Also-by Dani Rodrik (One Economic, Many Races: Cleblzation, Insitutions, and Eesnomle Growth Has Globalization Gone Too Far? The ‘ Globalization } Paradox 2 Democracy and the Future of the World Economy Dani Rodrik Be WW, NORTON & company.ToCetin Dajan An extraoiinary man whose digit, fore, and resolve wil reall ‘over the great injustice he nas been forced to endure. CONTENTS opi 20D Rsk ‘Pein tot penn reo hia, "reese com ne ane eee nopaction: RecstngGotalzatons arate x rion hp dnb ps je ots [WN pec et pedo rE 1. Of Maretsan Stats: Gotalition a stnys nae 3 Meco hy HR Dnt Haran 2 TheRiseand alo te Ft Great Gabaliation 2 oot dtgy Chi Dig 3 Why Does’ EenaneGtihe ase forreeTase? «7 Siew clay ee eee 4: Beane Anh Wena ted aba 5. nal tan fais aes geeeeana tens ace ee 6 TefousanteweogsofFiame 2 ‘nates 2 PerComtesina eos conn tt ie 8 Taefetiensinte Tops ss ‘tacit 4. ThePaitial emma othe Wel Ecanony ane te worm 10. Is Global Governance Feasible? Ist Desiabie? 207 soxrnasamea 1 Desig aang eee 22 Asean = sore Arveawon: Adee Sot Gom-aps woe setts as ce eerie era eenowstoeweets 39of Markets and States Globalization in History's Mirror 1 November 17, 1671, the regulars at Garraway’s coffee- house, @ popular hangout for London’ shipowners, stock- brokers, and merchants, were greeved with an unusial ‘On the ith of December, ensuing, There Will Be So in ‘he Greate Hall of tis Place, 3000 weight of Beaver Skins, ‘comprised in thirty lois, belonging to the Honourable, the Governour and Company of Merchante-Adventurers‘Trading Ii Hudson's Bay. ‘This sae of beaver fur was of more chan passing interest fo the lientele at Garraway’s. Considered a source of the highest qual ity fur, beaver pelts were in great demand during the seventeenth century. Beaver was held in such high regard that in 1688 King (Charles Thad prohibited the se of any material other than beaver farin hat making, ‘To the gieat consternation ofthe elty’s merchant, financiers, ‘and nobility, London was a backwater where the fur trade was ‘concerned. Most heaver fur originated from Russia and was sold ‘rough the Baltic and Black Sea ports to traders in major Gont-4 ‘The lobaliaton Paradox ental cities such as Paris, Vienna, and Amsterdam. In addition, ‘overunting had resulted in a severe depletion ofbewer stock and in high prices. London's wealthy had to content themselves with Tower quality fur thae trickled in from dhe Continent or obtain ir supplies directly fom these cities at great expense. The pub- igh- tie auction at Garraway’s heralded a new era of plentiful ‘quality far? “How had che beaver furs found their way to Garraway’s? Who oF “what was the Governour and Gompany of MerchantAdventurers ‘Trading into Hudson’s Bay"? There les an interesting tale of glo- baization from another era This was 2 very different kind of “globalization, to besure. Yet lookatitelosely, and you learn quitea deal about what makes globalization possible—and what lints it The Age oF Chartered Trading Companies “The series of events that landed the beaver furs at Garraway’s had three unlikely protagonists. Two were brothersin-law of Frees ‘extraction with the colorful names of Pierre-Esprit Radisson and ‘Médard Chouart, sieurdes Groseiliers. Radisson and des Grosel- Tiers were courews det Dos, unauthorized adventurers and traders furs inthe northern reaches of Quebec in today's Canada. The French colonial regime in what was then called "New France” had ‘eatablished a profitable basiness buying beaver pelts from Native ‘Americans. The natives would bring their supplies to trading poss established by the colonists and sell the beaver in exchange for firearms and brand. In keeping with che economic philosophy of the day-—mercantilism—this was all arranged as a monopol to generate the maximom profit for the French crown and its representatives. ‘Radisson and des Groselliers’s foray in the northern forest of the region, closer tothe shores of Hudson’ Bay had led them to think they could greatly expand the existing supply of beaver (OF Markets ana States ‘ fars by ging deeper int the largely unexplored Native American temitories. But che French colonial administration, too sti its established ways, would have none oft The wo adventures were fined for trading without license and des Grover landed in jailfora brie time “Tharted by ther countrymen theo brother n lay decided to change masters. In search of alermatie sponsors they ta eted to London, where thy were presented to King Chale Most important they managed to attract the attention of Prince Rupert, the third protagonist of our story. Prince Rupert, born Jn Bohemia asthe nephew of Chases anda adver of a Aitferent kid. He had fought in England on dhe Continent an the Caribbean, and wae also an amateur inventor and art Radisiom and des Grosiliers' plan was to establish a sea route from England by raving aerosthe northern ante into Hud son's Bay through the Howson’ Sra, This way they could the ech urs nd ech nan elon she north, an area as yet unclaimed by Buopean governments Tewasa risky and ost plan, for which they needed both royal protection and financial support. Prince Ripert was in apoio 10 provide both, On the morning of june 8, 1608, des Grosiliers se si Fem London on the Nonuch, a small veel expecially selected for is abil to travel inland, in a voyage vanced by Prince Rupert. and his entourage: He landed on the shores of Hudsons Buy out ‘months ater. (A second ship with Raison on board had etn to England afer encountering severe storms along the way) Dex Groscliers and the crew wintered here, established contact wth the Gree Indians, and retrned 1 England in Octeber 1669 on the Nonuch with a good supply of beaver? Haring demonstrated that ther busines plan worked, ourthece protagoniss then did what snyone witha good head for business engaged in longditance trae would have done atthe ime! lobby the king for monopoly rights, It didnt hurt of ours tat‘ he Gobaization Paradox Prince Roper was faily to Charles, On May, 167, the crown granted Prince Rupert and his partners a charter which estab- Tished “the Governour and Company of Merchants Adventurers “Trading ino Huon’ Bay" The company thereby created even tually came to be known as Hidson's Bay Company It survive 0 this day as HBC, Canad’ ares general retailer, which makes it also the world's oldest join stock company. “The charter Charles TT granted to Huon’ Bay Company it an extraordinary dace hat confers enormons powerson the company. The King begins by commending his “beloved cousin” Prince Rupert and his asorates for having led the expedition to “Hueon' Bay “it their om great cos and for hating discovered “eonsierable commodes” which wi produce “great advantage to usand our Kingdom" He then grants sole wade ard commerce of al thove “eas, a,b ver, ake, creeks, and sounds in whatsoever ate they shal be" that ie within dhe entrance of hudson’ Sat along wit all the adjoining terry that does not already belong to another “Christin prince of tate” But the ‘hares doesnot sop there. Charis I then makes the company “the ue and abso lords and propritors ofl the testis jist described“ Tm appreciation ofthe troble that Prince Rupert and his sso- ‘éats (ine "merchaneadventurers who had iked thei capital inthe venture) had gone through, and in expectation of great Ienefs othe Kingdom i he fstr, the company recived not just monopey trading privileges but aso fll property ights oer the Hudsons Bay area. “Raper Lan, an area covering al the rivers hat drain ing the Bay, came under the ownership ofthe Company. Tefal dimension ofthis terstorywerea'even known a the ime since i hadnt been completely explored, It turned out that Cares I had jt signed off a good chunk of todays Canada-—an are that venualy would amount to roughiy 40 per centofthe county or moe than sx ines the sizeof France—t0 private company! Of Markets and States ’ ‘The king’ charter made Hudson's Bay Company a government in all bue name, administering a vast errtory and ruling over ‘the local Indians who had no choice inthe matter. The company could fight wars, pass laws, and dispense justice. Needles to say, itwas the sole arbiter ofthe fur trade in Rupert's Land, eating {he conditions and prices ofthe exchange with the natives. Inthe nineteenth century, i even issued its own paper currency, which ‘became legal tender in area it controlled. The territorial control (of the company did not end for some two hundred years, until 1870, at which point the company turned possession of Rupert's Land over to the Dominion of Canada in exchange for £300,000 (834 million in today's money) ‘The Canadian fur trade was comparatively small and the ‘Hudson's Bay Company no more than a footnote in the exten- sive mercantile system of longdistance trade of the seventeenth and cighteenth centuries. The major trade routes lay elsewhere, ‘There was of course the infamous Atlantic wiangilar trade, which ‘carried slaves to the Americas in exchange for sugar, cotton, and tobacco (with che Europe-Africa leg providing an important con: necting link), There was also the ever important trade with India nd Southeast Asia, which could now bypass Venetian and Muslim Intermediaries thanks to Vasco da Gaia's passage ofthe Cape of Good Hope in 1497-98. In the three centuries following Colum- bbus's ancl da Gama's discoveries, the world experienced averitable ‘boom in longeistance trade. According to one estimate, interna tional trade rose at more than double the rate of world incomes “ imthis period? ‘The Companies that made this trade possible were most char~ tered trading monopolies organized along lines similar to Hud ‘son's Bay Company. Many have wellxecognized names, suchas the “English East India Company and the Dutch ast India Company, and many have left significant marks om history. ‘The mos famous among them, the English East India Company, ‘or the "Governor and Company of Merchants of London Trading' ‘The ovaizatin Paradox into the Bast Indies” a was originally called, was chartered in 1600 asa joint stock company. Is monopoly covered trade with {he Indian subeoatinent and China (iding opium trade). As with the Hudsons Bay Compan beyond trae. I had a standing army, could make wat, entr into wcties, mint i currency, and adesiniter justice. I expanded its contro over India through a erics of armed confrontations wth he Mughal Empire and alliances with local ruler. The Eas India Company performed avast range of pubic functions, including investments in transport irrigation, and public education. Ieeven- tually became a tax collector aswel, administering a land tax on the local population to supplement its trading profits. Bren though the company lost its trading monopoly in India in 1815, continued to rule fer several decades. Final, twas abolished a result the Indian Mutiny o 1858 at which ime contro of Inia passed directly tothe British crown ‘Thete companies had their own Mags, armies, magistrates and currencies. Meanwhile they paid dividends to heir shareholders back home, ‘Tha trade and rule were so closely entrined may seem like an anachronism to modern observers—the peculiar, feature ofan era whose misconceptions about economics have long been set straight. The dominant economic philosophy of the seventeenth century was mercantlsm, which advocated a close alliance between the sovereign and commercial interests In hindsight, mercaniits had some truly cranky ideas, uch a, the view that economic wellbeing sprang from