THE GLOBALIZATION PROGRAM “Globalization, Prosperity, and Global

							THE GLOBALIZATION PROGRAM
A RUSSELL FAMILY FOUNDATION-NBR PARTNERSHIP

“Globalization, Prosperity, and Global Poverty”
George F. Russell, Jr. 2005 Japan-America Society Annual Meeting
April 28, 2005

It’s a great pleasure to be here tonight to speak to the Japan-America Society and this important gathering of business, community, and political leaders. And I appreciate this opportunity to speak with you about a subject I feel very strongly about, namely Globalization and why it is such a powerful and beneficial force in the world today. This audience is certainly no stranger to the idea that globalization and free trade are a prime engine of economic growth, prosperity, and the creation of more and better-paying jobs. The remarkable history of Japan’s post-war economic “miracle,” which was built on growing trade and engagement with the international economy, demonstrates the power of economic globalization. Both U.S. and Japanese post-war prosperity have been powered by the boom in U.S.-Japan trade over the past 60 years, which has grown from just $2.6 billion in 1960 to $184 billion in 2004. Even after the difficult decade of the 1990’s, Japan remained the third largest market for U.S. exports in 2004 while the U.S. is the largest single market for Japanese exports. Japan is a terrific example of the power of trade and global commerce to drive economic prosperity and reduce poverty and deprivation. However, in the current, highly-charged American debate over globalization, Japan’s experience and many other examples of the connection between trade and prosperity often seem to have been lost. We need to remind leaders here in Washington state, across the
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country, and in Washington, D.C. of the power of this link between globalization and reducing poverty. To state my views as simply as possible, we need to speed up the process of globalization in order to reduce global poverty at a faster pace than ever before. What do I mean by globalization? I mean the integration of economic activity across borders, through markets supported by free market policies. The overwhelming fact is that the increasing globalization of the world economy during the second half of the twentieth century led to the most rapid worldwide reduction in poverty and rise in standards of living in the history of mankind. How? The answer is simple: the global expansion of trade and free markets accelerated broad-based economic growth, and economic growth is the most powerful weapon in history to reduce poverty. You need only look at the East Asian economic miracle of the past 60 years, which was founded on opening to international trade and freeing up markets, to understand the connections between globalization, growth, and poverty reduction. The single most profound example is China, of course, where Deng Xiaoping began to introduce market forces and to open his country to trade in 1979, and more than 400 million people lifted themselves out of poverty in 25 years. The prosperity of today’s China was literally unimaginable in the China of 1979. Martin Wolf, the Chief Economics Commentator at the Financial Times, has written a powerful book called Why Globalization Works, and he states the point clearly, and notes a critical, additional ingredient. Economics alone is not enough. Quoting Martin: “The world needs more globalization, not less. But we will only have more and better globalization if we have better states. Above all, we must recognize that inequality and persistent poverty are the consequences not of the still limited integration of the world’s economy, but of its political fragmentation.” I’d like to make another point, this one about the links between globalization, peace, and security. It is clear that without a major reduction of poverty in the world, (the

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narrowing of the gap between the haves and the have nots), and the continued expansion of globalization, our world will continue to face persistent violence and war. So if the benefits of globalization are so clear, why then is there such a passionate debate raging in America and Europe today over the impact of globalization? How did globalization get such a bad name? Let’s look at the arguments against globalization and then let’s look at the reality. The opponents of globalization, what Martin Wolf calls “antiglobalization.com,” consists largely of a patchwork of individuals, informal groups on the INTERNET, labor unions, and some “Non-Governmental Organizations,” “NGOs,” whose agendas relentlessly pursue a broad range of idealistic social, environmental, and political goals. Many are united in what they are against in globalization, not what they are for. They are united in their distrust of free markets and free trade, the rich industrial countries, particularly the U.S., the large international institutions such as the World Bank and IMF, and the large international corporations and banks – in other words, all the institutions that have generated unprecedented economic growth around the globe. With the collapse of Soviet-style communism, activism against globalization has become the new ideology of dissent against the modern global market economy that has delivered such prosperity over the past 60 years. Some of the arguments are justified. For example, those who argue that some rich countries, including our own, maintain subsidies and tariffs on agricultural goods that impoverish the poor countries are correct. This year, however, we have seen some potential for progress on this very issue with respect to the Doha Round of trade negotiations. But, the vast majority of arguments by the critics of globalization are simply wrong. However, the problem for us here is that despite being profoundly wrong, these opponents have managed to seize and define the debate on globalization in the United States. They have done this by the sheer force of their activism, organization, coalition building, and creativity with the mainstream media including their reaching out to traditional supporters of protectionism. Their movement is strong and focused.

