U6800: Conceptual Foundations Final Essay

Question 2

Xin Yi Cheow xc2298

Instructor: Hisham Aidi, Tuesday 610pm Section
This essay is a debate on the role of the state and whether it should adopt a free market
versus interventionist approach in managing the forces of globalization.
My essay will argue that the state should actively intervene through Keynesian economics
and regulation to curb the excesses of globalization, which was pursued under a framework of what
Joseph Stiglitz (2010) has called market fundamentalism. Characterized by unfettered markets
and rapid privatization and liberalization, I will show that this free market approach has led to
underdevelopment, inequality and in some instances, even violence, especially in developing
countries.
When managed appropriately, state intervention in the form of affirmative policies, direct
investment and suitable mix of regulation can help countries leverage economic linkages inherent in
globalization through the engines of trade, growth and transfer of knowledge to achieve equitable
economic prosperity.
Terms of reference
Given the economic nature of the debate, I shall focus on economic globalization as the term of
reference in this essay, which is defined by Jagdish Bhagwati as the integration of national
economics into the international economy through trade, direct foreign investment (by corporations
and multinationals), short-term capital flows, international flows of workers and humanity
generally, and flows of technology. (Pg 3, 2004)
Working definitions aside, definitions can betray inherent ideological bias for discussion,
and Dani Rodriks framing of Tom Friedmans globalization definition in what he called the latters
ode to globalization, The Lexus and the Olive Tree is significant: where globalizations economic

linkages as personified by financiers and speculators who can move billions of dollars around the
globe in an instant forced all nations to don a "Golden Straitjacket This defining garment of
globalization, (Friedman) explained, stitched together the fixed rules to which all countries must
submit: free trade, free capital markets, free enterprise, and small government, wrote Rodrik. (pg
189, 2011)
Consequences of free-market non-intervention: Volatility, Exploitation and Violence
The conditions under which globalization is pursued under the Golden Straitjacket is synonymous
to the neoliberalism and neoclassical economics as terms used by Stiglitz and Vincent Ferraro.
According to Rodrik, the demands of such hyperglobalization require the crowding out of
domestic ideals, the insulation of economic policy-making bodies (central banks, fiscal authorities,
regulators, and so on), the disappearance (or privatization) of social insurance, the push for low
corporate taxes, the erosion of the social compact between business and labor, and the replacement
of domestic developmental goals with the need to maintain market confidence. (pg 204, 2011).
In fact, I would argue that globalization has been hijacked by the free-market ideology and
even Bhagwati, often dubbed the modern Adam Smith, alluded to the need for intervention when he
stated how the growing integration of nations worldwide into the international economy has
intensified competitive pressures from rivals, while instant access of scarce knowledge by
multinationals due to diffusion of new information technologies has shrunk buffer and increased
economic insecurity (pg 12, 2004) In arguing for state intervention, I shall first lay out what are the
consequences of non-intervention under the free market doctrine.
Volatility: Stiglitz articulated for instance, that the rapid liberation of financial markets
through international economic institutions like the International Monetary Fund (IMF) is inevitably
accompanied by huge volatility that impedes growth and increases the risk of investing in a country,
leading investors to demand a higher-than-normal profit in risk premium. This increases the

