Social Education 66(2), pp. 111-116
©2002 National Council for the Social Studies

Globalization

 The inside story of our new interconnected world

 

Daniel Yergin

The 1990s brought forth an unprecedented level of global integration. Today, the pressures of globalization are driving an across-the-board review of the rules of the game guiding the global economy. The debate surrounding this process has been broad and contentious, and the context of the debate is shifting continuously. Indeed, the context for the globalization debate today differs drastically from that of even a couple of years ago. The “new economy” crash ended the long boom of the 1990s, and the optimism of the new age of globalization dissipated with the synchronized global economic downturn. Then came the September 11 terrorist attacks on the World Trade Center and the Pentagon. To many, the magnitude of destruction and the symbolic force of its target appeared to show the dark side of interdependence and integration. In the new and less confident era that followed September 11, the debate about globalization has taken on another dimension—that of global security in the face of global terrorism. What, then, are the prospects for globalization? What are the new issues surrounding it, and what kind of new rules are needed to keep up with the fast-paced immense engine? What are the challenges facing it in the new decade? In order to answer these questions, we need to understand what is globalization.

Globalization is often attacked or lauded as a thing. It is, more accurately, a process. It is in many ways the result of the opening up of the world economy, the increasing integration of national economies, and the emergence of the global marketplace. Foreign direct investment and trade are obviously major aspects—but it is also more than that. Globalization is a move to a more connected world in which barriers and borders of many kinds—from the Iron Curtain to corporate identity to government control of airwaves—are coming down, driven both by technological change (especially technologies that bring down the costs of transportation and communication) and by ideas and policies that bring down the barriers to the movement of people, goods, and information. This is an era in which a world that is organized around nation-states is increasingly conjoined in a global marketplace, where national economies are increasingly interwoven through the growing flows of trade, investment, and capital across historical borders. Technologies and communications have in important ways eroded borders, corporations have become multinational, work is carried out jointly across continents, and governments have increasingly integrated their economies—to the point, in the case of Europe, of currency union.

What seems undeniable is that globalization has advanced faster, and produced results (whether these are seen as positive or negative) more quickly, than was generally predicted. This means that observers are continually struggling to catch up with the reality of the changes, which perhaps helps to explain why globalization projects so much promise and yet induces so much anxiety at the same time.

What made the process of globalization possible is the fundamental shift away from traditional government control of economies toward greater reliance on markets. It was this shift that led to the liberalization and the gradual erasing of borders that are such fundamental characteristics of globalization. That shift became dramatically apparent in the mid-1990s. By then, the economic pendulum had swung away from the emphasis on regulation and Keynesian economic management that had emerged out of the Great Depression in the United States and other countries. The success of British Prime Minister Margaret Thatcher’s revolution, which had turned England from “the sick man of Europe” into one of the world’s leading economies, sparked a tidal wave of liberalization, deregulation, and privatization across the world, leading to dramatic results. By the mid-1990s, the change was evident everywhere. It was apparent in the
United States when, in January 1996, President Bill Clinton stood up in his State of the Union address and announced that “the era of big government is over.” (In fact, he felt so strongly about it that he said it twice!) It was apparent in China, where Deng Xiaoping’s reforms had put the country on a rapid course of development, leading to unprecedented rates of economic growth. It was apparent in India, where the end of the “Permit Raj” had made possible the rise of Bangalore, India’s own Silicon Valley, making India an indispensable link in the global information technology industry. In Latin America, the “lost decade” of the 1980s revealed the bankruptcy of the ideas of import substitution and reliance on government knowledge for managing the economy. But the real landmark was the fall of the Berlin Wall, the dissolution of the Soviet Union, and the collapse of communism—the ultimate system of state control.