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Meanwhile, we supporters of globalization have stood by talking among ourselves, agreeing within our “coalition of the convinced.” As a result, the opponents of globalization are winning the battle for the “hearts and minds” of the American public. Even the strongest supporters of free trade are running scared today. The presidential election campaign we recently concluded showed how angry and potent the forces of protectionism have become in the United States. And important new trade agreements, such as the Central America Free Trade Agreement, known as CAFTA, are facing tough votes in the Congress right now, with opposition led by the highly protected domestic sugar industry. So unless we supporters of globalization, economic growth, and poverty reduction begin to speak out right now in a unified and broadly-based voice to the public and media, we risk losing this battle, both in Congress and among the American people. Now let’s look at the Facts! Most of the opposition to globalization today is based on misinformation, a lack of information, or just plain politics. Let’s look at the connection between poverty and globalization. One of the most common claims today is that globalization worsens poverty and that poor people do not benefit from globalization. Instead, goes the argument, globalization’s benefits go primarily to the rich. This is simply not true! It is a huge myth perpetuated by the anti-globalization movement. Looking back 180 years, remarkable progress has been made on global poverty. In 1820, in the early days of modern industrial trade, 83% of the world’s population made less than $1 per day. In spite of the setbacks of imperialism in the 19th century and protectionism and global war in the mid-twentieth century, by 2000 that number was 13.1%! [Adjusted for purchasing power parity in 1985 dollars] When we look back more recently, especially during the period of rapid trade growth and globalization since World War II, the evidence that globalization reduces poverty is overwhelming. On a wide range of measures – poverty, life expectancy, health, education – more people have become better off at a faster pace in the past 60 years than ever before. All this happened in the context of the global multilateral economic and trade framework

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established at the end of the Second World War. We know it as the Bretton Woods system. Trade liberalization and economic growth have been at the center of the postwar surge in living standards. Despite the claims of the anti-globalists, poverty reduction in the developing countries has been more rapid than anywhere else in the world, although progress has varied significantly across regions. • According to the World Bank’s World Development Indicators of 2004, trade growth allowed the developing countries to grow at 4.3% a year during the decade of the 1990s, twice the rate of the rich countries. At the same time the share of people living on less than $1 a day (the threshold for extreme poverty) fell dramatically. By 2000, 137 million people have risen out of extreme poverty in just one decade. • To put this number in perspective, the percentage of people worldwide living on less than $1 a day dropped from 30% in 1987 to just 13% in 2000, even while the global population increased substantially. • Not surprisingly, much of the overall reduction in global poverty occurred in East Asia, which is the region most deeply integrated into the global economy. The share of population in the region living in such extreme poverty dropped in half. • • But progress in reducing poverty has been very uneven. Much of the difference is linked to the lack of globalization in certain developing regions. Those developing regions least globalized and open to trade, like the Middle East, North Africa, and Sub-Saharan Africa, had the slowest economic growth and, not surprisingly, experienced a rising share of population living in extreme poverty. For example, in SubSaharan Africa the number of people living on less than $1 a day rose by 75 million to a staggering 315 million people. Other serious problems help explain Sub-Saharan Africa’s desperate plight, including the HIV/AID epidemic, wars, and famine. The inescapable message is that globalization does not increase poverty; it is the lack of globalization that increases poverty. Unless we speed up the process, as the world population increases from 6 billion to 9 billion by 2050, coming almost entirely in poor countries, we will see worsening poverty, disease, and violence! As Martin Wolf states…

