- The Washington Times - Saturday, April 9, 2005

Described by Institute for International Economics Director C. Fred Bergsten as the most influential and widely read economics commentator in the world today, Martin Wolf acquired that well-deserved reputation by spending decades focusing on “the big picture” and explaining what he saw. In addition to being the associate editor and chief economics commentator for the Financial Times, Mr. Wolf last year authored “Why Globalization Works,” a timely argument detailing the worldwide benefits generated by what he terms “the integration of economies through markets across frontiers.”

Delivering the third annual Whitman Lecture at the IIE last Tuesday, Mr. Wolf asked, “Will Globalization Survive?” His response was conditional. Globalization, he warned, “is not inevitable. It depends on politics.” After repeatedly warning in his speech about the rising threat of protectionism in the United States, he added, “In today’s world, it depends above all on U.S. politics.”

“Without successful U.S. leadership at a time of huge upheavals,” Mr. Wolf concluded, “the present globalization may founder, just as the last one did.” By “the last one,” of course, Mr. Wolf meant “the first liberal order — that of the 19th century.” World War I “began the ruin of the first globalization,” Mr. Wolf noted, setting in motion “30 years of catastrophe” that culminated in World War II.

Two forces — the reduction in the costs of transport and communications and economic liberalization — drive globalization, Mr. Wolf explained. Emphasizing that revolutionary changes in transportation and communications do not represent a new phenomenon, he cited the railway, the steamship, the refrigerator, the telegraph and transatlantic cable, which was first laid in 1866, as the underlying forces contributing to the first age of globalization in the late 19th and early 20th centuries. Technologies of comparable impact that have become widespread since the end of World War II include the container ship, the giant tanker, the airliner, television, satellites, computers and the Internet.

Regarding economic liberalization, the indisputable success of outwardly looking Asian economies became evident in the late 1960s. The generally recognized failures of socialism and state planning followed a decade later. These developments “set the stage for what must be the most dramatic period of economic liberalization there has ever been — a process that has, in a quarter of a century, brought something like four billion additional people within the purview of the global market,” Mr. Wolf argued. Citing the transformation of Mao Zedong’s China, the collapse of the Soviet empire and the reform of India’s bureaucratically stifled economy, Mr. Wolf calculates that these three changes alone could be responsible for the economic emancipation of nearly three billion people.

As for “the big picture” — our phrase, not Mr. Wolf’s — he points to World Bank data revealing that “the proportion of the east Asian population living on less than a dollar a day at purchasing power parity fell from 56 percent in 1981 to 16 percent in 2001.” Putting the data in context, he observed that “[t]his is the biggest and fastest reduction in extreme poverty in world history.” Regarding the benefits that globalization has produced for the United States, Mr. Wolf referred to the recently published IIE book, “The United States and the World Economy,” which concludes that “U.S. incomes are $1 trillion per year higher due to the… country’s increased integration with the world economy since 1945.” That represents about 8.5 percent of gross domestic product (GDP); an average of nearly $10,000 per household per year; and a favorable cost-benefit ratio of 20-to-1, the IIE reported.

The IIE book also projects that “U.S. incomes could rise by a further $500 billion per year by moving all the way to global free trade.” However, because, as Mr. Wolf notes, “[g]lobalization is not inevitable,” neither is the potential $500 billion increase in U.S. incomes attributable to it. Among other dangers, Mr. Wolf warns of the problems posed by global economic instability. “The strangest and most disturbing feature of the world economy [is] its dependence for macroeconomic stability on explosive rises in U.S. current-account deficits,” he argued. This has caused “two big risks: [first], rising protectionist sentiment in the U.S.; [second], at some point, a brutal and sudden correction, as the rest of the world decides that its holdings of dollar claims are excessive and, not least, too vulnerable to the [dollar] depreciation that must occur if the U.S. current-account deficit is to fall sharply as a share of GDP.” The chances of a hard landing, Mr. Wolf warned, “get bigger with each passing year.”

Since World War II, “we have recreated a better liberal international order — one that extends opportunities to the world as a whole,” Mr. Wolf favorably noted. “It is our duty to our descendants not to throw away this golden opportunity once again.”

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