UPDATED AND BUMPED: PEARLSTEIN RESPONDS IN ONLINE CHAT
Washington Post business columnist Steven Pearlstein is probably right when he concludes that the world is experiencing something of a backlash against globalization, but he is almost completely wrong about the reasons. Tim Graham has already noted a few problems with Pearlstein’s column, but I’d like to zero in on one statement in particular:
Take the standoff in Sunday’s election in Mexico. Here’s a country that has dutifully followed the globalization script written by the U.S. Treasury, the World Bank and the International Monetary Fund, adopting a free trade pact, denationalizing and deregulating much of its economy, and attracting gobs of foreign investment. But in the years since, it has suffered one financial crisis, seen its small farmers brought to the brink of ruin and failed to develop an efficient and entrepreneurial service sector. And the one sector of its economy that had produced the most gains, manufacturing for multinational corporations, is now threatened by even cheaper labor in China.
Pearlstein makes it seem like Mexico’s problems are the result of following “the globalization script.” But as Jason Steorts documents in this week’s NR cover story, the exact opposite is the case: Mexico suffers from too little reform, not too much. The state-owned energy monopoly is going broke. Socialist agricultural policies have spread rural poverty far and wide. And despite its steps toward liberalization, the business climate remains unfriendly toward foreign investment. Steorts writes:
Improving the business climate would require, principally, a combination of labor reform and tax reform. A medium-sized company in Mexico paid 31.3 percent of its gross profit to the government in 2005, while its U.S. equivalent parted with only 21.5 percent. Starting a business in Mexico can be a bureaucratic nightmare: The World Bank found that doing so takes, on average, 58 days, compared with five in the U.S. (Mexico is bad even by Latin American standards: Starting a business in Chile takes 27 days; in Argentina, 32.) Mexico also has more rigid regulations on work hours and on the firing of workers than other countries in the region, as well as greater hiring costs. All of this gives pause to potential investors. Luis Pazos, the Mexican economist, believes that a combination of lowering corporate tax rates, reducing Mexico’s value-added tax to 10 percent on all goods and services, and introducing greater labor flexibility would result in “many more companies’ settling in Mexico to take advantage of NAFTA and the proximity to the U.S. market.”
Latin American leftists are good at blaming their countries’ problems on globalization rather than lingering statism. They must be pleased that Pearlstein is buying their arguments. He concludes:
With the near-certain collapse of the Doha round and the prospect of a wall going up across the Rio Grande, you can be sure that, in the coming days, business executives, think-tank economists and former chairmen of the Federal Reserve will come forward with all sorts of dire warnings about the dangers of protectionism and isolationism.
They should all save their breath. You can’t go around the world preaching about democracy and free markets if you’re not willing to accept the results of elections and acknowledge the shifting sentiments in the marketplace of ideas.
This might be the stupidest thing I’ve read all year. Free-trade advocates have been fighting an uphill battle for over a century against the power of demagogues and populist rhetoric. This is not the first time the world has experienced a bout of protectionism and isolationism, and it certainly won’t be the last. But free-traders have consistently made the case that these forces are dangerous, because they happen to be right.
But Pearlstein isn’t interested in who’s right or wrong. He just wants to accuse the “economic elites” of hypocrisy because “the marketplace of ideas” has turned against them. Here’s a newsflash for Pearlstein: The “marketplace of ideas” has always been hostile to the idea that free trade alleviates poverty while protectionism causes it. But it’s an idea that time and again has been overwhelmingly vindicated, Pearlstein’s ad populus arguments not withstanding.
UPDATE: Here’s how Pearlstein answered my question in his live online chat today:
New York, NY: You write that those who warn of the dangers of protectionism and isolationism should just “save their breath” because global sentiment has shifted against them. But then you argue that globalization has never been a popular idea, that it has been foisted on people by economic elites. So if it has never been popular, why should free-traders just shut up because it is suddenly less popular? What if they happen to be right about the dangers of protectionism? Do they suddenly lose any authority to make their case because a few leftists have won elections in Latin America?
Steven Pearlstein: They should save their breath, and instead focus on getting to policies that “fix” some of the unintended and negative consequences of openness and globalization, rather than lecturing us yet again on how good this has all been for eveyone, when the evidence now is that this is not true. The difference beween now and then is that people have a lot more personal experience with globalization, and can contribute to the debate in ways they couldn’t have when it seemed like just some wonky thing. This isn’t a situation where the elites are right and everyone else is wrong. At this point, it is that the elites need to do some re-evaluation because it is their position that needs rejiggering. There is still a danger from protectionism and isolationism, but the people who can assure things don’t go in that direction are the free traders and globalizers, by coming up with some needed adjustments to their program.
First, if this is really what Pearlstein meant, it is not at all clear from what he wrote. Second, if certain countries react to the problems associated with trade liberalization by moving back in the direction of protectionism, shouldn’t free-trade advocates remind everyone what a disaster that would be? And third, most of the problems associated with globalization are falsely so, usually by leftist demagogues angling for power. Often when you look at the countries that globalization has allegedly failed, you find that the real problem is a corrupt, incompetent or statist government. Globalizers cannot “rejigger” their position to prevent governments from failing their people.