[Congressional Record (Bound Edition), Volume 154 (2008), Part 8]
[Extensions of Remarks]
[Pages 10945-10946]
[From the U.S. Government Publishing Office, www.gpo.gov]




                 THE CORRECT APPROACH TO GLOBALIZATION

                                 ______
                                 

                           HON. BARNEY FRANK

                            of massachusetts

                    in the house of representatives

                         Thursday, May 22, 2008

  Mr. FRANK of Massachusetts. Madam Speaker, the overriding economic 
issue confronting our country is the task of proceeding with the 
increased globalization of the economy in a manner that promotes an 
equitable distribution of the benefits. For too many years, until 
fairly recently, there was a consensus supported by many in the 
academic and business establishments that argued that concern about the 
distribution of the benefits of globalization was unnecessary at best 
and disruptive at worst, and that if we simply proceeded with greater 
openness, in trade, in the freeing of capital from any restraints, and 
in other ways, we would all be better off.
  It is now indisputable that this is not the case, and that growth has 
proceeded in the U.S.--and in some other parts of the world--in recent 
years in a manner that has increased both wealth and inequality. Of 
course it is the case that in a capitalist system, some inequality is 
necessary for the economy to function. But we have seen inequality grow 
far beyond what is either productive or, in the minds of many of us, 
morally justifiable. Many of us have argued to people in the business 
community that the resentment that is being generated--very 
legitimately--by this increased inequality has become an obstacle to 
the adoption of policies that they think are in our national interest. 
Many of us, including I believe the leadership on economic issues of 
the Democratic Party here in the House, believe that we should proceed 
with globalization in a reasonable and orderly way, but accompanied by 
policies that offset its tendencies to increase inequality, erode 
environmental standards, and promote reckless deregulation. Recently, 
former Treasury Secretary Larry Summers wrote interesting articles in 
the Financial Times strongly arguing that such a position is both 
necessary and achievable. In the Financial Times of May 21, Martin 
Wolf, a very thoughtful economic commentator, makes a further important 
contribution to this debate. The movement from an unqualified cheer for 
globalization without any concern for its negative consequences on 
substantial numbers of Americans to a thoughtful discussion of how to 
go forward with the economic integration of the world in a socially 
useful manner is a very welcome one. Martin Wolf's contribution to that 
debate in the Financial Times is therefore very important and I ask 
that it be printed here.

                [From the Financial Times, May 21, 2008]

          How To Preserve the Open Economy at a Time of Stress

                            (By Martin Wolf)