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“There are no examples of countries that have risen in the ranks of global living standards while being less open to trade and capital…There are no anti-global victories to report for the post-war developing world. As an Indian remarked of his own country’s policies, ‘by suppressing economic liberty for 40 years, we destroyed growth and the future of two generations.’” Or in the words of Kofi Annan, Secretary General of the United Nations, “I believe the poor are poor not because of too much globalization but because of too little.” The Facts About Poverty and Governance There is another consistent cause of chronic poverty in the developing countries that often gets ignored by the anti-globalists: bad governance, corruption, and resulting social inequality and injustice. In many developing countries, wealth is siphoned off by a selfish and corrupt political elite that monopolizes wealth and power. This is a chronic problem in Latin America, Africa, and the Middle East. Anti-globalists blame the global economy for this but the real culprits are bad politics and bad governments! As former Secretary of State Colin Powell recently wrote, “The root cause of poverty is social injustice and the bad government that abets it. Poverty arises and persists where corruption is endemic and enterprise is stifled, where basic fairness provided by the rule of law is absent.” This explains why poverty tends to be most severe in closed economies controlled by corrupt, repressive governments. A perfect example of this is Burma where the military Junta refuses to open up its economy because it knows that free markets and trade will undermine its power. Not surprisingly, Burma has one of the worst economies in the world. The most notorious example of this, of course, is North Korea! Over the long run, globalization works to undermine undemocratic regimes, not support them as the anti-globalizers contend. Globalization and the growth of free markets undermine the power of these closed regimes and promote political reform and openness. It is the basis for America’s historic “engagement” strategy toward China that is predicated on

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this notion that open trade and free markets will promote economic growth, rule of law, an educated and prosperous citizenry, and political forces that will bring about a more democratic China and a greater respect for human rights. Globalization and Jobs Globalization and the impact on American jobs is the next big myth of the antiglobalization movement. The new lightning rod of old-style protectionism comes in the debate over “outsourcing.” The key opponents here are the old-style American labor unions who feel threatened by globalization and the continual shift in jobs due to rapidly rising productivity. They are aided by populist politicians always looking for villains when job growth lags and by misguided pundits like CNN’s Lou Dobbs, who lambastes American companies for “exporting America” every night on television. They blame outsourcing for “high unemployment,” which in fact is low by historic standards. They blame outsourcing for the long-term decline in manufacturing jobs, for slow economic and job growth coming out of this latest recession, and for a more recent trend of job losses in the service and IT sectors. Let’s look at the facts: First, outsourcing is a symptom of a healthy economy and rapid productivity growth. In other words, it is good for the economy. Virtually every respected economist from either American political party agrees with this. It has been happening for decades in manufacturing and, not surprisingly, is now happening in the service and IT sectors. The movement of standardized, lower-paying jobs to the developing world frees up capital in the U.S. to invest in higher value-added industries that are more competitive in the future and that will generate better-paying jobs. As The Economist magazine recently stated, “outsourcing actually sustains American jobs.” In fact, recent studies suggest that outsourcing actually results in a net gain of better-paying U.S. jobs because it lowers production costs, lowers prices for consumers, increases new investment, reduces interest rates, all leading to higher consumer spending, and stronger economic growth. For example, a recent study by McKinsey & Company showed that for every five jobs lost to outsourcing, six new jobs are created.

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Critics of outsourcing only see the loss of routine old jobs but overlook the new jobs being created to solve new problems. • According to Robert Reich, one of the most liberal economists in the Clinton Administration, trying to protect service industry jobs currently being outsourced is like trying to hold on to the jobs of elevator operators, telephone operators, bank tellers, and service station attendants. • By protecting routine service and IT jobs like these that can be automated, replaced by technology, or replaced by less costly programmers and call centers, the opponents of outsourcing would simply be raising America’s production costs, raising prices for consumers, and reducing investment in more sophisticated jobs needed to keep the U.S. at the cutting edge of the global economy. • He points out that one-quarter of all Americans today work in jobs that weren’t even listed in the Census Bureau’s occupation codes in 1967. The fact is that the rise in U.S. unemployment from 2000-2003 had virtually nothing to do with outsourcing. It was caused by the global recession and the sharp decline in domestic demand in the wake of the economic damage of 9/11 and the collapse of the stock market and high-tech bubbles. A recent very detailed study by the Brookings Institution shows that the bursting of the high-tech bubble alone resulted in the loss of half a million jobs in computer and electronics production. The loss of U.S. jobs after 2000 attributable to trade was less than 10% of total job loss and was due almost entirely to lower exports, not rising imports, as the protectionists contend. Lower exports, in turn, largely reflected the impact of the very strong dollar and recession in the major U.S. export markets. Now that the U.S. economy is recovering from the global economic slowdown, American employment is again rising rapidly. Since the beginning of the recovery in June 2003, the U.S. economy has generated 3 million net new jobs while the unemployment rate has now dropped to just 5.2%.