accumulating sik ver and other precious metals. They thought fre trade should be confined to raw material and industry reserved for domestic producers through high import tariffs Bu they ako belived in capitatinm (as we would call today) and in exports, which set ther ight years ahead of many of eheir contemporaries, While the Dutch and the English were scouring the ends ofthe world forraw materials and markets, the Ottomans and the Chinese— by far the more powerful enties—had both withdrawn doomed quest for slfsfciney. The mercantiliss' narrative of ts powers extended considerably cts and Sates i capitalism was based on the view that the state and commercial ‘enterprise ought to serve the needs of each other. Eeonomics was tool of politics, and vice versa. International trade, in particular had to be monopolized to exclude foreign powers and to reserve the benefits forthe home country. Today, we ae likely to take our cue more from Adam Sinith, ‘whose Wealth of Nations (published in 1776) was a frontal attack on ‘mercantilist thought and practice. Economic liberals, with Smit a8 their founding father, havea different narrative: They believe that economies flourish when markets are left fee of state con- trol. Competition, rather than monopol advantage. Protective barriers on trade—import tariffs and prohibition ition and thus are a way of shoot {ng oneself in the foot, State- business collaboration i just another name for corruption. Adam Smith did not deny tha 8 role for government, but his vision was of a state restricted to national defense, protection of property rights, and administra tion ofjustice. In hisvew, mercantilsm and the chartered monop- cles were a drag on the development of national economies and ‘of global commerce. According to this narrative, rapid economic frowth and true globalization had to wait until the nineteenth ‘century, when Adam Smith's ideas Finally won the day. Thisdichotomy between marketsandstates—between trade and rule—isfalse and hides more than itreveal, Marketexchange, anh ‘specially long-distance trade, cannot exist without rules imposed from somewhere, The story ofthe Hhidson's Bay Company reveals the close link between power and economic exchange in ts naked simplicity. want co trade with you, so you better play by my rules! ‘We may think oflate eras of globalization as more detached from state rules and power—and hence ws more pure” But that would bbe quite wrong. Power was exercised; just differently—and less obviously. Where there is globalization, there are rules, What they are, who imposes them, and how—those are the only real questions eis not that there are always malevolent powers lurking behind reduce comp» The Globalization Paradox markets and globalization, We can have better or worse rues. But sre need to discard the idea that markets work best when they are left to their own devices, Markets necessarily require non-market institutions in order to function. Using the Nobel Prizewinner Douig North’s pithy definition, chete institutions supply the “rules fof the game” for markets, Their presence in turn begs the ques tions of how they are designed and whose interests they serve. ‘When we confront these questions head-on, instead of assum ing them away, we get a better handle on how to design market supporting institutions, We are also led to some uncomfortable thoughts on the limits of economic globalization. ‘But le’ first return to our chartered companies to understand the role that statelike powers played in fostering long-distance trade. What It Takes to Reap the Benefits of Trade visas pincleshteey hilo antenna Collage economies courses there regain from trade whenever Souivesanehng that vibe mor thanyou do Recs ade Yetween different pats ofthe work this quicky becomes tale of Comparative advanage, Whatever country hs plenty of 4 be ‘cenanged for things that i lack. Cree Indians along Hudsons Day certainly had plenty oF beaver But they were shor of blankets ete and ofcourse the rifles and bran that they din even now they needed before they encountered white men. Given the high demand for beaver fur in Europe, the potential gains fom jotercontinentl trade were huge Th took endions of trade, this would bejustabout heen of te sory Inthe real world, things are no that simple. Look at the obstacles that our triumvirate of heroes and their associates had wo overcome. They nd to engage ina dangerous vnture— fut hat both purse and liao reach the Indians through OF Markets and States a ‘new, maritime route, They had to build and man trading posts along Hudson's Bay under severe weather conditions. They had to explore the areas inland and make connections with the In fans. They had to open and maintain channels of communication, build trust and convince the Indians oftheir peaceful intentions. They had todo the “market research’ to figure aut what the Indi- ‘ans would buy in return for fur Above all elke, they had to provide 8 dafe and secure environment within which grade could be car Fed out. That in turn required laws and regulations, backed up by forve (fneeded). In other words, they had to invest in the infrastructure of trade—transport, logistics, communications, trust, law and order, contraet enforcement—before trade could actualy take place, (Our "merchantadventurers” had to carry ou tatelike functions, because rade would ave been impossible in thelr absence The bargain thar a sovereign struck with private companies under mercantitism was essentially tis: You, the company, pay forthe institutional infrastructure, and in return Twill allow you tomake monopoly profits from the resulting trade. This quid pro quo was well understood, and sometimes quite explic. As early 48 1468, the Portuguese granted Fernio Gomes a monopoly of trade with Aftica for five years on the condition that “he extend the exploration of the coast southwards by one bundred leagues (@ litle over three hundred miles) each year.” In 1680, when ‘the monopoly of the Royal Aftican Company in Britain's slave trade was challenged, the advocates for the company defended itn terms that were quite explicit about the “public functions Performed by the enterprise: the slave trade required the com ‘truetion of forts along the West African coast at an expense that ‘was too great for private traders; the trade had to be defended from attacks by other nations; maintenance of forts and warships ‘required exclusive control; private traders upset local rulers by suempting to enslave “al and sundry, even Negroes of high rank"; and so on. Unfortunately for the company, these arguments did® The Globalization Paradox not prevent the monopoly from being repealed in 1698. The slave trade was far too profitable fort to remain the exclusive preserve ‘of single company. ‘When the Hudson's Bay Company was charged by ts apponents with nderpaying American Indians for beaver pelts, it argued that those low prices were only fair given the difficulties of com- merce in the North American wilds. Its true, the company sid, that Indians were asked to pay bigh prices for English goods while being paid litle forthe furs. But this was common practice for *civliaed traders all the world over, when] dealing with ignorant and dependent tribes” Afterall, “the risks of life and limb and sgoodsin remote regions are great, and great profits must be made to meet them." ‘Uhimately, someone has to shoulder the responsibility for peace, security, and the framework of lavs and regulations that makes trade possible, What distinguishes mercancilism from later versions of capitalism i thatthe job fll by and large on private «entities. When private companies could no longer perform those tasks either because they became to0 weak or competition from ‘other nations underent thei rents—the crown had to intervene, Asked bya House of Goramons committee in 1857 about the likely consequentes of abolishing the special privileges of Hudson's Bay Company, a leading politician and former director of the com- any put it plainly: this would be of no consequence as long as ‘Canada shall bear the expense of governing {the territory ceded by the company] and maintaining a good police and preventing the introduction, 9 far a8 they can, of competition within the far trade." The company may not have been happy to sec its ‘monopoly go, but i could live with it as long as the prerequisites for doing business were henceforth to be supplied (and paid for) bythe Ganadian sate, ‘The abolition of the East India Company following the Indian Mutiny of 1858, and its replacement by direct colonial rule from London, provides another perfec example ofthe transition, When OF Markets and states a the private firm and its armies were no longer up to the task, the sovereign had to step in with his own, more effective powers of persuasion, Overcoming Transaction Costs contemporary economist would summarize the argument thus far by saying that the role played by the Hudson's Bay Company, the East India Company, and other chartered trading companies as to reduce the “transaction costs in international trade to ‘enable some degree of economic globalization. Itis worth spend- ‘ng some tle on this concep a it holds the Key (0 understand- ing globalization—hat restriets or deepens it—and will recut throughout our discussion. Economists lke to think that che propensity to “truck, barter, and trade; in Adam Smith’ evocative (but careful)” phrasing, is such an ingrained element of human nature that intakes “free trade" the natural order of things, They even have coined a gen- eral term for different types of friction that prevent mutually beneficial trade or render it more dieu: “transaction costs” ‘Transaction costs arein fac rampant in the real world, and if we fal to see them all around us itis only because modern econo nies have developed 40 many effective institutional responses to overcome them. ‘Think of all the things that we take for granted that are abso: ‘ely essential for trade to take place. There must be some way—a ‘marketplace, bazaar, trade fair, an electronic exchange—to bring, the two parties toa transaction together. There must be a modi- ‘cum of peace and security for theim to engage in trade without risk {olfeand liberty or concern for theft. There must bea common Janguage forthe partes to understand each other, In any form of ‘exchange other than barter, there must be a trusted medium of ‘exchange (a currency). All the relevant attributes ofthe good or“ The Glebalization Paradox service eng exchanged (for example, dai and quay) ‘Bote fly sere. There mut be vient st betwee the pres These mathe (and beable demonstrate) ‘lear property rights over the gods eig 0 and mst have the alo trae hve rights tothe le. Any contact hat thew sdcr eer into mut be chorea court of lan oF throu ete rangement The partis mst be able ake tn fare comment (wl pay ous mi pon the ie pot) and dso ened Tre mt be protection gins {hed pares tpng to block the exchange or impede Youd teep ging, bute point probably clear. Senet thx requement donot ate aor bude for trade Ifyou have wo cookies and have wo glses of mon Sve could any carey outa rade hat woul eae bot of tere ofA ter times the tae lin oman extensive nt vnc otinonl prereaten Appe ad subcontractors rmhina must neces opeate na contactech envionment hong tongs pec tral commen’ When Gi soup makes loan to rn na deve snacon of he borrower epuasen, the seg fas init county and the Hetnood of interatonal stetons