likelihood of recessions where the poor, without adequate social nets, bore the brunt of such
downturns. He showed how in the case of Thailand, free market lending principles imposed by the
IMF resulted in the investments of empty office buildings, starving other sectors like education and
transportation of badly-needed resources, even though the Thais had restricted bank lending for
speculative real estate before the IMF and US Treasury came along (pg 6, 2002). Bhagwati also
stressed the need to distinguish between the case for free trade versus and the freeing of capital
flows in haste without putting in place monitoring and regulatory mechanisms and banking
reforms, which he said amounts to rash, gungho financial capitalism. It can put nation-states at
serious risk of experiencing massive, panic-fed outflows of short-term capital funds, which would
drive their economies into a tailspin. (pg 7, 2004)
Perhaps the greatest illustration of the consequences of non-interventionist free market
ideology polices would be the Great Financial Crisis in 2008, where Stiglitz charged deregulation
played a central role in the crisis(pg 216, 2010). Stating that the debate over market
fundamentalism is over, Stiglitz wrote, September 15, 2008, the date that Lehman Brothers
collapsed, may be to market fundamentalism (the notion that unfettered markets, all by themselves,
can ensure economic prosperity and growth) what the fall of the Berlin Wall was to communism
(pg 219). A new set of regulations, he said, would be needed to prevent another crisis and restore
trust in banks, and they must be comprehensive. If not, there will be regulatory evasion- finance
will go to the least regulated country. (pg 216, 2010).
Exploitation: Dependency theorists, whose basic premise of international capitalism
creating dependency of poor peripheral states and their exploitation by richer countries (pg 60,
Ferraro, 2011) would also point to the failures of neoclassical economics the bedrock of free
market economy to explain the persistence of poverty in developing countries. When poor
countries export primary commodities to rich countries who then manufactured products of these
commodities and sold them back to poor countries, the difference in value added of these
products means poor countries would never be earning enough from their export earnings to pay for

their imports. While the phenomenon is underpinned by a free market economy, Ferrero said that
the neo-classical approach, which assumed economic growth was beneficial to all, nevertheless
failed to predict such economic problems in developing countries (pg 58, 2008).
Secondly, Ferraro pointed to dependency theorists repudiation of the market as sufficient
distribution mechanism, a central theory in the neoclassical model of trickle-down economics.
Paying relatively little attention to the question of distribution of wealth, the neoclassical models
concern is on efficient production and assumes that the market will allocate the rewards of efficient
production in a rational and unbiased manner. This assumption may be valid for a well-integrated,
economically fluid economy where people can quickly adjust to economic changes, and where
consumption patterns are not distorted by non-economic forces such as racial, ethnic, or gender
bias, but these conditions are not pervasive in developing countries, said Ferraro. (pg 63, 2008)
Violence: In fact, the raw, laissez-faire capitalism form of markets promoted by United
States in the non-western world, and ironically abandoned by the West, has unleashed ethnic
violence against market-dominant minorities in the developing countries, argued Amy Chua. (pg
524, 2002) Because markets and democracy benefit different ethnic groups in such societies, the
pursuit of free-market democracy produces highly unstable and combustible conditions, she wrote.
(pg 520) Markets concentrate enormous wealth in the hands of an outsider minority, fomenting
ethnic envy and hatred among chronically poor majorities, and Chua attributed the ethnic conflict
playing out in countries from Indonesia, Sierra Leone, and Zimbabwe, even citing the personal
account of her Chinese aunts murder in the Philippines to this special combustibility of markets,
democracy and ethnicity. (pg 520, 517, 524)
Another scourge of free market is the phenomenon of privatization, as outlined by Beatrice
Hibous piece analyzing the marginalization of the economic role of nation states to private actors
due to economic globalization, which resulted in continued imbalanced distribution of power and
wealth and criminal violence. In her Tanzanian example, Hibou states that liberation and the decline
in direct intervention did not mean the end of parasitic capitalism rents were transformed into

