Threat to globalization goes intellectual

With American economy witnessing a downturn many economists have begun to point an accusing finger at an unlikely suspect: the free market itself. Peter Gosselin took a note of it in a recent piece in the Los Angeles Times. "The nation and its political leaders," he wrote, "have begun to sour on the notion that the current market system is the key to a fair, stable and efficient society."

Uptil recently America projected itself as the champion of free market. It democracy and free markets were the governing principles of groups like G-8,OECD. The view that markets no longer work, if true, would turn economic thought on its head and be a major intellectual victory for the American left. “Widespread acceptance of that view would have profound implications for the future of market economies and open the door to a massive expansion of government,’’ says influential commentator Kevin Hassett.

The world economy has seen globalisation collapse once already. The gold standard era came to an abrupt end in 1914 and could not be resuscitated after World War I. Are we about to witness a similar global economic breakdown?

Although economic globalisation has enabled unprecedented levels of prosperity in advanced countries and has been a boon to hundreds of millions of poor workers in China and elsewhere in Asia, it rests on shaky pillars. Dani Rodrik of Professor of Political Economy at Harvard University believes that unlike national markets, which tend to be supported by domestic regulatory and political institutions, global markets are only "weakly embedded". There is no global anti-trust authority, no global lender of last resort, no global regulator, no global safety nets, and, of course, no global democracy. In other words, global markets suffer from weak governance, and therefore from weak popular legitimacy.
The presidential electoral campaign in USA has highlighted the fragility of the support for open trade in the world's most powerful nation. The sub-prime mortgage crisis has shown how lack of international coordination and regulation can exacerbate the inherent fragility of financial markets. The rise in food prices has exposed the downside of economic interdependence without global transfer and compensation schemes,believes Rodrik. Meanwhile, rising oil prices have increased transport costs, leading analysts to wonder whether the outsourcing era is coming to an end. And there is always the looming disaster of climate change, which may well be the most serious threat the world has ever faced.
The threat to globalisation is not from communism,dictatorships ,protectionists, trade unionists and protesting youth. Rather it’s the mainstream economists who are questioning globalisation's virtues.This could akin to academic blasphemy in today’s highly intedependent and competitive trade environment.
Paul Samuelson is worried that China's gains in globalisation may well come at the expense of the US. Paul Krugman, today's foremost international trade theorist has argued that trade with low-income countries is no longer too small to have an effect on inequality. Alan Blinder, a former US Federal Reserve vice-chairman, is worried that international outsourcing will cause unprecedented dislocations for the US labour force. Martin Wolf, the Financial Times columnist and one of the most articulate advocates of globalisation, is disappointed with how financial globalisation has turned out.
While these worries hardly amount to the full frontal attack mounted by the likes of Joseph Stiglitz, the Nobel-prize winning economist, they still constitute a remarkable turnaround in the intellectual climate.
Howver this is not to say that globalization has no takers in the intellectual sphere. Jagdish Bhagwati, the distinguished free trader, and Fred Bergsten, the director of the pro-globalisation Peterson Institute for International Economics, have both been on the frontlines arguing that critics vastly exaggerate globalisation's ills and under-appreciate its benefits.
Facts still offer an overwhelming support for the free markets. A wide body of research has developed that demonstrates the empirical relationship between free markets and economic growth. A study by Harvard University economist Robert Barro found that property rights and free markets were the most important institutional elements for promoting economic growth.
Similarly, the Fraser Institute's 2004 Economic Freedom of the World Report documented that the free-market recipe of competition, entrepreneurship and investment activity is the key to fostering economic growth. According to the study: "Countries with more economic freedom attract more investment and achieve greater productivity from their resources. As a result, they grow more rapidly and achieve higher income levels."
Studies also show the negative impact of regulation on growth. Harvard economist Silvia Ardagna and Dartmouth College's Annamaria Lusardi found that tight regulatory environments discourage entrepreneurs who are motivated by new business ideas.

We had the 1973 oil crisis, where prices quadrupled, the 1979 Iranian turmoil, which also devastated oil markets, and the savings-and-loan debacle, where more than 700 banks failed. Even the glorious Reagan revolution was marred by fluctuations: One of the deepest recessions of the postwar period happened during Reagan's first term.
Even with those setbacks, the free-market system won because other approaches didn't merely deliver fluctuations, they delivered constant misery. Free markets helped US win Cold War. Nations from Ireland to Estonia have embraced free-market ideology and seen a historically unprecedented economic transformation believes Kevin Hassett.
Although none of the intellectuals has unleashed an open tirade against globalization its clear that voices of dissent have shifted from streets to the columns of financial press.But the problem is that they are yet to come up with a better substitute-an improved economic model.