an peconion fr arcing t he dal When othing goes oop in these laontipe-a Chinese soar psi The Phones proprietary design tos competitor or CHigroup’ boveoner fies to etic ie i blgatiny—there may be recs thatthe aggre pasa .Tefeehatsich Thing can and wil go wrong ac comiderabe deterrent Che eactons in he fit lace. In econ Tagua, thee sre tudes win pote scant sition os. Tonttoneat east hove that sport astra soca acrangment designed race sich annacion cox These insuoes come in three forms: longterm relationships hae on sccrocty and tru belt sean ipa 1g nation, it relies on enforcement. OF Markets and states. s ‘The first ofthese generate cooperation through repeated ints action overtime, For example, a supplier is deterred from cheat ing his customer because he worries that he would lose future business. The customer in turn chooses not to shortchange the supplier because it would be costly to switch euppliers and build a long-term relationship with anew firm. As the relationship builds, ‘us increases, and i hecomes possible to contemplate langer ven” tures. These selEsupporting processes do not rely on any formal legal structures or organizational backstops. They predo ‘developing nations where such structures are weak, Second, trate can be supported through belief systems or ideologies. The fruit seller doesn’t sell a traveler rotten fruit because “that would simply be wrong” A country may choose not to raise tariffs or restrict capital flows because “that is not the way things are done." Perhaps these actors trly internalize the reasons for their actions. Perhaps they fear being ostracized by their communities—tibe, east, religions gioup, ethnic group, ‘or “community of nations,” asthe case may be—if they are seen to defy prevailing norms of good behavior. Wherever they may come from, widely held views on the appropriateness of different courses of actions may discipline parties to/an exchange and sup- Port a level of honesty and cooperation that might be dificult to achieve otherwise Repeated interaction and community norms work best when markets are mostly local and small scale, when people do not move around much, and when the goods and services traded aresimple, ‘andardized, and don't have to travel overlong distances. But as economies grow and geographical mobility increases, the need for clear and extensive rulesand more reliable enforcement becomes paramount. The only countries that have managed to become "ich under capitalism are those that have erected an extensive set ‘of formal institutions that govern markets: tax systems that pay for Public goods such as national defense and infrastructure, legal regiines that establish and protect property rights, courts that6 ‘he Globalization Paradox enforce contracts, police forces to sanction violators, bureaucrats ‘who design and administer economic regulations, central banks that ensure monetary and financial stability, and so on. In the language ofthe economist, these are institutions of “third-party enforcement.” The rules ofthe game are enforced by. formal, yp- ‘cally governmental apparatus. You pay your taxes In part because you want better roads and schools, but suspect you would pay a Tot les ifie weren't for the tax collector. ‘When we look at the sie of the government across different societies, we uncover a rather amazing fact. Wit very few excep tions, the more developed an economy, the greatér the shave ofits ‘esouttes thats consumed by the public sector. Governments are Digger and stronger notin the world’s poorest economies butin its most advanced economies. The correlation between government and per capita income is remarkably tight. Rich countries have better functioning markets and larger governments when ‘compared to poor ones. All this may be surprising at frst sight, but the preceding discussion helps us understand what is going ‘on. Markets are most developed and most effective in generating ‘wealth when they are backed by soli governmental institutions. ‘Marks ad states ae complements, no subsites, as simplistic €co- ‘nomic accounts would often have it ‘Trad and Governments. ‘This point was brought home to me in quite an unexpected way some years back: The government plays such a pervasive role in ‘modern society that many socal scientists, myself among them, find itimporsible nat to be obsessed by it. One day was iting in my office wondering why shrinking the public sector had proved. 0 difficult despite the clamor for *small government" from con servative politicians when an article by the Yale’ political scientist David Cameron crossed my desk* | OF Markets and States ” ‘Cameron was interested in the following question: Why had the public sector expanded 20 rapidly in the major advanced econo ties in the decades folowing World War I? Even though Cam- «ron focused only on the port 945 experience, this wasn facta tren that went further back in history. Around 187, de share of orernment expenditures inthe economies of today's advanced economies averaged around 11 percent. By 120, this share had almost dobed, 020 percent. It ncreased further, to 28 percent {in 1960, By the time of Cameron's study tod at more than 40 percent, and hax continaed to rs since then." The increase hay notbecn uniform aro diferent countries Governmentsare considerably smaller today inthe ited State, Japan, and Auy- trai (vith expenditure shares below 95 percent) than they are Jn Sweden or The Netherlands (55-60 perce), wih mos of the ox Baropeancoutviesin betwen. Cameron wanted rounder stand the sources ofthis diference His conchson, bated on aul of eighteen advanced rations, vas that openness t international trade had been a major com. tributo. Governments had grown the largest in those economies that ere the mostexposed to international markers, Some oun tres are naturally moe steered fom the foreso international Competition ether becase they are lage or because they are discant fom their major trading partners, This is exactly the case ofthe small government economies on oni (te United Sates, Jopan,and Awsrala). Smal economies close heirtrading part ners, by contrat engage in shich more trade and have ger able sectors uch kn Sweden and The Netherand). ‘This highly counterintive argument if you are used to thinking that markets can prosper only where the state does not intrude. Lknew ofcourse that more advanced economies have Jaeger public sectors, but the Cameron claim was something ese heargued thatthe variation nthe size of the publicsector among qualy rich economies could be explained by the importance of trade to thei conomies,“ ‘The Globalization Paradox {must confess that I was suspicious about Cameron's result: ‘economists tend to be a skeptical bunch, especially when faced ‘with seatsical work by other social scientists, My first reaction to the article was this cannot be tue, The sample i (o0 small (only ‘eighteen countries). The effect is driven by country size rather than exposuré to international trade per se. There are many other confounding effects thatthe analysis has not taken into account And s0.0n, I decided to check for myself 1 downloaded some data and began to look at how government size lines up against economic ‘openness. firstscrutinized che advanced countries that Cameron hhad focused on. I used different data sources and varying time periods, but to my surprise the Cameron result held up. Then expanded the analysis to developing nations, looking at more than a hundred countries for which data were available. Again, the picware was the same. Finally I tried to make the result disap pear by controlling for everything that I éould think of country size, geography, demography, income level, urbanization, and ‘many other factors besides. Whichever way Ieutthe data [found «strong positive correlation between nation’s exposure to inter rational trade and the sizeof its government. ‘Where was this correlation coming from? I considered many ‘posible explanations, bat none survived my batery of tests. In the ‘end the evidence seemed to point strongly tomard the socal insur- ance motive. People demasid compensation aguinstriskwhen their economies are more exposed to international economic forces and governments respond by erecting bronder safety nets, either ‘trough social programs or through public employment (more: typical in poor nations) This was essenally the same argument that Cameron had made, and it clearly went beyond the small set of ich countries he had considered. Lhad stumbled on one ofthe fundamental truths of economics that no one in graduate school hhad ever told me about: Ifyou want markets to expand, you need {governments todo the same." Of Markets and States ” This need for expansion isnt just because governments are necessary to establish peace and security, protect property rights, enforce contracts, and manage the macroeconomy, It is also because they are needed t preserve the legitimacy of markets by protecting people from the rsks and insecurities markets bring, with them, The recent subprime mortgage crisis and deep recession pro: vide a good example, Why didn't the world economy fall off the ‘same protectionist cliff that it did in the Great Depression of the 1980s? In the decades since, modern industrial societies have ‘erected a wide array of social protections—tinemployinent com- pensation, adjustment assistance and other labor market interven 3s, healt insurance, family support—that mitigate demand for «eruder form of protection such as sheltering the economy behind Dhigh tariff walls The welfare state is the flipside ofthe open econ- omy. Markets and states are complements in more ways than one. Globalization’sLove-and-Hate Relationship with the State Now we can begin to appreciate how greatly international com= merce differs srom domestic economic transactions. [Fyou and 1 are citizens of the same county, we operate under an identical set. ‘of legal rulesand benifit from the pubic goods that our govern: ment provides. If we ae citizens of different countries, none of this is necessarily rue. There is no international entity that guar- antes peace and safety, passes laws and enforces then, pays for public goods, or ensures economic stability and security In view and distances that separate nations informal institutions such as reciprocity and norms typically do ‘not induce much cooperation either The marketsupportinginsi= tutions that do exist are local and vary across nations. Asa result, ‘international trade and finance entail inherently higher ransacton costs ‘han domestic ewhanges of the differences in cult» ‘Te Slabaization Paradox ‘But there is more The higher transaction costs are mot just due to the absence ofthe requisite international institutions. Domes tic arrangements geared to the needs of national markets also ‘impede global commerce frequent. National rules inhibit global ization, The most obvious examples inchide governmentimposed tariffs on cade or regulations that restrict ternational lending or borrowing. Whatever domestic purpose such restrictions may serve—social and political stability, encouragement of domestic centreprencurship, or pure cronyism—they constitute clear trans- action costs om international exchanges. The taxes that finance social safety nets and other publi investments can also necessitate some restrietions on international exchange in order to prevent Footloose profesionals or capitalists from evading them. In addition, many domestic