Underlying that shift was a fundamental shift in ideas. What until only recently had been the conventional, indeed the dominating, wisdom regarding the relationship between state and marketplace suddenly came under attack—or, as in the case of communism, became discredited and abandoned. All around the globe, socialists were embracing capitalism, governments were selling off companies that they had previously nationalized, and countries were seeking to entice back multinational corporations that they had expelled just two decades earlier. State control was jettisoned in favor of entrepreneurship. The market focus that had seemed radical and beyond the pale when Thatcher initiated her revolution has become the new consensus in less than two decades.

This shift toward the markets set the stage for greater and deeper global integration. As nations liberalized their economies, they allowed for greater harmonization of fiscal and monetary policies, further diminishing barriers to trade. And as the closed economies of Latin America and the Soviet bloc rejoined the world, an acute sense of the need to catch up spurred these countries not only to embrace global trade, but also to welcome foreign corporations and—most of al#151;to establish capital markets, in order to capture a stream of the rapidly growing global flow of investment money seeking applications and returns.

These major transitions established the landscape and the possibility of globalization. By the early 1990s, only a handful of countries explicitly rejected participation in world trade, or had regimes so eccentric or chaotic as to be outside the global economic system. To be sure, just who within each country was able to “participate” in the global economy, and on what terms, varied enormously from place to place and was everywhere a matter of contention. But, as many indicators revealed, the economies themselves were linked, and economic activity across borders was blossoming.

The dawning awareness of all these ongoing economic phenomena—the renewal of trade, the mushrooming of capital markets, the development and diversification of foreign investment—accompanied by the sense of collapsing borders due to communications and travel, brought forth the term globalization to describe the process at hand. And the connotations, at least at first, were optimistic. After all, the events of the day appeared to signal a great transformation, and one overall for the good. The end of the Cold War and the collapse of communism meant that the boundaries that had divided the world economy would disappear. The Gulf Crisis pushed back a new military threat and portended a more peaceful world order. The thrust of the time was the shift from confrontation to cooperation and integration. With the Maastricht Treaty in 1991, the Europeans took a decisive step toward an economic integration conceived as a solution to the many conflicts that had devastated Europe throughout the twentieth century. At almost exactly the same time, the North American Free Trade Agreement was moving in the same direction for the United States, Canada, and Mexico.

Other indicators seemed relevant as well: Democracy appeared on the rise, with Latin America coming out from the shadow of its various dictatorships, and a wave of democratic elections appeared to portend improvements in Africa—not least of these, the end of apartheid in South Africa in 1994. The spread of communications and media also bolstered the sense of progress and change. The rise of the Internet furthered the sense of discovery. All of this seemed to contribute, in one way or another, to globalization, and gave grounds, it appeared, for optimism about its prospects.

But as this process of increased integration proceeded, it also produced a range of conflicting views and emotions. Globalization became blamed or credited for a series of results—many of which had other causes, such as technological innovation. Those who approved globalization cited its contributions to economic growth and higher standards of living, health, education, and environmental performance; to lower costs and improved efficiency; to a sharing of technologies; to cultural integration; and to stronger international relations. Critics argued that it undermined wages in rich countries, exploited workers in poor countries, hurt the environment, compromised human rights, diminished sovereignty, concentrated wealth, and gave large corporations too much power. In 2001, the return of terrorism to the global agenda, on an unprecedented scale, brought home the destabilizing force of a backlash against a more interconnected world. And it was also clear that international terrorism could thrive on the very networks and connections that enabled globalization—networks of finance, telecommunications, media, and individual trave#151;often in very sophisticated ways. Meanwhile, the sense of risk that terrorism induced in the targeted countries could only spark in public opinion a new suspicion of international economic, political, and cultural involvements.

An increasingly integrated global marketplace, but one vulnerable to new forms of terrorism, contagion, inequality, and insecurity, presents a contrast to the unbridled optimism of the early 1990s, a sobered reality. Optimism and the sense of progress now share the stage with anxieties, concerns, and often fierce debate, as was shown by the protests and disruptions in Seattle, Washington, and subsequent summit meetings, but also by the complex and sometimes acrimonious international negotiations and debates inside the meetings being protested.

