The diffusion of prosperity and peace by globalization.

Author:Weede, Erich

Capitalism and economic freedom promote peace. Globalization can be understood as a process of market expansion and market integration, as the universalization of capitalism. After a short discussion of the political economy of globalization, I turn to the frequently overlooked security benefits of globalization. The diffusion of prosperity, free trade, and democratization is part of the story. Quantitative studies provide a great deal of evidence for a causal chain running from tree trade via prosperity and democracy to the avoidance of military conflict, as well as for another causal relationship between trade or economic openness and conflict avoidance. After a review of the quantitative literature and a discussion of some methodological issues, I illustrate the capitalist peace by historical examples and contemporary applications. At the end, I consider how the capitalist peace may be "exported" from Western societies to poor and conflict-prone nations and regions.

The Political Economy of Globalization

The process of globalization had already begun in the late nineteenth century. Before World War I, trade and foreign investment were fairly globalized. Because of low political obstacles to international migration, labor markets actually were more globalized at the beginning of the twentieth century than at its end. The two world wars and the Great Depression between them interrupted the process of global market integration for about half a century. Thereafter, the process regained force and speed. Now, inexpensive, fast, and reliable communication and transportation enable producers of goods and some service providers in low-wage countries to challenge high-cost producers in rich countries on their home turf; but technological innovation resulting in falling prices and rising speed of intercontinental communication and transportation is not the only determinant of globalization. Political decisions in rich and poor countries alike contribute strongly to globalization, too. Tariffs and, to a lesser degree, nontariff barriers to trade have been reduced. Many countries try to find and exploit their comparative advantage, to realize economies of scale and gains from trade by looking for buyers and sellers everywhere. If trade between countries is truly free, then it promises to enrich all nations.

Since the publication of Adam Smith's Wealth of Nations ([1776] 1976), we have known that the size of the market limits the division of labor and that the division of labor boosts innovation and productivity. In principle, globalization is the logical endpoint of the economic evolution that began when families switched from subsistence farming and household production to production for the market. As long as globalization is not yet completed--and it certainly is not yet--gains from trade remain to be realized by further market expansion. Because globalization adds to competitive pressure, however, it causes resentment, and because globalization springs from technological innovation and political decisions that promote free trade, these innovations and decisions attract resentment, too. The world is already globalized enough that national resistance does limited damage. Except for the United States, national resistance is more likely to contribute to a country's decline than to derail the process of globalization.

Free trade is vulnerable. If foreigners are perceived as a cause of the need to adjust, then attacking free trade becomes politically attractive. After all, no politician benefits from the affection of foreigners who cannot vote. Of course, economists who insist on the benefits of free trade (even if your trading partner does not practice free trade) are right. Benefits include serving customers better at lower prices, but also faster growth of total factor productivity (Edwards 1998; OECD 2003, 89). The benefits of free trade, however, tend to be dispersed widely, whereas its costs (for example, certain bankruptcies and job losses) tend to be concentrated and more visible. Therefore, the political case against free trade may become very strong despite the weakness of the economic argument.

Who in rich Western societies is affected most by globalization? Although unskilled labor is much less expensive in poor countries than in rich countries, this difference does not necessarily provide poor countries and poorly paid labor there with a competitive advantage. Frequently, even unskilled labor is much more productive in rich countries than in poor ones. If the wage gap is neutralized by a countervailing productivity gap, unit labor costs are not affected by international differences in pay. If unskilled labor in rich countries is overpaid compared to unskilled labor in poor countries, however, then flee trade reduces the demand for rich-country labor that is used intensively in the production of importable goods--that is, for low-skilled labor used in producing goods that compete with Western imports. The wages of low-skilled Western workers may suffer from downward pressure because their services have become more easily substitutable than previously (Rodrik 1997). This process might result in growing volatility of earnings and income inequality, as in the United States, or high unemployment, as in much of Continental Europe. Of course, unemployment is most likely to result from a combination of fierce international competition and rigid labor markets at home. Otherwise, trade is more likely to affect the composition of employment than its amount (Irwin 2002, 71).

Analysts dispute the degree to which either trade or technological progress has caused the predicament of unskilled labor in the West. Although the majority view (for example, Krugman 1996) blames most of it on technological progress, this conclusion is not entirely satisfying because technological progress is frequently inferred from estimated production-function residuals rather than from direct measurement. An outspoken minority (for example, Wood 1994, 166-67) puts most of the blame on free trade and estimates that approximately 9 million manufacturing jobs might have been lost in rich countries by 1990 and many more by now. The complementary gain of 23 million jobs in poor countries may satisfy humanitarian impulses, but it does not help Western politicians to win elections. In the past three years, one out of six manufacturing jobs has been lost in the United States ("Flying on One Engine" 2003, 30). Although trade is almost certainly not the primary determinant of this job loss or of increased wage inequality (Irwin 2002, 99), some Americans look for scapegoats. Because China has a larger trade surplus with the United States than even Japan does, China bashing has become popular in America.

With regard to the expansion of economic freedom and secure property rights, globalization provides reason for hope. Globalization ties politicians' hands and prevents them from pursuing politically attractive but self-defeating policies, such as those that created the welfare state and its disastrous effects on incentives to produce goods or services for others. As Vanberg has observed, "competition among jurisdictions offers citizens and jurisdiction-users effective protection against exploitation, be it in favor of privileged groups or of those who hold the reigns of political decision-making power" (2000, 106). Where markets are significantly larger than political units, stifling the markets by political controls and by undermining economic freedom becomes more difficult than elsewhere. In my view (Weede 1996, chap. 4, and 2000, inspired by Jones 1981), even the rise of the West and the comparative stagnation of the great Asian civilizations until the mid- or late twentieth century is owing to political fragmentation and disunity in Europe in contrast to the huge centralized empires in China, India, or the Middle East. Capital and even labor to a lesser degree could exit from oppressive rule in the West, thereby mitigating its incidence. By contrast, Asian emperors or sultans were not forced to respect the property rights of merchants and producers.

Because globalization may require Western welfare states to accept either widening income inequality or high unemployment (given their fairly rigid labor markets), protectionism remains a politically attractive cure. In politics, competition does not guarantee a movement toward greater efficiency or economic freedom. For special interests--owners and workers of enterprises threatened by foreign competition, and politicians willing to serve them rather than the much bigger, but silent constituency of consumers--academic support may be crucial in legitimating their claims (Bhagwati 1991, 6). Even if material well-being were one's only concern, it would be extremely important to resist the protectionist temptation. Protectionism harms consumers, reduces the speed of wealth-enhancing structural change, and diminishes opportunities for employees to move to better-paid jobs producing for global markets.

The Security Benefits of Globalization

A Survey of Empirical Studies

Although neither "realist" theorizing about interstate politics (Waltz 1979; Mearsheimer 2001) nor critical treatments of globalization (Gray 1998; Kapstein 1999) recognize it, a strong and beneficial link exists between globalization and the avoidance of war. In my view, the economic benefits of globalization and free trade are much less important than the international security benefits. The quantitative literature (summarized by Weede 1996, chap. 8, and 2000, chap. 11) comes fairly close to general agreement on the following four propositions from economics, political sociology, and international relations.

First, democracies rarely fight each other (Russett 1993; Russett and Oneal 2001). This finding does not necessarily imply that democracies fight fewer wars than do other regimes. It is even compatible with the view widely...

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