the plunder of mineral an other natural resources and continued to benefit the 'container bourgeoisie'
that exercised power in an increasingly informal and non-institutional way. (pg 9,10, 2004). In
Morocco, the privatization of patronage dating back to the French protectorate through the
distribution of rents and a debureacratized access to economic activity has led to the explosive
growth of criminal activities such as counterfeiting, drug trafficking and prostitution, as well as an
informal economy of smuggling and unrecorded production, in what Hibou said has been claimed
to be the 'revenge' of the 'market economy. (pg 11,12)
Why, and how, state intervention works
If the unfettered pursuit of free markets through globalization has produced volatility, exploitation
and violence, what can state intervention do? Even Bhagwati, the worlds foremost free trader by
his own admission, spoke in favor of appropriate governance and stressed the need to put into
place institutional mechanisms to cope with the occasional downsides of globalization. (pg 222,
2004) There are several ways in which intervention can work and in this section, I will outline
positive strategies and examples of effective state intervention.
Bhagwati, in particular, distinguished between a passive, laissez-faire strategy of growth
often a catchphrase in neoclassical trickle down economics to policies that can transform
growth into an active, pull-up strategy instead. It required a government that would energetically
take steps to accelerate growth, through a variety of policies, including building infrastructure such
as roads and ports and attracting foreign funds. By supplementing meager domestic savings, the
foreign funds would increase capital formation and hence jobs, he wrote. (pg 54, 2004)
The East Asian Story: Along with other scholars, Bhagwati pointed to the successful East Asian
economies as the story of a virtuous interaction among beneficial policies: outward orientation,
high literacy, and emphasis on higher education. (pg 63, 2004). Noting that the East Asian
miracle economies such as South Korea, Taiwan and Singapore are not driven by officials trained

as economists by IMF, Ha Joon Chang said they nevertheless knew some economics of Friedrich
List, Joseph Schumpeter and Albert Hirschman to name just a few, with the commonality of a
recognition that capitalism develops through long-term investments and technological innovations
that transform the productive structure, and not merely an expansion of existing structures, like
inflating a balloon. This deviation from the free-market view is what drove East Asian government
officials in the miracle years to policies that protect infant industries, forcefully mobilize resources
away from technologically stagnant agriculture into the dynamic industrial sector, and exploiting
what Hirschman called the linkages across different sectors (pg 249, 250, 2010). Summing up the
advantages of a state-led economy, Joseph Stiglitz compared the steel industry that the Korean
government created as among the most efficient in the world as compared to its private-sector rivals
in the US, while he pointed, while private, are constantly turning to the government for protection
and subsidies. (pg 2,3, 2002).
Chua, in advocating remedies to ethnic conflict brought on by free markets, also suggested
affirmation policies targeting root causes of group-specific market dominance, such as educational
reform and equalization of opportunities for indigenous population in Latin America. Such polices
are imperative if global markets are to benefit more than must a handful of cosmopolitan elites. (pg
526, 2002). In particular, she pointed to the relative success of what she acknowledged as a more
controversial strategy of direct government intervention in Malaysias New Economic Policy in
creating a substantial Malay middle class. While the countrys sweeping ethnic quotes on corporate
equity ownership, university admissions, government licensing and commercial employment have
not eradicated poverty for the majority of the countrys rural population, it has served a symbolic
function, with then Prime-Minister Mahathir Mohamad conceding, With the existence of the few
rich Malays at least the poor can say their fate is not entirely to serve rich non-Malays.(pg 527)

Critique

Critiques of pro-interventionists would often refute the downsides of free market globalization by
pointing to positive statistical outcomes. In extolling the virtues of globalization and by extension,
on how it has been managed, Charles Calomiris cited figures from David Dollars World Bank
Policy Research Report on Globalisation, which showed that participation in global trade in the last
twenty years significantly narrows income inequality across countries, with catching up in income
gains confined largely to open economies that has presence for rule of law (pg 44, 45, 2002). He
also downplayed the success of East Asian economies, pointing to massive mobilization of savings
to finance domestic investment, and not productivity growth, as the key to East Asian expansion.
Calomiris also linked haphazard management practices of Asian banks designed to encourage
imprudent lending, and a lack of market discipline, as the cause of the Asian Financial Crisis that
slowed Asian economies. To Calomiris, the fact that Asian banks are protected and often supported
by the state is an illustration of the pitfalls of cozy relationships between the state and banks that
typically act as financial engines of the economy. (Pg 59. 60, 61)
William Easterly, who has argued against the unchecked power of states against individual
rights, also warned that too much focus on the well-being of the nation which is a typical
conceptual justification for state intervention in economic policies instead of focusing individual
rights, might promote nationalism and intolerance at the expense of ethnic minorities. Taking a
decidedly different stance from Chua, Easterly sees the focus on national policies which
expropriate(ing) the excess profits of the capitalists as the cause of ethnic strife more so than
market capitalism itself, and attributed the mass killings of the Chinese in Indonesia in the 1960s as
an example of autocrats manipulating hatreds toward non-national groups to consolidate their own
power.
Despite stressing that his piece is not set up as a market-versus-state debate, Easterly
argument seems to point to the pitfall of too much government intervention when he spoke about
the virtues of spontaneous solutions versus conscious design. In favor of the former, Easterly