And yet, to be “for” or “against” globalization was a simplification that polarized the debate but did little to solve it. Beyond the generalizations, and the protests and debates, has been a more elusive but fundamental challenge—a challenge to political communities, and particularly to the state. For after all, globalization overflowed national boundaries, yet did not erase them. And for all the attempts to forge a “global civil society” through non-governmental organizations and the use of new media and communication tools, individual political expression—voting—still occurred at the level of the state, as did individual participation, in the form of paying taxes and enjoying social benefits.

By now, globalization has withstood several challenges. Today it is clear that despite the global economic downturn, the trend toward greater market liberalization and globalization continues. Over the 1990s, world trade actually doubled to almost $8 trillion—equivalent to 30 percent of total world output. Yet, globalization is neither unstoppable nor inevitable. In 1914, the “guns of August” put an end to the First Age of Globalization, which had extended for the previous four decades. The Great Depression undermined the confidence in the markets, leading to several decades of protectionism and drive to autarchy. How to prevent a similar development in the second age of globalization?

An important part of the answer lies with whether the world will retain its confidence in the markets. This confidence is more likely to endure if it is anchored in a realistic appraisal of risk and uncertainty, and of the benefits and limits of the market and its values. Despite the transformations, an underlying mistrust of the market persists. Why? George Shultz pointed to one reason when he said, “Markets are relentless.” The move to the market may bring a higher standard of living, better services, and more choice. But it also brings new insecurities—about unemployment, about the durability of jobs and the stress of the workplace, about the loss of protection from the vicissitudes of life, about the environment, about the unraveling of the safety net, about health care and what happens in old age. Certainly, a new debate about corporate governance and regulation was energized in 2002 in the United States following a massive corporate bankruptcy.

Further, the global nature of the marketplace disrupts traditional values and familiar forms of organization, amplifying the sense of a loss of control and generating a nostalgia for the past and its settled order. “This is, in some ways, the age of anxiety,” observed former Treasury Secretary Robert Rubin. “It’s an age in which a lot is happening very quickly, and the forces of globalization create not only economic dislocations, but cultural dislocations and a great sense of insecurity and unease. And I think at the same time that we get the economic benefits of globalization, we on a parallel track need to find ways to deal with these other effects.”

Whether or not the anxieties of globalization give way to a renewed optimism will depend on the results that it delivers. The global economy—and the market consensus that underpins it—will be evaluated by its performance, by a series of critical tests measuring the results.

Foremost among these is whether the globalized market economies will deliver on their promise in terms of measurable economic goods—growth, higher standards of living, better quality services and jobs. The counterpoint to globalization has become the reduction of poverty in the developing world. The record to date shows that those countries that have integrated into the world economy have experienced much higher growth and much higher standards of living—with large numbers of people moving from poverty to middle class in a single generation. Indeed, the “new globalizers”—leading developing nations—are among the most dynamic forces in the global economy. But the distribution of those benefits is uneven, and billions continue to live in abject poverty in many countries. Furthermore, the experience of the past ten years teaches that, in order to reap the benefits of globalization, countries need to make the necessary investments in education, health, and social safety nets. But ample experience has shown that public investment, no matter how well intentioned, does not necessarily reach its targeted beneficiaries: It can disappear into the tangle of inefficiencies, corruption, and poorly-adapted rules. This means getting the appropriate institutional arrangements into place—a process that is likely to take many years.

Another fundamental test of the globalized market economy is the way in which its success is distributed. How widely shared is it? Is the system just and fair or does it disproportionately benefit the rich? Does it treat people decently, and does it include the disenfranchised and the disadvantaged? Market systems by their very nature, and by the nature of the incentives on which they depend for motivation, generate a much greater range of inequality of income than the more controlled societies, in which the egalitarian values are so strong but in which, to paraphrase Deng Xiaoping, there is nothing to distribute but poverty. Market economies provide more opportunities to create wealth. But excessive concentrations of wealth will undercut the legitimacy that a market-oriented system requires.

