8 Jun 2016

Globalization breaks things but still does good

The upsides of globalization -- exchanging goods and ideas on a larger scale -- are massive. We know this from the theories of comparative advantage, innovation diffusion, and institutional evolution. The downsides of globalization include the transaction costs of change and negative impacts on the "losers" -- the less efficient producers, rulers of old ideals, and masters of outdated institutions.

As I said two weeks ago, the transaction costs of change can be reduced by allowing enough time for adjustments in procedures, expectations, contracts and relationships. That economic fact also has a bigger political role, as more rapid change also creates greater threats to the beneficiaries of the status quo. The obvious implication is that change should happen but at a speed that minimizes transaction costs and opportunities for political backlash.

We can see these tensions often, but I will link two ideas here.

First is the danger of "hot flows of capital" that result from liberating financial markets. In this IMF paper on macroeconomic neoliberalism (i.e., more open capital flows and reduction of public debt), the authors show that an over-hasty turn to markets can result in counterproductive volatility. I agree with their recommendations of slowing down direct investment flows and reducing government spending by program, rather than across the board.*

Second is the disruption and controversy caused by increasing "globalization of ideas." Back in 2004, I visited Peru and saw how internet cafes were proliferating in remote villages. Although those cafes surely brought information, connection and entertainment, they also brought "anti-community" ideas of individualism, novel approaches to living one's life, and -- of course -- pornography.

This clash of new ideas is causing troubles in many places. "Radical" versions of bigotry, dogma, liberalism, and nationalism are causing more trouble, more broadly, because they are arriving faster, without filters, into communities and mentalities that may not be willing or prepared to accept them.

On the one hand, we have to agree that people need exposure to new ideas as a means of evolving human culture. On the other, we have to admit that "hot flows of ideas" disrupt and threaten dominant ideologies and power structures. 

The resulting backlash against ideas -- like the backlash against financial liberalization -- throws out the good (freedom and innovation) with the bad (challenging outdated beliefs). It's thus similarly useful to find a happy medium that allows ideas to flow at a rate that is more helpful than harmful. This debate is now front-and-center with the war for/against free speech that takes different forms everywhere -- from micro-triggered in the US to machete murderous in Bangladesh.

Such a battle will be fought regardless of our wishes or intentions, due to the presence of losers, but it should be fought to maximize the gains to winners. It therefore makes sense to maximize the small flows of cash or ideas across borders, while perhaps slowing down the flows of larger-scale cash or ideas. Let individuals trade or talk without constraint, but avoid large-scale flows of hot money and zealotry, respectively, that come with global finance and populist jihad.

Bottom Line Globalization is useful to the vast majority of humanity but the losers (the local monopolists in trade and ideas) will try to disrupt it. Their chance of suceeding is lower if we defend the long term benefits but also allow for a slower disruption of "bedrock" institutions that should be abandoned gradually (and individually) rather than through frontal assault.**

* I still agree with the "neoliberal agenda" of increasing competition and reducing the role of the state, but not dogmatially, as there are always places for less competition (e.g., where production creates pollution) and presence of the state (e.g., regulating public health).

** Examples: Saudi financing of Wahabbist medrassas or US evangelicals writing anti-gay laws in Africa, but NOT Facebook or the Daily Mail. The former two are push-supply side; the latter pull-demand side.

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