quoted Lawrence Summers talking about Friedrich Hayek Things will happen in a well-organized
efforts without direction, controls, plans. Thats the consensus among economists. Thats the Hayek
legacy. (pg 33, 2014). His arguments are also buttressed by Bhagwatis claim on how the poors
accesses to investment are best ensured by bureaucrats are replaced by markets wherever possible.
The anti-market protesters do not adequately appreciate that, as has been documented by numerous
development economists who have studied both the working of controls and the rise of corruption
in developing countries, far too many bureaucrats impose senseless restrictions just to collect bribes
or to exercise power. (pg 58, 2004)
Counter Critique
While Calomiris, Bhagwati and Easterly have shown the virtues of some form of market
liberalization, they are mostly discussing the issues in a domestic context, whereas in the
international domain, I will cite Stiglitzs argument that each of the most successful globalizing
countries determined its own pace of change; each made sure as it grew that the benefits were
shared equitably; each rejected the basic tenets of the Washington Consensus, which argued for a
minimalist role for government andrapid privatization and liberalization. (pg 2, 2002). Meanwhile,
in articulating the dependency theory, Ferraro (pg 62, 2008) notes that the dependency theorists rely
upon a belief that there exists a clear national economic interest that can and should be articulated
for each country, but focused by addressing the needs of the poor within a society. While he
acknowledges the difficulties in determining what is best, his points can counter Easterly charge
that focusing on national development can lead to manipulation by autocrats the theoretical
solution is to articulate what should be the lofty end goals of national development, and tailor
policies accordingly.
In conclusion, my essay has sought to show that globalization can be beneficial in helping
states address underdevelopment and inequality, but only if viewed within the right framework
approach and managed properly, although empirically, the converse framework of a neo-liberalist

approach to globalization has led to underdevelopment and inequality. I have also shown that the
state assuming a bigger role in economic development of a country, which, coupled with strong
institutional mechanism and functional capabilities, can give developing countries a more equal
footing in the international economy, optimize their international economic integration, and even
enhance global economic governance.

Bibliography
Jagdish Bhagwati, In Defense of Globalization (New York: Oxford University Press 2004) pp.3-28,
51-68, 221-228.
Ha-Joon Chang, 23 Things They Don't Tell You About Capitalism (New York: Bloomsbury Press
2010) pp.242-264.
Amy Chua, A World on the Edge, The Wilson Quarterly (Autumn 2002).
William Easterly, The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the
Poor (New York: Basic Books 2014) pp.3-42.
Vincent Ferraro, Dependency Theory: An Introduction, in Giorgio Secondi ed., The Development
Economics Reader (London: Routledge 2008) pp. 58-66.
Beatrice Hibou, From Privatizing the Economy to Privatizing the State, in Beatrice Hibou, ed.,
Privatizing the State (New York: Columbia University Press 2004) pp.1-47.
Charles Calomiris, A Globalist Manifesto for Public Policy: The
IEA Hayek Memorial Lecture, Institute of Economic Affairs (April 2002).

Tenth

Annual

Dani Rodrik, The Globalization Paradox: Democracy and the Future of the World Economy (New
York: W.W Norton 2011) pp.184-233.
Joseph Stiglitz, Globalism's Discontents, The American Prospect Volume 13, Issue 1 (January
2002)
Joseph Stiglitz, Freefall: America, Free Markets, and the Sinking of the World Economy (New
York: Norton & Company 2010) pp.210-237.