Economic systems will also be judged by how they respond to the wide range of environmental concerns, and they will be compelled to find further improvements and new solutions. The private sector will increasingly find itself carrying a growing environmental role, and companies will find themselves judged by the nature of their commitment and contribution to improving the environment.

Population trends will further challenge market economies. Liberalized economies of the developing countries are struggling to generate opportunities for their rapidly growing populations. For the developed world, the key population trend is the growing proportion of the elderly, which will add to the crucial need to reform the traditional welfare state. The challenge for each society will be to sort out what it considers entitlements, to be paid out of public funds, and what it regards as marketable services, for which the individual is responsible.

For many countries, participation in the new global economy also challenges their national and religious identity. While it promotes economic growth, it can undermine a traditional and comforting sense of security—whether it is the high degree of job security in Europe or the social rules in Asia or religious values in the Middle East, or indeed values about family and cooperation and to what the young might be exposed. If the assaults on the core national values become too strong or the reactions too bitter, then countries that have reduced their tariffs and other import barriers may respond with renewed nationalism and new barriers in the form of regulations and restrictions.

If the market is seen to fail these tests, if its benefits are regarded as exclusive rather than as inclusive, if it is seen to nurture the abuse of private power and the specter of raw greed, if it does not contribute to higher standards of living, then surely there will be a backlash—a return to greater state intervention. The state would again step forward to expand its role as protector of the citizenry against the power of private interests. This is not only a matter of what happens within nations. The backlash against globalization is premised exactly on the idea that there is something seriously wrong with the workings of the global marketplace, and that is where the focus of the debate is. On one side are those who say that a globalized economy is fundamentally unfair and immoral, though often with more emotion than data, and that markets and capitalism are the enemy. On the other are those who say that the priority is to develop the new and appropriate rules for the new world that will enhance and broaden the benefits while dealing with the downsides.

In the meantime, the general movement away from traditional state control continues, leaving economies more and more to the realm of the market. What will really determine whether this change will persist, or whether there will be a swing back, is the quality and character of the confidence that underpins the marketplace. The opportunities that markets can create for people are enormous, yet there is a clear unease with its demands, its impact, and the reordering that it can impose. Risk will be an evident part of this new world, as it should be. For it is out of risk that emerge the innovation and the incentives—and the imagination—that carry the world forward.

 

Daniel Yergin is coauthor with Joseph Stanislaw of The Commanding Heights: The Battle for the World Economy. The book has been translated into thirteen other languages. For his previous book, The Prize: The Epic Quest for Oil, Money, and Power, Yergin received both the Pulitzer Prize for General Non-Fiction and the Eccles Prize for best book on economics for a general audience. Yergin received his B.A. from Yale University and his Ph.D. at Cambridge University. He taught at Harvard University prior to starting Cambridge Energy Research Associates, a research company of which he is currently chairman.

 

Commanding Heights

The PBS Series

How and why did the world change its mind about the relationship

between government and market? And will it change back?

These questions may sound simple, but they are also very important—encompassing much of the history and politics of the twentieth century, and now certainly front and center in the twenty-first century. How much do we look to government for solutions, and to what degree are we willing to rely on markets? Where does the frontier fall between the two? Within the United States, this has been a fundamental political battleground, but one with certain broad boundaries. Elsewhere around the world, the battle lines have been much more starkly drawn.

For much of the twentieth century, the global trend was toward greater government control. By the end of the century, however, a worldwide wave of market-oriented economic reform had reversed this trend. Trade barriers fell and capital flowed freely as a world organized around nation states became increasingly integrated into a global marketplace. This led to both progress and problems, stimulating an intense and sometimes violent debate about globalization.