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Moreover, outsourcing is not to blame for the long-term decline in manufacturing jobs. The real issue is productivity, which is why manufacturing jobs are gradually declining virtually everywhere in the world due to constantly improving productivity. • The number of manufacturing jobs in the U.S. peaked in 1979! The world lost 22 million manufacturing jobs between 1995 and 2002. During that period, we lost 11% of our manufacturing jobs, but China lost 15%, Japan lost 16% and Brazil lost 20%. • The loss of manufacturing jobs during the 2000-2003 recession also was largely unrelated to trade. The Brookings study cited earlier showed that 90% of the manufacturing job loss from 2000-2003 was due to the decline in domestic demand while only 10% related to trade, mainly declining exports. • Manufacturing is going the same way as agriculture did in America due to productivity gains: in 1910, 33% of American workers worked in agriculture, today less than 3%...but production has risen dramatically. America did not lose 30% of its jobs since 1910. Millions of new and higher paying jobs were created in the cities to replace menial and backbreaking agricultural work! The WTO and Fair Trade The opponents of globalization also attack the WTO and the system of world trade negotiations for perpetuating unfair trade rules. However, it is the reduction of tariffs achieved through the WTO that has fueled decades of world economic growth and rising standards of living in both the developed and developing world. Trade among nations now generates one-half of total national income globally. A recent study by the Institute of International Economics shows that in the U.S. post-war integration into the global trading system adds $1 trillion every year to current U.S. national income. Moreover, if the world moved to total worldwide free trade in the upcoming WTO Doha round, it would add another $500 billion per year to American standards of living. The potential benefits of a stronger WTO and accelerated trade negotiations are even greater for the developing world. Economists estimate that with fairer global trade rules, African countries could earn six times what they receive in assistance from wealthy countries every year. If all poor countries’ share of world trade increased by just 1 percent, their 9

income growth would lift 128 million people out of poverty. From South Korea and Hong Kong in the 1970s to Malaysia and the Maldives today, focusing heavily on trade and reducing trade barriers have proven a successful way for countries to build modern economies and dramatically improve living standards. As Carla Hills, former U.S. Trade Representative reminds us, “poor countries that opened their markets in the last two decades grew 4 times faster than those that kept their markets closed.” This is why the U.S. needs to keep pushing to reduce trade barriers through the current “Doha Round” of WTO negotiations. Economists calculate that eliminating tariffs and other protective barriers globally in the Doha Round would lift at least 500 million people out of poverty over 15 years and create long-term economic benefit to developing countries of $200 billion per year. Although the opponents of globalization are wrong in trying to undermine the WTO, they are right on at least one big issue. That is the hypocrisy in the rich countries when it comes to agricultural subsidies and tariffs. Although the rich countries talk about the importance of trade liberalization, they maintain a system of agricultural subsidies and residual tariffs that cripple the ability of many developing countries to export their vital agricultural commodities that often are their only source of export growth. For example, the rich countries maintain subsidies of nearly $1 billion a day paid to their farmers that force even the most efficient producers in poor countries out of many markets for agricultural products. A case in point: 25,000 wealthy U.S. cotton producers receive $3 billion in subsidies per year. The surplus created by this absurd policy is then dumped on world markets, at a grievous cost to 10 million West African cotton farmers. We’re literally buying the market out from under some of the poorest, least developed countries in the world. Millions of developing country small farmers are deprived of a living in the lone area where they can win from trade. The World Bank estimated in 2001 that liberalization of worldwide agricultural trade would increase developing countries’ income by nearly $150 billion annually by 2015.