regulations and standards iscour- age cross-border transactions, even when they are not primarily aimed at raising barriers to trade. Differences in national curren- cies, egal practices, banking regulations, abor market rules, food safety standards, and many other areas raise the costs of doing, ‘business internationally "For us to remain competitive,” Jttrey ‘mmelt, CEO of General Electric, eoraplained in 2005, “we simply ‘cannot navigate a regulatory maze that forces us to tweak and modulate every product and proces to suit individual regulatory regimes at their whim.”” Governments help reduce transaction costs within national boundaries, but they re a souree of ition in trade beta nations International markets operate outside the formal institucional framework of sovereign entities and therefore, absent special arrangements, are deprived of the support of those frameworks. Equally important, international markets operate across the insti> tutional boundaries demarcating sates and their jurisdictions These two faets—the absence of an overall institutional frames ‘work for global markets and the tensions such markets generate between local insitutions—are fundamental to understandin economic globalization. They help us think our way through the Of Markets and States 2 challenges of globalization and appreciate ts limits, We return 10 ‘them dhroughout the book. ‘Thus the difficulties the Hudson's Bay Company and its com- ‘emporaries faced while carrying out long-distance exchange were not specific to the seventeenth century of to trade in fur, spices, and other favored commodities ofthe time. International trade is different and requires special institutional arrangements, For all ts faults, che chartered trading monopoly was a successful Insticutional imovation-—aligned with the politics and economics ‘of the time—that overcame many ofthe transaction costs specific 1 intercontinental trade. I spusted private entities to invest in Knowledge, security, and contract enforcement, and thus made ongoing trade possible, ‘Of course, not all participants in the trade benefited equal ‘The prices received by the Cree Indians for example, were uncor- scionably low.* The slave trade was an abomination, Over time, ‘companies became more interested in maintaining their monop ‘oly profits chan in expanding trade networks. The co-dependence that developed between staves and private companies helped nei- ther the quality of governance nor economic performance over the long ran. Adam Smith was right to question whether char tered monopolies contributed positively to the national balance sheet in the end, But as Smith's ideas gained ground and Britain and other leading powers dissolved the monopolies, the funda ‘mental problem remained: how to render international trade ‘and finance cheap and safe. The wransaction costs inherentin the ‘international economy would continue to haunt trader, fines cers, and politicians Globatization's Conundrum Markets have demanding prerequisites—and global markets even more so. Markets for basic foodstuff, say, and other necenstis,” ‘The Globalization Paradox can work prety well on their own in small communities where people know each other and interact repetitively. A small cabal ‘of businessmen and financiers can enforce trade and exchange ‘when they share a common belief system. Anything bigger, more ‘wide-ranging, and wlimately sustainable requires a large cas of, supporting institutions: property rules to establish ownership, courts to enforce contracts, wading regulations to protect buy. crs and sellers, a police force to punish cheaters, macro-policy frameworks to manage and smooth the business ele, prudential standards and supervision to maintain financial stability, alender- ‘oflastresort co prevent firancal panics, health, safety labor, and environmental standards t ensure compliance with public norms, compensation schemes to placate the losers (when markets leave “some in the cold, as they often do), social insurance to provide ‘some insulation against market risks and taxes to Finance all these Functions In shart, markets ae not slfcreting,selfregulating,selftabilcng, orselflegtinizing Every wellfunctioning market economy blends state and market, lassexfaire and intervention. The precise mix ‘depends on each nation's preferences it international position, and its historical trajectory. But no country has figured out bow to develop without placing sibstantal responsibilities on ts public If sates are indispensable to the operation of national miar- kets, they are also the mai obstacle to the establishment of global markets, As we will see, their practices are the very source of the transaction costs thar globalization has to surmount. That i the central conundrum of globalization: can't do without states, cant. with them! Hence global markets are doubly problematic: they lack the institutional underpinnings of national markets and they fall between existing institutional boundaries. This dual curse leaves ‘economic globalization fragile and ful of transaction costs even in the absence of direct restrictions on trade and cross-border Of Markets and States a finance. It renders the quest for a perfect globalization a fool's errand. ‘The mercantilists' chartered trading companies offered ome solution to these dilemmas, Thanks to their statclike enforcement powers, these companiesimposed their own rules over foreign populations in distant lands. However, they became less effective ‘overtime as they proved unable to handle restless local popu tions and the mercantilist narrative lostits appeal. The nineteenth ‘century—the first era of true globalization would have to ely on different mechanisms.The Rise and Fall of the First Great Globalization had expanded at a steady clip of around I percent per year, ‘outpacing the rise in world incomes but not greatly so. Start- ing sometime in the early part of the nineteenth century, world trade began to grow by leaps and bounds, registering an unpree- fedented rate of almost 4 percent per annum for the century asa ‘whole? Transaction costs that impede long-distance trade—due to transportation and communication difficulties, government ‘restrictions, or risks to life and property-—began to decline pre- ‘dpitously. Capital flows boomed and most of the work's econo- ties became financially more integrated than ever before, This ‘was also an’ era of vast flows of people between continents, with ‘working-class Buropeans migrating en masse co the Americas and. other lands of recent settlement. For these reasons, most economic historians consider the long century before 1914 the frst era of ‘globalization, Indeed, by many measures the world economy only recently surpassed the 1913 levels of globalization in trade and finance. i terms of labor mobility, the world as stil to catch up. [esac cae rade “The Rise and fall of he Fest reat Globalization a Trade and Institutions During the Nineteenth Century ‘What made this era of globalization possible? Standard accounts: Identify three important changes in this period. First, new tech nologies in the form of steamships, railroads, canals, and the telegraph revolutionized international transport and communi- ‘ations and greatly reduced trade costsstartingin the early part of the nineteenth century. Second, the economic narrative changed asthe ideas of free market economists like Adam Smith and David Ricardo Gall got some traction. This led the governments of the word's major economies to substantially relax the restrictions they placed on trade in the form of import taxes (tariffs) and ‘explicie prohibitions Finally, from the 1870s on, the widespread adoption of the gold standard enabled capital to move interna tionally without fear of arbitrary changes in currency values oF ‘other financial hiccups ‘Yer these cannot he the end of the story. As we saw in the last ‘chapter, the transaction cossin the world economy extend beyond ‘wansport, tril, and currency instability. The standard accounts ‘omit two vitally important institutions specific tothe nineteenth ‘century, These insttations enabled a deeper globalization than hhad been possible to date and echo the marketsipporting arrangements we encountered eatler: ‘The first of these was a convergence in belief xystems among the period's key economic decision makers. Fconomic liberalism and the rules of the gold standard connected poliey makers in different nations and led them to coalesce around practices that ‘minimized transaction costsin trade and finance. Where thismar- zative held sway—as in Britain and among the world’s major een= tral banks throughout the entire period—globalization remained safe, Where it was absent or dissolved over time-—as with trade policy in Continental Europe after the 1870s—globalization lost ground.” The Globliation Paradox ‘The second instication was imperialism. Whether of the for- ‘al or informal kind, imperialism was a mechanism for imposing trade friendly rules, a type of “thitd-party enforcement” with the ‘governments of the advanced countries asthe enforcer. Imperial ist policies deployed the political and military power ofthe major countries to bring the rest of the work into Tine whenever pos sible, Hence they provided an important backstop o globalization being derailed in the peripheral parts ofthe world eeonomy— Latin America, Asa, and the Middle East—and could be used to render these regions safe for international trade and finance ‘This chapter explains how the nineteenth-century version of flobalization emerged and how domestic politics led to its unrav cling, We begin our tour with trade policies and turn to the gold standard next The (Limited) Victory of Free Trade Frce trade beliefs were ascendant throughout the nineteenth cen tary, thanks to the efforts of economists such as David Ricardo and John Seuazt Mill who built on Adam Smiths insights to show how unrestricted trade is beneficial to all countries taking part in it. As we shall seein the next chapter, these ideas were elegant, powerful, and could be stated with logical precision. But their influence varied across countries and over time. Even though we think of the nineteenth century as an era of free trade, Britain is the only large economy that maintained open trade polices for any length of tine. The United Siates put up very steep tariffs om manufactured imports during the Civil War and kept them high throughout the century. The major Continental powersin Europe ‘were unhesitant converts to free trade only fora short period dur ing the 1860s and 1870s ‘The crucial date in nineteenth-centary tariff history is 1846, the year that Britain abolished Napoleonic Wars-era tariffs on, The Rise and Fall ofthe Fist Great lobliation » imports of grains, These so-called "Corn Laws" were at the cen- ter of political struggles in early nineteenth-century Britain, as they pitted rural inerests against urban interests, Here “corn” was synonymous with grains, and the tariffs in question covered all, 000 and cereal imports. Landlords wanted high tariff that kept food prices high and rated their incomes, Urban manufacturers, Increasingly powerful ax the effects of the Industrial Revolution dligfused through London, Manchester, and other cities, wanted to abolish the tariffs to reduce the cos of living. That reduction, as Karl Marx among others would argue, would allow capitalists to pay even loner wages to their workers. This debate