       Is the spread of prosperity in the interests of citizens of 
     today's high-income countries? Is globalisation of their 
     economies in their interest?
       These distinct questions are raised in my mind by two 
     important columns from Lawrence Summers (``America needs to 
     make a new case for trade'' on April 27 and ``A strategy to 
     promote healthy globalisation'' on May 4). In these, Mr. 
     Summers argues that the international economic policies of 
     the U.S. need to be coupled more closely to the interests of 
     its workers. Many Europeans will concur.
       This is not to argue that the interests of citizens of 
     high-income countries are more important than those of 
     others. On the contrary, the view that increases in incomes 
     of the poor offset equivalent losses for the rich is morally 
     compelling. But politics is national. Unless or until a 
     global political community emerges, politics will respond 
     only to perceptions of national interest.
       So is the rising prosperity of China, India and other 
     emerging economies in the interests of today's high-income 
     countries? The correct answer to this is: not necessarily. It 
     would be absurd to pretend otherwise.
       The big advantages of the spread of prosperity include a 
     wider distribution of innovation and bigger opportunities for 
     profitable exchange. The rise of the U.S. brought such 
     benefits to the U.K. Also valuable (though not certain) is 
     greater political stability in previously impoverished 
     countries.
       The big disadvantage is greater competition for scarce 
     resources. Power is a scarce resource: if country A has more, 
     country B has less. Resources are also limited. If commodity 
     prices rise, the terms of trade (the relative prices of 
     exports and imports) of net importers will deteriorate: 
     countries have to sell more exports to obtain given imports.
       Since the end of 2001, U.S. terms of trade have 
     deteriorated by an eighth, as commodity prices have soared 
     and the currency devalued. This has turned an 18 per cent 
     increase in real gross domestic product between the last 
     quarter of 2001 and the fourth quarter of 2008 into a 16.4 
     per cent increase in real national income. The difference is 
     not huge. But it is worth some $220bn in today's dollars. So 
     countries may indeed be harmed by the prosperity of others. 
     (See charts).
       The answer to this is: so what? As Willem Buiter has 
     pointed out (Economic Internationalism 101, Maverecon, May 
     5), nothing can be done to halt the diffusion of ``knowledge, 
     skills, technology, management systems'' and so forth. Or at 
     least nothing rational or decent can be done. Of course, the 
     U.S. could launch an unprovoked blockade or even war against 
     China or India. To mention such ideas is to reveal their 
     strategic and moral bankruptcy.
       The U.S. could, it is true, try to halt the flow of ideas. 
     The U.K. tried to halt the spread of technology to the U.S. 
     in the early 19th century: it failed. The Chinese empire once 
     made it a capital crime to export silkworms: that failed, 
     too. Similarly, protectionism against the emerging countries 
     might slow their growth, but would not halt it. Yet it would 
     guarantee a breakdown in international relations that 
     threatened hopes of a peaceful future.
       To repeat, nothing can be done about the rise of emerging 
     countries, as they follow the lead of the west. What cannot 
     be helped must be accepted. This takes us to my second 
     question. Given the rise of the emerging world, should the 
     developed world limit the globalisation of its own economies? 
     Of course, so long as high-income countries depend on imports 
     of commodities, trade will be essential. Self-sufficiency is 
     a mirage. It is a question rather of how much openness to 
     trade and movement of capital and labour there should be.
       One issue has been the huge current account deficits of the 
     U.S. Yet these are at last contracting, as export growth 
     explodes (see chart).
       On trade more narrowly, the basic point is well known: free 
     trade is in the interests of the country adopting the policy, 
     unless it has monopoly power. But--an important ``but''--the 
     benefits and costs are likely to be unevenly distributed. The 
     latter is particularly likely for trade between rich and poor 
     countries. Free movement of capital or labour may also harm 
     important interest groups within a country even if it raises 
     aggregate incomes. The freer movement becomes, the harder it 
     may also be to impose taxes and regulations on those able to 
     move.
       As Mr. Summers argues, it is hard for a democracy to 
     proceed with policies that a large minority believes are 
     against their interests. If the fall-back position is not to 
     be protectionism, itself no more than an inefficient tax and 
     subsidy programme, more creative options must be chosen. The 
     most obvious point, at least for the U.S. is the need to 
     shift the provision of security from employers to the state. 
     Corporate welfare states are unsustainable in a dynamic and 
     open economy.
       Yet if the U.S. is to have a more generous welfare state, 
     including universal health provision, as in every other high-
     income country, taxes will have to be raised. Indeed, they 
     will have to be raised even to meet existing commitments. Mr. 
     Summers argues, in response, for international action against 
     harmful tax competition, He argues, too, for greater 
     international agreement on regulation. In some areas, notably 
     finance, the latter makes sense. But the view that the U.S. 
     must obtain such agreements if it is to raise some of the 
     lowest levels of taxation and weakest regulation in the 
     advanced world is unpersuasive. If Sweden's taxes can be 56 
     per cent of GDP, it is not tax competition that keeps the 
     U.S. at just 34 percent. The mobility of capital and people 
     is an excuse, not a justification, for low U.S. tax levels.
       What is desperately needed is an honest debate about these 
     issues. Such a debate would, I believe, reach four 
     fundamental conclusions. First, whether or not citizens of 
     the U.S. (or other high-income countries) welcome it, the 
     global spread of economic development is ineluctable. Second, 
     protection against imports is a costly and ineffective way of 
     dealing with the consequences. Third, parties of the centre-
     left should argue for redistributing the spoils of 
     globalisation, not sacrificing them. Finally, a necessary 
     condition is higher taxation of the winners. But the chief 
     obstacle to that is a lack of domestic political will. 
     Globalisation is not a reason for low taxes, but an excuse. 
     It should be discarded.
       Everybody should remember, above all, that the opening of 
     the world economy is the west's greatest economic policy 
     achievement. It would be a tragedy if it were to turn its 
     back on the world when the rest of humanity is at last 
     turning towards it.

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