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U.S. tariffs are also deeply arbitrary and unfair. While the average U.S. tariff is less than 2%, it is 274% on sugar, 254% on peanuts, and on juice and vegetables it ranges from 40% to 100%. In 2001, Norway and Mongolia each paid the U.S. the same amount in import duties, about $23 million. But Mongolian exports were only $143 million while Norway’s were $5.2 billion! Something is terribly wrong with the trading system when the U.S. extracts more duties from Bangladesh on its $2.3 billion in exports than it does from France on its exports of $30 billion. So I applauded Bob Zoellick, a former NBR Board member, when he proposed as the U.S. Trade Representative, that the U.S. offer to quickly eliminate all U.S. farm-export subsidies and slash tariffs on goods and food imports in order to re-invigorate the stalled Doha Round! It’s a major initiative, with the real caveat that getting something like that through Congress is not easy! Moreover, it has to be matched by the Europeans and Japanese in order to work. What Needs to be Done? First, we Americans have got to push harder in Washington, D.C., as well as our state governments, to continue cutting barriers to trade and not raising them. A new Presidential term, a new Congress, and many new State administrations give us the perfect opportunity to do just this. This means supporting political leaders who have the courage to stand up to the protectionist, anti-globalization hysteria. Legislators need to hear from us on these issues! Second, we need to seize back the initiative in the battle for the hearts and minds of the American public by getting out there with more information about the beneficial impact of globalization and to counter the increasingly active, inaccurate, but effective antiglobalization movement. We need to work together and make our voices heard with the media, political leaders, community leaders, and opinion shapers. Third, we need to find better solutions for those who lose their jobs in this creative process of global growth. Although the whole economy is better off and more jobs are created in this process than lost, the hard fact is that some people face real, long-term personal hardships. Telling them it’s for the greater benefit of the U.S. and world poverty is

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cold comfort for the person who’s just lost their job! This means supporting smart unemployment benefits, new training and job opportunities, and health care support for all workers who lose their jobs, whether due to domestic competition and improving productivity or foreign competition. Fourth, large companies need to do more than just offer platitudes to their employees affected by the company’s need to source globally to remain competitive. In the same way that global companies now recognize the need to respond to their environment, ethical, and social responsibilities, they also need to respond to the legitimate concerns of their employees as the economy gets ever more dynamic and globalized. For example, United Technologies subsidizes four years of college-level education for any worker dislocated by a company decision to move a facility. IBM recently announced its “Human Capital Alliance” program which aims to provide retraining and job placement for any of its workers dislocated by global sourcing decisions. Fifth, we need to improve education in America, all levels of education, to train our people for the jobs of the 21st century, not the past century. The only lasting competitive advantage in a rapidly evolving, dynamic global economy is knowledge and education. We are falling behind on this by badly shortchanging our education system. We all know that. But, in globalization as in other areas of education, if you think education is expensive, try ignorance! This brings me to my final reason for being with you tonight. Business and trade leaders can play a critical role in educating the public about the benefits of trade, globalization, and engaging other nations in commerce. But, while the opponents of trade have been well-organized and vocal, the business and trade community have not. The message about trade’s benefits to both business and society is not being effectively delivered and the business community needs to take a leadership role in doing so. The Globalization Program of The National Bureau of Asian Research and the Washington Roundtable are developing a new partnership to build a coalition of business, trade, nonprofit groups, and community leaders here in Washington state to provide leadership in

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getting the free trade message out to a broader audience of state political leaders, opinionshapers, and the public. We are developing a model that can be replicated in other states where globalization and free trade face growing opposition. We are enlisting the support of a wide range of major Washington companies, trade groups, and non-profits in this effort and I urge you to join this coalition so that the voice of business and the trade community can be heard strongly, effectively, and consistently by our political leadership. BEING RIGHT ON GLOBALIZATION is the easy part for so many of us in this room. We already understand that for developing countries the road to prosperity, democracy, and peace is through robust trade and free markets. There are ideologues, on the other hand, for whom facts and history will always come second to passionately held beliefs. They are not going to be convinced of the benefits of globalization, no matter what proof is presented to them. Fortunately, most folks are open-minded. Their views are not cast in concrete. I’m talking about the great majority of voters and many members of Congress. If we get out and support the system of global trade that delivered unparalleled prosperity over the past 60 years, we will take the initiative away from those who fear the future and want to build walls at the water’s edge. Thank you very much.

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