galvanized British society and polities, with forces for and against the Corn Laws engaged in what appeared to be a bitter fight over a few import taxes; but was really about who would rule Britain and prosper in years to come. The well-known magazine The Economist isa product of thisera, fouled by opponents ofthe Corn Laws spread and popularize free trade views, a role which it continues to perform today. Inthe end, the ascendant manufacturing inter ‘sts wom the day they had both the intellectual argamentsand the forces ofthe Industrial Revolution on their side. Once the Gorm Laws were abolished in Britain, che dominant ‘economic power of the das, the pressure was on for other Euro: ‘pean countries to follow suit, Many perceived the reform asa polit ical and economic success in Britain. Eeonomie commentators on the Continent pointed with awe to the large increase in Britain's commerce and output since the repeal—although of course it ‘was really the Industrial Revolution that deserved the bulk of the credit. Britain's apparent suecess did not necessarily make trade liberalization easier in other countries. As the emperor Louis Napolgon Bonaparte put ito the British MP and fre trade pros- dytizer Richard Cobden, “Lam charmed and flattered atthe idea ‘of performing a similar work in my countrys bu itis very difficult, in France to make reforms: we make revolutions in France, not reforms” However, there was one politcal expedient to whieh2% ‘he Gabaization Paradox free trade-minded leaders have resorted ever since: reduce ade barriers in exchange for another country doing the sime, and thea present liberalization to the opposition asa necessary “con. cession” made to get the ther party to open their markets, The result was the Cobden committed Britain to reduce its duties on French pitts in return {or France reducing its tariffs on British manufactured goods Tie was followed by a series of similar treaties signed with other jortant innovation in the Cobden Chevalier treaty was the mostavored-nation (MFN) clause. The clause required that the original signatories also receive any tar- iff reduction one of them subsequently grants to third countries. “Thig network of trade treaties became an important instrument of tariff reduction throughout Europe during the 1860s and 1870s, By the mid.187s, most prohibitions on trade had disappeared and average tariffs on manufacturing stood at low single digits {in Britain, Germany, The Netherlands, Sweden, and Switrerland, and in the low teens in France and Italy, down from levels that ‘were a multiple ofthese rates* Free trae did not win everywhere, The fghtover the Com Laws illustrates a theme we will hace plenty of occasion to return to: ‘because trade policies have important consequences for income distribution, they get entangled in much breader politcal con tests, The economist may decry the artficialigy—and therefore ‘oiinlessnest—of the transaction costs that governmentimposed trade barriers create, but the argument does not always carry the dlay when there ate strong political interests or economic argu- ‘ments that goin the opposite ditection. In ease you think those political pressures and economic arguments always derive from cvalier treaty of 1860, which Continental countries. An narrow selPinteres aiid obscurantst doctrines—the sory ofthe repeal af the Corn Lavi soften held upasa victory af progressive ideas and liberalism over traditional nobility and authoritarian insitutions—consider che experience ofthe United States. ‘As different a8 the United Stats’ politcal makeup was from The Rise and Fll ofthe First Great Globalization » Britain's during the early part ofthe nineteenth century, the two countries had one thing in common: (ati controversies stood atthe center of national polities, As one exasperated Pennsylia nla legislator would later reflect, “man is an animal that makes ff speeches" Trade polices fed divecly into the most impor tant social and political cleavage in the country, between South and North, The slaveholding South was organized around an ‘export economy based on tobacco and cotion. The free states of the North relied on a nascent manufacturing base that lagged behind Britain in productivity and struggled to compete with ‘cheaper imports. The South depended on international erade fr its prosperity. The North wanted proteetion from imports, st least uni tel catch up ‘The Givl War of 1861-86 was fought as much over the future ‘of American trade policy as itwas fought over slinery As soon as the war started, Abraham Lincoln raised’ US. aris, and trade protection was increased further following the North's victory. Import tariff on manufactured goods averaged 45 percent in the decade after 1866 and never fell much below thatlevel until World War L-By any standard, the Unived States was a highly protection: ist country during the late nineteenth centry. Coincidentally or rnot—the debate continues—thiswasaluo the period during which it caught up with and then surpasted Britain's industrial prowess, ‘We will recur tothe elationship between trade policy and eco: nomic growth later. For nov, what is interesting about the US. ‘experience is that i represents a case where free trade was deci edly notin the service of a "progressive” political cause, As the Aistinguished potitieal scientist Robert Keohane has written, *pur- suing the logic of the market had tragic effects in the ong run, The economic impact on the South of growth without diversifica- tion or industrializ was harmful enough, Much more serious ‘were the social and political results of making cotton king: slavery ‘was entrenched and civil war became increasingly lkely"* What ever its other economic consequences, free trade in nineteenth-* The Globalization Paradox century America would have further reinforced and strengthened slavery a8 2 social and political institution. The damage that it ‘would have done (othe development of political institutions of the ‘country can only be guessed at, bu the pictures unlikely to have been a prety one? "The lesson i lear: depending on where country stands in the world economy and how trade policies align with is social and politica cleavages, free trade can bea progresive or a regressive force. Britain was the industrial powerhouse of the world in the ‘mid-nineteenth century and liberal trade polices favored! mam facturing interests and the middle clases, The United States was an industrial laggard witha cost advantage in stavery-based plane tation activites, where Hberal wade policies would have benefited repressive, agrarian interests, Free trade and “good politis” don't lays go together ‘Meanwhile, on the European Continent second thoughts about free trade did not take long to make their appearance. An impor ‘tant tigger, as often happens, was along economic recession that started in the 1870s and hic farmers especially hard. The transport revolutions and tarffcut resulted in an influx of grains from the [New World and sharply lower prices. Bserywhere on the Continent agricultural interests clamored for protection, often making com ‘on cause with industrialists who were reeling under competition from the more advanced British producers (and increasingly from American exporters too) In Bismarck’s Germany, this led to the famous “marriage of ion and rye," coalition beoween agricultar> aliss and industrialists that produced sharply higher tariffs from the end of the 1870s onward, Always a savvy politcal operative; Bismarck rationalized che new policy by complaining that Ger- ‘manyhad ecome the dumping ground of other countries’ excess production. Brance and other Continental powers followed soit with their own high tarifs, and the genetal rend toward tighten ing of trace restrictions continued until the onset of World War I. | The Rise and Fall ofthe Fist Great Glonalization » By 113, average impor tari the Continent om mance bad docbled to smost 30 percent® “There was a paradoxical aspect rom the standpoint ofthe eral economie nara, to this increase in protection i ate snezeniveentury Earope As the economic trian Pel Bab ech nots notonly dd rae ylumes increase quite apy after 1990, 4 Incomes, expecially in those counties that pt ip trade barriers! This experienc, jst ike Uat of the post-Chi War Untied Sts, cat more doubt ona simple relasonabip Benen policies of fee trade and economic growth We wl return to the sjet ater the context of our dacs ofthe Breton Woods regime andthe effects of gtliation on today developing count Teas onlin Britain thatthe protection per lope was rested inthe decades before World War, expt presi frm “fair tradrs who wanted oretalate agains the high taf on Bris exportin the rest of rope” wan't that ee rae ‘eology dominated the pole dacoue toa mich rete extent in Brain, “protectonn” having become derogatory tem t Twowbeat our opponents with twa alo tht Bria’ song trate poston in manufacturing rendered arifsarnther poss and redundant policy. When Prime Minister Wiliam Gladstone Inocked hos who sought eatin in trade poi he peste to both ators. What in he werd dacs Fis Trade” mean? he ste, “Well gentlemen" he sponded, asin a argument hat ‘ould be repented endl by free taders henceforth, mast fay it ears suspic ikenes fo oar old fend Protection “This wat plain ot protectioniom trying to make ie look more aliractve by asnming new pane. (Gladstone poined ou that Britain stood to gain ite from retaliation see its imports of manufactured goods nee 4 ich smal than ts exports, Tarfsimnposed on sich ny bate wold te ite pone power. rin’ age rade ups, ladsone» ‘The Globalization Paratox pronounced, made free trade the beter policy forthe country. A contemporary economist would cringe at Gladstone's mercantilst, argument, which suggests that a country benefits from trade only {insofar as erunsa trade surplus" No matter. Britain's dominance ‘in manufactures helped it avoid a protectionist cascade. If among advanced countries free trade relied on a difficult ‘and fragile balance between 2 shared ideology and a constellac tion of politial interests at home, in the rest of the world it was imposed mostly from the outside. In Asia, European imperialism {guaranteed thatthe rights of foreigners wee protected, contracts enforced, disputes adjudicated under European countries’ rules, exporters and investors weleomed, debts repaid, infrastructure investments undertaken, locals pacified, nascent nationalist ambi- tions thwarted, and so on—neutralizing the long list of transac tion costs that could impede international commerce, Recall how ‘the Fast India Company was superseded by the British Raj when ‘the former proved unable to handle local insurgency, or how the “Hudson's Bay Company’s police powers were handed over to the ‘Dominion of Canada. The British Empire brought law and order to societies that lacked them, argues the Harvard historian Niall Ferguson: “no organization in history has done more to promote ‘he free movement of goods capita and labor he writes, "than the British Empire in the nineteenth and early ewentieth centuries” ‘One does not need to buy into Ferguson's glowing take on the British Empire to agree with his assertion that imperialism was a tremendously powerful force for econoimic globalization. A recent statistical study found that two countries that were mem bers of the same empire lad tice the volume of trade berween ‘them compared to trade with others outside the empire, holding ‘as many things constant asi feasible in this kind of quantitative ‘work. The reason? *[E]mpires increased trade by lowering trans- actions costs and by establishing trade policies that promoted trade within empires" The specific instances of reduced transac- ‘ton costs thatthe sudy’s authors are able to quantify ae the use The Rise an Fall ofthe Fest Great lobatization B ‘of « common language, the presence of a common currency, the monetizing of recently iequired colonies, and preferential trade arrangements." would bea mistake to think such effects were confined tocases where metropolitan powers exerted direct imperial rule. Imperial- ism came in both formal and informal variants, Britain, France, the United States (which eventually got into Uhe game), and the ‘other powers did not always have to extend direct rule to bend other regions to their wll. The threat of military force and politi- cal pressure were often adequate, Ina classic article entitled "The Imperialism of Free Trade;” Jol Gallagher and Ronald Robinson. “show that there'was a continuum berween informal infience and formal rule, with the latter employed only asthe lst resort when Conditions were (oo unsetled and unruly o achieve the desired ‘effects through local ralers!