crisis and social unrest. However, if the loans cease, there will be a social crisis from the massive numbers of workers who will be made redundant—and social unrest. Avenues of escape from impending social turmoil have been cut off by a decrease in export growth, declining inflows of foreign capital, and a slowdown in economic growth.

Although China’s people are likely to suffer, the expansion of economic freedom as the basis of promoting political freedom elsewhere will continue. As there is a shift from centralized or authoritarian economies toward free markets, individuals will react to changing incentives to work and earn profits. These growing private initiatives will stimulate economic growth and raise living standards.

Many emerging economies offer relatively low wages relative to education levels as well as a strong work ethic. (With its high literacy rate, watch Cuba become the Hong Kong of the Caribbean when the chains of Castro’s communism are cast off!) An increasingly open global trading system will allow more rapid technology transfers while free capital movements will aid in economic development. As the incomes of the emerging economies rise, they will become a source of export income for more developed economies in North America and Europe. At the same time, they will be able to increase their own savings and provide a domestic source of capital that will also increase efficiency of international markets, driving down the cost of capital.

While there will be adjustment costs, there will be considerably more benefits accruing to most people in most countries. Most of the losers will be workers or owners of previously protected industries whose privileges cost consumers in the form of higher prices and robbed jobs from newcomers to the labor market. It is only just that the few who imposed so many costs on so many should be the ones to bear the greatest burden.

A lesson of globalization is that protectionism is wrong not so much for the economic distortions and technical inefficiencies that it has always caused. Rather, protections for domestic industries are immoral because they steal job opportunities from the young by reducing growth potential and innovation. Future generations will have more hope if there are fewer restrictions on trade and capital flows, for that is what will create more opportunities in their future.

ASSOCIATED ISSUE

April 2000

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