Honest trade is ticket to world wealth

Terence Kealey welcomes rapacious capitalism in the third world.

President George W. Bush says he believes in free trade, yet he has nearly doubled domestic agricultural subsidies and raised tariffs on steel and wood. The European Union professes itself shocked by the actions of the world's hyperpower, but its own Common Agricultural Policy and tariffs damage the developing world as comprehensively. The US and EU, via their control of the World Trade Organisation, ensure that their own exports to the developing world can move without restriction, but they frustrate the reverse flow. Is globalisation not merely another expression of western imperialism?

Yet until recently it was the West, not the developing world, that feared globalisation. The US reform party founder, Ross Perot, claimed that the North American Free Trade Agreement heralded the "sucking noise" of vast numbers of North American jobs being lost to Mexico, while in Europe James Goldsmith's book The Trap made similar claims for the ease with which low-paid labour in the East would capture European jobs. So whom does globalisation really favour?

Globalisation is a self-important word, but it means little more than the removal of trade barriers, the increasingly free movement of ideas and people and the convertibility of currencies. It is often presented as a recent development, but the world before 1914 was reasonably globalised, with the freedom of trade, the movements of ideas and people, and the convertibility of currencies being comparable to today's.

There is one fundamental question: does globalisation promote "convergence" or not? Under convergence, the gross domestic products per capita of rich countries continue to grow at their historic rates of about 2 per cent a year, while those of poor countries grow faster as they converge on the rich ones. Convergence is a non-zero sum game under which everybody benefits.

According to standard theories of comparative and competitive advantage, free trade - even between countries of vastly different wealths - should enrich all parties. Advanced countries should export hi-tech products and expertise in exchange for cheap-labour goods and services (such as outsourced call centres) to mutual benefit. But does free trade work thus in practice?

The empirical evidence for convergence by regions, in nations, is clear.

Consider the US. A hundred years ago, the different states enjoyed very different GDPs per capita, but since then states have approached each other closely in terms of income per capita because the poorer states have grown rich at a faster rate than rich ones have grown even richer. Convergence works in the US.

Sceptics, though, have argued that successful convergence in a country such as the US may be attributable less to internal free trade than to the preparedness of people to move and to the subsidies paid by the federal government to poor states. But convergence works in Europe, too - not just within the EU but also within the countries of the European Free Trade Association. Indeed, convergence within the EU has been no faster than within Efta, suggesting that free trade alone is enough.

If that is the case, why is convergence globally so patchy? Contrary to myth, some areas of the developing world really are developing, and poverty globally really is diminishing (witness the good news from India) but in some parts of the world, especially in sub-Saharan Africa, economic growth is low or even negative. These discrepancies cannot be blamed on the West because, for all the US and EU's selfishness, the world is now a reasonably free trade area.

The best answer to this question is provided by Hernando de Soto, the Peruvian economist, in The Mystery of Capital (2000). De Soto established that the essence of third worldliness can be distilled into the absence of property rights. Without property rights, people do not invest in property and physical capital. They produce little, so have nothing to trade.

Poverty rules.

Making Globalization Good consists of 15 essays written by the international great and good. Oddly, only one of the contributors, Joseph Stiglitz, refers to De Soto. This is ironic because Stiglitz is the West's flagellator-in-chief, and his attack in his own book Globalization and its Discontents on the World Bank, the WTO and other western-controlled international agencies is scathing. But in his essay here he joins De Soto in placing the major responsibility for their development on the countries of the third world themselves. In particular, Stiglitz entrusts third-world governments with responsibility for creating the legal and institutional frameworks that provide the ethical and sociological structures without which economic growth is impossible. For Stiglitz, entrepreneurs are two a penny but healthy cultures are rare. And without healthy cultures and sound government, entrepreneurs will enrich themselves by corruption, predation and scams rather than by the creation of wealth: witness Nigeria. Stiglitz emphasises how important it is for the third world to transform itself if it is to join the developing world.

Although only Stiglitz refers to De Soto, Making Globalization Good is subtitled The Moral Challenges of Global Capitalism, which speaks to the now-wide recognition (well re-articulated here by Deepak Lal and Michael Novak) that, while markets may provide the best means of economic growth, the contracts (including the observance of property rights) on which markets are based are moral constructs. If people do not keep their promises, then contracts are impossible. Economic growth is, therefore, at its core, a moral question, which is why Hans Kung in his contribution calls for all market players not just to trade honestly but also to proselytise ethical business.

Morals grow out of cultures, and a number of the contributors here ask which cultures and religions in today's world best promote markets. Brian Griffiths and Jonathan Sacks (chief rabbi of the UK) assure us that Christianity and Judaism are good at this. David Loy suggests that the eastern religions and traditions (Buddhism, Hinduism, Confucianism et al) move on such different, non-materialistic, planes from capitalism, that they neither inhibit nor promote it.

Khurshid Ahmad, however, maintains that the collective nature of Islamic cultures precludes the US business model of individualistic capitalism from flourishing in Muslim countries. He is not, though, gloomy about Islam's economic prospects because he claims that different market models can thrive in different countries. He invokes Japan to prove his case. Ten years ago he might have invoked Rhennish (German), Asian and other non-US models, but such models are looking increasingly tarnished.

It was Rousseau who maintained that capitalism promotes individualism at the expense of collective values. But while the individualistic US business model of capitalism consistently emerges as the most effective, it succeeds because the element of individualism is rooted in strong collective values.

The whole point of American capitalism is that individuals, though free to be individualistic, obey the rules of the market and of society. Witness America's genuine rage over Enron and other corporate frauds.

I disagree with Ahmad, therefore, and I believe that Islam will have to accommodate the individualistic American business model if it is to grow.

Theoretically, Judaism and Christianity (with their proscriptions on usury and other individualistic market tools) are no more capitalist-friendly than Islam. So, while Islam may require a Reformation before it gets there, I anticipate that in a century or so the Middle East will boast of stock markets and fund managers and venture capitalists fully as rapacious as the ones that dominate the western landscape today.

I certainly hope so because the Muslim world - unlike supposedly non-materialistic cultures - does care about relative economic might, and if Islam really never will sustain western-style economic growth, then the ever-growing imbalances will only further inflame Muslim resentments.

There is no space here to dissect all the contributions in this book, including those from UK politicians Gordon Brown and Shirley Williams, but let me note that this is an eminently sane book written by sensible observers. The contributors write from a surprisingly common perspective, which suggests that the world today is in the hands of an enlightened elite. I suspect that most of the contributors would have been dismayed by the invasion of Iraq by Bush and Blair.

The only significant omission from the list of contributors is Noam Chomsky, but this book is not written from viewpoint of those who protest against WTO meetings, it is written from the perspective of those attending them who recognise that the Uruguay Round tipped the balance of trade too far in the West's favour and who hope that the Doha development agenda will help redress it.

Globalisation is not culturally neutral. The hatred it provokes springs from the recognition that, ultimately, it will homogenise global cultures into the US model. But that homogenisation will be voluntary: capitalism provides the goods and services that people want and, as early protesters such as Thoreau showed, it provides refuge for internal exiles.

Global capitalism is very old. Neolithic tribespeople traded axe heads across hundreds of miles. Adam Smith argued that free trade is innate to humanity and that today's religions and traditional societies represent a hangover from the Bronze Age's oppression of the masses. Even if one disagrees with Smith, this book reassures us that those who drive the international agenda (America's neo-cons and Europe's trade commissioners excepted) are thoughtful and decent.

Terence Kealey is vice-chancellor, University of Buckingham.