* prime instrument of informal influence was the trade treaty If the locals proved insufficiently in ame of Smich and Ricardos ideas, gunships standing atthe ready could always provide the necessary persuasion. So Britain signed a treaty with Ottoman, ‘Turkey in 1888 that forced the country to restrict import duties to maximum of 5 percent and abolish import prohibitions and 'monopolies. The British also fought the so-called "Opitam War” with China in'1889~42 (0 open up the country 10 imports of ‘opium and other goods exported from the British Empire. Com- ‘modore Matthew C. Perry signed a treaty with Japan on bebal€ of the United States in 1854 to open the country to foreign ship- ping and trade, These and other similar treaties would impose lings on import duties (one-sided, of course), restrict the abi ity of the less powerful countries to conduct their trade pol ies independently, grant foreign traders legal privileges, and ‘enforce foreigners’ access to ports ‘Thus, despite the unmistakable explosion in trade, the glo- batization ofthe nineteenth century was not based as much on free trade as it soften portrayed. Policies of empine—formal or* ‘The Globalization Paratox informal—clearly promoted trade, but they were based on the naked exercise of powerby the metropolitan countries and hardly represented “free trade” in the true sense of the term, And if one leaves Britain aside, liberalism scored only limited vietoriesin the domestic trade polices of major economies. Some countries (such asthe United States) never truly espoused Free trade policies, while others (such asthe European Continental powers) reverted back to higher levels of protection after a couple of decades. Domestic polities rarely proved conducive to free trade for long stretches, ‘except where economic supremacy guaranteed relative immunity from import competition. Thanks tothe transport revolution and the rise in incomes, there was plenty of globalization—more prob- ably than at any other time in history with the exception of the Tast few decades. But this globalization rested on awkward and. fragile instutional pillars, a set of prerequisites unlikely to be replicated. ‘Te Gold Standard and Financial Globalization What was rue ofthe trade regime was even truer ofthe nancial and monetary elie that govemed nineteenth-cenuay gloaliae tion, che gold standard Discipine enforced through imperialist practices was once again crucial to uphold fre capital flows. And the belief system that uiderpinned the gold standard and sus- tained financial globalication bewween 1870 and 1914 ould not, survive the mortal blows recived from the Great Depresion and the revolution in economic thought that John Maynard Keynes ‘wrought “The gold sandard rested on afew simple rues, Bah national currency had its gol party, which pegged itsvaue rig to gol For example the Betsh pound string was defined a 18 grains cofpate gold and the US. dolla a5 28 2 grains" The central bank ‘ofeach nation stood ready to convert national currencies to gold ‘The Rise and Fal ofthe First Great lobaiation » athe partes Accortaghy exchange rats betwen arenes wee ali ievcaly ed oe rsh pound equed 13/2522 Or 5 dlrs Money oi flow fei ars counties, and be exchange at teed tes determine bythe gol parte ‘Theale meant hat changes inthe domestic mply of! money were tied to movements in gold eserves A eounty nit 2 efit on reign ance of payments wal foe ldo ‘rade partner, ad experience a redutn nt money Thee go wa woud nr ger erections coon condion which economical ‘ama ajtoent me ani Ina dfck country, gtmoneyand eet woul retain ‘combinono ing interes ae a aling domes res ‘These ton woul endo reduced pendingand improved tae competivenes, storing eqlibviun on extra! payments Under gold ata geerens had obi rack sround with monetary psy fo alr domes ce condor bectie doer mony ule were ely decmoedby ol and apa low acton natlonal borden ta principe etal Pater had it do bese go eng dame or sec the lelof gol in tr aus Macuated. The tn had lear, ute and nondsreonary rue. The nancial rege minnizo rnton co eos national beundaes Firanierandiestors ado comend with ncthesureser ot conto atthe bord, I practic, eta aes had some oom manewe an departed om thes“ the game” om econ. In parce ta country wid wade defic col delay or ald ie imeret rate here were componeating private cape owe coming in fom abroad But the aaa ote “tabsng? fms of expt depended realy onthe erably of conta tank’ commiment co the gold party. Market antumed that goverment wou venta defend the partes come Bell ot high weiter. They dio because tat was the Bel ten hg cred central ak hehavor athe ne, The malmerance athe* The Globalization Paradox {gol standard had absolute priory inthe conduct of monetary policy both because the system came to be viewed asthe founda. tion of monetary stability and because there were no competing ‘objectives —such as fll employment or economic growth—in the conduct of monetary policy. Ideas mattered, here as elsewhere. ‘The notion that setive monetary and fiscal polices could systems- tically sooth business cycles or that currency devaluation could help reduce trade imbalanoes—these were yet to come, or hereti= cal at best. There was no widely believed or welkarticulated con- ception of how governments could stabilize demand, output, oF ‘employment. Unlike trade policy makers, central binkers were insulated from the push and pall of domestic polities and could operaie autono- ously. Barry Kichengteen, one of our most astute historians of ‘nancial globalization, hist righton the nail central banks abil- ity o maintain free capital flows and fixed exchange rates in the face aFeconomic shocks "rested on limits on the political pressure that could be brought to bear on [them] to pursue other objec- tives incompatible ith the defense of gold convertibility" The central banks ofthe leading powers—Britain, France, and most ‘others—were in fact privately owned and had no public function besides the issue of legal tender. The United States did notacquire 4 publie institution acting asa central bank until 1913, when the Federal Reserve Act created the Federal Reserve System. Central bankers in different nations operated as members of club, with ‘greater affinity for each other than for their domestic brethren. ‘drawn from worlds outside finance!" In the words of Fichengreen, the gold standard was “socially constructed instinution.”™ “The financial globalization experienced by the world economy in the decades before World War Iwas nothing short of extraordt nary In a passage thats reproduced in almost every book on glo- balization, the predominant economist of the ewentleth century. John Maynard Keynes would nostalgically reminisce in 1919 about how the inhabicant of London could invest his wealth freely in The Rise an Fall of te Fist Great Glotaliation ® any par of the world without any hindrance or worry that he maj be deprived of the fruits ofthat investment2® This was a period When the world’s inanckal markets operated with the leat amount of transaction costs, Interest rates in London, New York, and the ‘major financial centers of Burope moved as one—as if they were Joined as part of one single markee. Capital lowed freely and in Ihuge quancties from where itwas plentiful (Britain in particular) towhere itwas scarce (the New World in particular). Unlike in the case of free trade, there was no retreat from gold and from free capital flows before World War Tintervened—despite considerable ‘clamor for departing from the gold standard during the 1870s and 1880s. Such heights of financial globalization were not to be sealed again until very recently The durability ofthe institution was severely tested in the 1870s hen a shortage of gold resulted, asthe rules of the gold stan- ard demanded, in tight credit conditions and price deflation in both Purope and che United States. Most hard hit were farmers, for whom the high interest rates in the face of falling prices were ‘rushing. There was much clamor for a return to a bimetallic standard, which would have alowed governments to monetize si ver and incfease the money supply. The revolt reached ts apogee in the United States, where William Jennings Bryan, three-time Democratic candidate for president, gave his famous “You shall ‘not crucify mankind upon a cross of gold” speech atthe 1896 Democratic National Convention." The central banks stood firm and the gold standard held. Ultimately what probably saved the ‘gold standard was that price deflation came to an end once the {old discoveries in South Afties after 1886 led to an increase in the market supply ‘As we have seen, among the major economic powers ofthe day financial globalization was the product of convergent beliefs within 2 close-knit cub of central bankers who made all the important decisions. Among the countries on the periphery of che global ‘economy in Latin America, Middle East, and Asis, monetary” The Globalization Paracok orthodoxy ruled as well—even though not many of them made a fullledged transition to the gold standard. The more serious problem in world finance was how to ensure that sovereign enti> ties, and borrowers within them, would repay their debts. ‘isa perennial problem and the bane of international finance. When a domestic borrower refuses to repay, the aggrieved lender can go to courtand attach the borrower's assets, and expect the judgment to be enforced by the domestic authorities. When a “debior ina foreign Tand will not pay, the lender has few options. There is no international court to pas judgment and no interna tional police wo enforce that decison, Essentially the only check fon the borrower isthe likely oes im reputation and the poten sets for 2 tial cost of being shut out of international credit n period of time: Despite these cots to reputation, history shows that defaulters eventually eenter international financial markets. Several implications follow, First, the borrower might default on his international obligations not just when he is unable to pay, but also when he is imply unuildng to pay—a much lower threshold. Second, anticipating this, a rational and forward-looking bank ‘or bond holder is unlikely to engage in much