A three-part series capturing and exploring these great developments and issues airs on PBS on April 3, 10 and 17, 2002. Titled Commanding Heights: The Battle for the World Economy, the series is derived from the book The Commanding Heights by Daniel Yergin and Joseph Stanislaw. A new edition of the book, which is published by Touchstone, will be available this April.

 

Program 1, April 3, 2002:
The Battle of Ideas

The social and economic catastrophe left in the ashes of World War I ignited an intellectual and a political struggle that would last most of the twentieth century—a battle between the powers of government and the forces of the marketplace over who would control the economies of the world’s great nations. This program tells the story of how, for half a century, the world moved toward more government contro#151;from the centrally planned economies of the communist world, to the “mixed economies” of Europe and the developing world, to the United States’ regulated capitalism—and then began to move away toward greater confidence in markets. The broad sweep of history is also conveyed through the intense rivalry and private friendship of two of the greatest economic thinkers of the twentieth century, John Maynard Keynes and Frederick von Hayek.

 

Program 2, April 10, 2002: The Agony of Reform

As the policies of governmental intervention in economic management through nationalization and protection in Latin America—and, in communist countries, through central planning—began to fail dramatically, a wave of turbulent economic reform swept through the globe. This program focuses in detail on “shock therapy” reforms in Russia, Poland, India, Bolivia, and Chile as they lived through the upheavals of rapid change. The film captures both the opportunities and the pain, the accomplishments and the failures, that are created by the agony of reform.

 

Program 3, April 17, 2002:

The New Rules of the Game

By the early 1990s, most of the world had converted to free-market capitalism, setting the stage for the dramatic fall of trade barriers and unrestricted capital flows fueled by furious technological innovation. This program examines the promise and perils of globalization in 1990s, the challenges that the world’s leaders faced—when things went unexpectedly wrong—in taming the virulent contagion of financial collapse in the developing world, and the violent debate over globalization, confronting a sweeping series of issues: the impact of free trade on the developing world and on American workers, the perils of financial contagion, and the challenge of inclusiveness—bringing the world’s poor into the era of global growth.

The series was filmed on five continents and close to two dozen countries, ranging from Russia and Poland to China, Japan, and Malaysia, to India, Tanzania, Chile, and Bolivia. Scores of intellectual, political, and business leaders around the world, who sparked the changes and were engaged in the battles, appear in the series. The 150 people interviewed range from Bill Clinton to Dick Cheney and Dick Gephardt and Supreme Court Justice Steven Breyer; from former Soviet president Mikhail Gorbachev to Mexico’s current president Vicente Fox; from Silicon Valley’s venture capitalists to workers in the maquiladora assembly plants in Tijuana to engineers in a frozen Russian city hundreds of miles north of the Arctic Circle.

A rich website is being created to accompany the program. One of its greatest assets is an unprecedented cache of interviews, of which only a tiny portion could be used in the series. (Consider that, in a television documentary, using ten minutes out of a two-hour interview is using a lot.) The interviews will bring the voices of the most influential actors in this saga directly to students. A glossary of key terms and concepts will also be included, as well as a list of key statistical indicators that can be compared against the text and the theories presented.

On the website, the show is broken into short segments, or “chapterized.” Each segment is linked to a more extensive pool of information drawn from all the material obtained for the series. This “chapterized” approach makes the use of the website a flexible and intuitive process. Students will be able to take a particular theme or issue and go through all of the material, sorting it by theme, country, or links to the “chapters” of the show. Teachers will be able to adapt the material to the curriculum that they are using and to work in a comparative case-study mode—looking, for instance, at certain policies (such as regulation and deregulation, devaluation, or central planning) or phenomena (such as inflation or unemployment) in different countries and time periods. And students will be able to work with the material at their own pace, depending on their academic levels. Both teachers and students will have the opportunity to explore the various dimensions of this multifaceted story in their own way, and develop and test their own arguments, while expanding their understanding of the subject. The combination of the storytelling in the television program and the richness of the materials on the website will help students engage with one of the greatest stories of our time.