international lend- ing, or will do s0 only ta high premium. Alternatively there will be boom-and-bust cycles driven by shortsighted lending followed by subsequent default, ‘The market for international finance ca not thrive unless there are credible mechanisms for enforcing. repayment. [As with trade’ treaties iC was a big help to have gunboats and imperial le as enforcers of debt contracts. The British capital ist who invested in Indian railways knew that che British Ra} was there to guarantee the safety of his investment: "to long ashe was guaranteed five per cent on the revenues of India” one British official remarked, “it was immaterial to bim whether the funds ‘which he lent were thrown into the Hooghly or converted into, bricks and mortan"® When the Ottoman Empire defaulted on its obligations to mostly British and French bond holders in 1875, the Te Rise an Fall of te Fist Great lobsliation x Europeans prevailed on the weakened Sultan to let them set up an extraterritorial agency to collect Ottoman tax.revemies. The Ottoman Public Debt Administration (which began operations in 1881) became a vast bureaucracy within the Ottoman state with the primary purpose of paying foreign creditors, When nation- alist agitation in Egypt threatened British financial interests in 1882, the British invaded the country to “restore political stabil ity” and ensure that foreign debts would continue to be repaid, ‘Acthe time, the prime minister, Wiliam Gladstone, had a sizable chunk of hs wealth invested in Egyptian obligationssoin this case the link between financial globalization and military power was particularly transparent." Britain eventually ended up governing Egypt directly, even chough is early intentions had been much more limited. ive United States iielf had a checkered history of honoring ‘debts, with many of the states having defaulted throughout the nineteenth century itis ironic chat the Americans eventually became the debt enforcers in the western hemisphere, Theodore Roosevelt made it clear in 1904 (in the so-called “Roosevelt Coro Jary” to the Monroe Doctrine) thatthe United States would ensure that Latin American countries honored their international debt He showed that he meant business by sending gunboats to Santa Domingo in 1905 and taking over customs revenue collection after the Dominican Republic defaulted on its debts—an action that signaled his determination to protect foreign creditors interests sand sent the prices of Latin American sovereign bonds soaring The question before the U.S. gunboats appeared was not whether the debts woutd be collected, bt whether iewas the Europeans or the Americans who would do i. By preempting the Europeans, Roosevelt intended to leave no doubs that this was an American sphere of influence, The gold standard and financial globalization were matte pos sible, just a in the case of free trade, bya peculiar combination of domestic politics, belief systems, and thied party enforcement.° ‘The Globalization Paradox “When these forees weakened, as a result of mass politics begin ning to assereitelf 0 did international finance, The ukimate col lapse of the gold standard during the 1980s provides 2 revealing window om the fragility ofthis combination. ‘The Demise of the Gold Standard World War I ushered in a period of heavy government controls on Foreign exchanges followed by instability during the 1980s. All gor cernments including Britain's suspended gold convertibility ring, ‘the warand imposed restrictions preventing free exchange ofthe domestic cirrency to foreign currencies (exchange controls). Fol lowing the conclusion ofthe war, several European countries expe- rienced hyperinflation during the early 1920s (Germany, Austra, Poland, and Hungary). This wns a tumultous time on foreign exchanges, with currency rates often gyrating wildly. Officials viewed a return to gold as inevitable somerime during the 1920s, to reestablish normalcy in international finance. But questions remained about the timing and about whether the return should take place atthe prewar parity (£1 = $4.87) orata more devalued ‘ate, The argument for devalsing the pound was clear, and in hindsight unassailable; Britain's economic star had dimmed and required a weaker pound to go along with it ‘Winston Churchill, fr all his subsequent staesmanship during ‘World War Tl dns have much ofa head for economies, or much, interest in it So it was particularly unfortanate that he became chancellor ofthe exchequer in 1924, on the eve of Britain’ return to the gold standard, He readily admitted that he was out of his ‘depth when conferring with his Treasury underlings. If they were “soldiers or generals, I would understand what they were talking bout he quipped. "Asieis they all talk Persian." British prices had risen more than threefold during the war and despite significant deflation (on the order of 50 percent) in The Rise and Fall ofthe Fst Great Globalization 2 the aftermath ofthe wa, they remained higher than in the United States. Britain had also run up large debts against the United ‘States, which now sat of top ofa large chunk of the world’s gold reserves. The British government had been forced to maintain high interest rates to prevent capital Night, and unemployinent remained high a 10 percent. The market vale of the pound stood significantly below the prewar $4.87 level for most ofthis perio. Keynes was prominent among those who thought return to the prewar party would be disaster since it would leave the British ‘economy saddled with an overvalued currency and a serious com Petitiveness problem in view of wheve British prices stood. British industrialists and the press magnate Lord Beaverbrook agreed. Churchill listened to financiers and the Bank of England Instead—to his considerable regret later on. The Bank's board and its governor Moitagii Norman convinced him that return to the gold standard at anything other than the prewar pacity would defeat the purpose of che restoration. They argued that the credibility of the system hinged om the immutability of the parities: change them once, and the markets will think they can >be changed again. More than economics, it was a question of eth- ics. To the purists, rerum at the old parity was “a moral commie: ‘ment on the part of the British nation to those around the world who had placed their assets, their confidence, and their trust in Britain and its curreney"* If British labor and industry ended up ‘uncompetitive, a period of deflation im wages and prices simply ‘would have to be endured. This was neither the first nor the last time in history that bankers have prescribed tough medicine tobe ssrallowed by others Is this instance, a8 in 40 mauty others they also had the benefit of having what was then considered “sound: ‘conomics” on ther sie, Despite continued price deflation, the British economy never adjusted to the reinstatement ofthe old parity, Wages and prices ‘remained too high for the British economy o regain its external competitiveness and correct its trade imbalance, Export oriented2 The Blokaliatan Paradox Industries such as coal, steel, shipbuilding, and textiles were hard bit and unemployment eventually rose to 20 percent. Labor strife and strikes were rampant, Byen though the economy remained in dive strats, the Bank of England was forced to maintain high inter- ‘est rates to prevent massive outflows of gold—competing in effect ‘with countries like France that had returned tothe gold standard in 1926 ata more competitive parity. The United States, despite its early financial support for the pound, did not help much either, ‘When the New York Fed raised its benchmark interest rate in early 1928 to stern whatit thought was speculative excess on Wall Steet, it also pat further pressure on countries with external payments deficits such as Britain. Higher interest rates in the United States forced those countries either to follow suit and raise their own interest rates oto suffer further hemorrhaging of gold and capi tal. Final, in September 198, Britain once again went off gol. Once this standard-bearer of gold was forced out, the regime's days were numbered, Franklin Roosevelt took the United States off gold in 1989 to enable monetary expansion, and France and the so-called “gold-block countries’ fellowed in 1956, ‘The gold standard had come under pressure in peacetime before, most notably during the deflationary episode of the 1870s spurred by «gold shortage. What was different this time around? First the economics, then the politics, and chen the economics once again tart with the first-round economic changes. The textbook odel of adjustment under the gold standard presumed individu. alistic, decentralized labor markets with flexible wages. If domestic industries became globally uncompetitive, wages and other costs ‘would fall, helping these industries retain marketshare. Cheaper labor would also curtail unemployment. This was of course never ‘quite how real economies worked, butt became more ofa fantasy ‘overtime as labor became organized and trade unions asserted themselves. There was a significant rise in union membership in the two decades before the 1920s, and industrial unrest was on the The Rise and Fall ofthe First Great Glotatation ® rise, culminating in the General Strike of 1926. Labor’ aitity to ‘maintain wages meant that sustained monetary contraetion due ‘oa gold outflow (or the threat thereof), as Britain experienced, ‘would now result in sustained unemployment. The full ramiica tions for economic policy would not be clear until Keynes pub- lished his great work, The General Theory of Employment, Interest and ‘Moneyin 1985-86, explaining why the go standard fails to oper- ate smoothly in modern economies. Now the politics kicks in. Regardless oftheir own instincts, cen ‘wal bankers and their political masters in the 1980s understood ‘that they could no longer remain aloof from the political conse ‘quences of economic recession and high unemployment. Workers hhad become not only unionized; they now also had the vote. The franchise had quadrupled in Britain in the decade after World War Newspapersand the radio were well on their way to become ‘ng “mass medi"; British national dailies had a combined eireula- tion of 10 million by the 19305" Economic policy was becoming, emocratized. There was a growing Socialist movement to con- ‘end with. All of this meant chat given a choice between suffering the political consequences of mass unemployment and giving up ‘on the gold standard, a democratially elected government would eventually pick the second choice, Democracy was incompatible vith absolute priority forthe gold standard, ‘Now to the second-round economics, which provides the coup de grice. Once financial markets begin to question the credibi ity ofa government's commitment toa fixed parity vis-a-vis gold, ‘they become a force for instability. Governments are now easy prey for speculative attacks. At the slightest hint of things going awry, investors sell the domestic currency, buy foreign currencies, and ‘move capital out of the éountry If the parity is maintained, they ‘can simply reverse the transactions and lose nothing. But ifthe ccarreney is devalued, they will make tons of money as they pur- chase domestic currency back at amuch cheaper price upon repa- ‘iating their capital. This i a familiar syndrome in the presence“ The Globalization Paradox of fixed exchange rates for financial markets itis acase of “Heads | win ails you lose." In the process of selling domestic currency, speculators of course put downward pressure on the value of the ‘currency and end up hastening the collapse ofthe parity. Their ‘expectations easily become self fulfilling. Britain's fate in the interwar period demonstrated that rigid monetary and financial rales such as those of the gold standard don't mix well wih» modern econoray and. modern polity. The {gold standard narrative of smoothly functioning, selfvegulating system of global finance ceased to be convincing inthe fue ofthe ‘new politieal reality created by democracy. Tt isa lesson that would Ihave tobe relearned in the 1990s. , Protectionism inthe interwar Period ome plies proved equally power ring he 19805 08 thee frat The adc se ake otrnaonal tooperaton in wade, fee forall hat agate the Great Depein The Unie Star was among ewer ad fotth preven al alin by pig the igh rie Ins oy in 1990 The tants Sooty Tl was sponse (0th flncommodiy pres and conor dete tod med weer enh idan it ome woke a Congen Bening hgh prota all hw ce bone sono wth congeina lgling and dsrctne proven, Taropean ston hd sla conc enn or ede parenand be US.moveace arethecne ig re inne thei yh 10 percent rif acorn oe mt (quot on impr wich a ley een aolibed in tee ofthe more rampant pon dues, One Hae ame te power in 108, he aed rade pin seal exe ‘naman antag fom Germanys eigen in southern ‘The se and Fallof the Fist reat Globalization 6 Europe.:The protectionist trend also spread wo developing areas such as India and Latin America; the British Navy was far too ‘weakened and preoccupied with other matters to enforce free trade in the periphery. Between 1929 and 1987, the volume of world trade was haled.”* ‘The priate cause of his proton reyponte wa the eo- ‘nomic calamity that came to be known as the Great Depression. ‘With farmers defaulting on their loans, businesses closing, and ‘unemployment reaching unprecedented heights, seeking pro- tection against imports was a navural impulse if ultimately col lectively self-defeating forall countries taken together. But the deeper root of protectionism lay inthe changing role of govern- ‘ment in society. A politically empowered and active society—the Joint resuk oC industritization, democratization, and World War ‘demanded greater economic protection from the government in the face of extreme adversity. Governments did not yet pro: vide extensive safety nets and social insurance to take the edge off international competition and cushion working people from the consequences of trade. Countries that remained on gold for longer (such as Prance and Switzerland) and therefore had less ‘freedom to stimulate their economies were especially prone to put ‘up high trade barriers* The beliof systems and habits of interna: ‘ional cooperation that served the world well under reasonably hnealthy economic conditions collapsed under the joint impact. of the changed economic circumstances and the inerease in the ‘number of stakeholders to which governments became respon ble and accountable ‘The wortd economy had outgrown the clasical “Iiberal” eco- ‘nomie order, but there were a5 yet no palatable alternatives on offer. As the Harvard politcal scientist Jeffry Frieden notes, "Sup- Porters of the classical order had argued that giving priority 10 ‘international economic ties required downplaying such concerns 8 social reform, nation building, and national assertion.” Once ‘they lost their argument, the fléodgates were open. ConhmunistsHf | “ The Globalization Paradox coon cia form oer he laa economy alse the faves of om word ares, Face choe sition builing, Troan oervomic nonlin a Eope a is the “So eld nh economic and pic cli, ny fre inernuonal econ ker wold hye te 4 Betet Da ther beeen the demands ofimeratnal esnonyand eof Somentocal oups Designing hat conpromie wun wrt ing of how ee ade cree vc require a better understan Why Doesn't Everyone Get the Case for Free Trade? ee ttade is not.she natural order of things. We get free trade—or something approximating it are lined up justright and the interests behind free trade have the upper hand both potitically and intellectually. But why should this be so? Doesn't free trade make us all better off over the Jong run? Iffree trade i 0 difficult to achieve is that because of narrow selinterest obscurantism, political fare, oral ofthese combined? It would be easy to associate fee trade always with economie and politial progress and protectionism with backwardness and decline: It would also be misleading, as we saw in the previous chapter. The real ease for trade is subtle and therefore depends heavily on context. We need to understand not ust the economict of free trade, but als its implications for distributive justice and social norms, ‘only when the stars ‘rade as Technological Progress There's no better place to begin than in 1701, witha certain Henry. Martyn. Martyn, a lawyer and Whig loyalist in early eighteenth-Be « ‘he loballzation Paradox cow all but forgotten. Greatly ahead of his centary England, isn jam Smith time, he produced, three quarters ofa century before Ad ain wore than a century before David Ricardo, the best argument for free trade known to men. ‘Martyn thought the mercant nomic policy had It all backwirds on trade. The prevail ort nothing but raw materials itis who dominated thinking on econ ing ew held that Britain should imp ve that manufacturing could be reserved for domestic producers ‘There was great public opposition to the East India Company, vvhch had started to import cotton textiles from India. Marty nought otherwise, He felt imports of manufactures fom Tia ‘benefit tothe English ation rather than & oss represented a Martyn wanted to set the mereaniliss straight, bu there vas 2 also interested in public office. le would even~ problem, He was: lof Imports and tually be appointed in 1715 as Inspector General porta post created a a result of the mercantls obsession init the volume of trade that requited him totally up England's qrbound aid outbound trade. Expressing fre trade views in pub- tie would have damaged his poitical ambitions: such was the dom: nance of protectionist sentiment atthe time. So when he penned tsinnocentsounding butincendiary tract, Considerations Con the Foot India Trad, in 170), be was compelled to do so anonymously” Tn this remarkable pamphlet, Martyn anticipated many of the trpuments that economists who favored fee trade would marshal Tater. Most impressively, he produced—with greater punch the “killer argument™ such than most textbooks manage even today—t for fre trade ‘Marty's argument relies on an analogy be sogical progress. Martyn pointed to Instances of 1 readers of his seen international trade and techno technology that would have been familiar to th thy. Take the sawmill he wrote. The sawmill allows wo people © “tothe work that in ts absence would have required thirty people Tove reject che use of the sawmill we cobldemploy chose thirty ‘people, but wou that be twentyight more chiral ee Why Doesnt Everyone Get the Case for Free Trae? es ant enews of the nation’ sources? Orca barge om tga rive, Fe men on the hae son ngs asmmuch eight none hundred mn ana nny hanson od ‘TE we neglect the river, we could put that many men and be = work, but wouldn't that once again be a > Mi Seanad wba we? Margo ssumed besa ol inden aoa ey ge sponte rts the aml oh pe "boing he tele ay alr he cindes Ws 2s wate ely workers in Eng wena gland the ene rode abe obtained om nay puting es to work?" steer perie We cn prodice tet tome; or ec aba th uate day preing azar cm seh in en tres ar a ormer, it is the same as if a be chi ying toe ine eee i dp ty ew ht eg jo the Benet of soil, brges or any ether abo innovations. Isn't it equally silly to reject: rs Senne inert equal echo marae cee puesto fe a : ee de operandi sal ven can ie ui cing progres When nto ys Serhan treo a tel ae : none of the problems with the argument. It assumes that th : ong n nge e l i nsome other cpt Ih bonne Ded inne ia geo bs Bay

‘lamiss popular concern about trade. The tendency of economists at ‘en was isi thee arguments Bien worse, books Tike mine ‘ould be dangerous case they would end wp provsingamimuiton tothe barbarians ae Krogman himael warned me ina pertonal com munication before my book was pbishe. 18 Wage ineqealiy has topped groning in thelower bal ofthe dri tion we ekeeprinerensigin the op ha The pin wages beoveen prodaction and non-production (eq. managerial and mipersisoey) ‘orkers has come down ince 200. 19 Chri Brada and John Roma, “inedsty and Pics Does China enc tne Poor n America? Univerity of Chicago Graduate Seio! ‘of Business, Mah 2008 120 See the iscrion by Douglas win Ltey Kat, and Robert Lawrence ‘hat follows Pl Kran’ eseay inthe Basins Paps on Beronie ‘Activ (Speing. 2008), pp 1854. 21 As measured ty the import penetration ratio: 22 The source for this information i Avratiam Ebene, An Haris, Margare Medfitn,and Shannon Philip, "Eating the Impact of “Trae and Otshoring on American Workers Using the Current Popul: sion Surveys” National Bureau of Eeonomie Reseach, Working Paper 15107, Cambridge, MA, Jane 2008 28 Lawrence Summers, "America Needs to Make & New Case for Trade” ‘Pratl Ts, Api 27,2008 (p/w ft ca/emns/9/0/0c1 8 Notes as 147%-11d.a70-0000779f42ac het); and Summers, A Strategy to Promote Heath Gloalaatin” Finan! Tims, May 4 2008 (p/ seston /eme/4/0/999160e6-a08-1dd-ba02 00007 70Fd2ae “nian. cheek= {2 Sommers, “America Needs to Make a New Case” 25 Alan Blinder, “Oflshoving: The Next fadustia! Revolution, orga ‘Afi, ol $5, no 2 (Marc -Apei 006), pp. 18-28, 25 hid, p18, 2 Jagdish Bhagwat, "Does the U.S. Need a New Trade Polley” ural of Poly Moding 3 (Juty-Augus 2009), p. 509-16. 28 There ia simple explanation for why compensation ex post is never vite cedibe exante Bele rade agreement xpased, export iter {xs want o minimize opposition from labor and other grenps wor ‘ed about adverse fet, and hence wil promise progeny such 28 Sajurmentassitance to nt the oppaitin. Bat once the agreement {apes the winners have much ese inentve 0 kep the losers bap. Sothe promised sfustmentanitance wil become underfunded ad ‘nettetve oer te The history of US. trade ajstment assistance ‘na followed this loge, which shy bor unlons ate rarely mole ‘hese da by peomises of expanded adjusmentassance- Fnac 11 cerved for several years a scar coordinator forthe Group of ‘Twenty Fou, a developing country caucus group within the IME. “The groups plenary gathering during dhe IMF asnual meetings was ‘enlemate of the treatment ministers fom developing nations, sare fora few among the, typically rected. The Wold Bank president and the IMF managing director would strollin atthe beginning of he ‘ecting, sake afew hands, ead ther prepared remarks and then Drompty depart. Their seats would then be led iy Bank nd Fund ‘clas wevera grads their unit, charged with the eat of tering ‘o (uffering through?) the presestaions bythe developing nations ‘Besiectes 12 Quote in Ran Abdel, Capital Rules: Te Gmsrucion of Cal Pine (Cambridge, MA: Harvard University Peas, 2007), p. 158. Abela provides an excell acon ofthe 1997 mectings andthe ronsep 9 them 8 Gommunlgaé of the Icerim Commitee of the Board of Governors of ‘the IME, IMF Press Release #9744, September 21,197 (api//ew Simorg/external/np/se/p/1997/pri744 ham). 4 Stanley Feber, Capital Account Liberalization aod the Role of the nntanin oles