Economic Development, Globalization, and Sustainability

Home , Binary economics, Economic integration

From Ashford and Hall (2011). Technology, Globalization, and Sustainable Development (Yale II University Press) Economic Development, Globalization, and Sustainability

In Part I of this book, we discussed the nature (Chap- and globalization have, or are expected to have, on ter 1) and evolution (Chapter 2) of the multidimen- the three pillars of sustainability (Chapter 5). sional concepts of sustainability and sustainable As we shall see, technological change is both a development. In Part II, we discuss economic devel- vehicle for the improvement of the workings of the opment within the context of (domestic supply and industrial state and a cause of unsustainability. There- demand) forces operating more or less within the fore, understanding the technological change process nation-state (Chapter 3), how the nation-state devel- (Chapter 6) and the possible roles of the private sec- ops in an environment increasingly infl uenced by tor (Chapter 7) and the government (Chapter 8) in forces (for example, globalized trade, information, promoting economic development is essential to and fi nance) operating in the global economy (Chap- the design of industrial policy, which is the focus of ter 4), and the effects that both technological change Part III.

—-1 —0 —+1

561-45401_ch01_8P.indd 143 6/23/11 9:50 AM -1— 0— +1—

561-45401_ch01_8P.indd 144 6/23/11 9:50 AM 3 Economic Development and Prosperity: Current Theory and Debate Coauthored with KYRIAKOS PIERRAKAKIS

3.1 The Meaning of Economic Development 145 3.4 Critiques of, and Alternatives to, the Northern Growth 3.1.1 Growth and Development Distinguished 145 Model 166 3.1.2 Factor Endowments and the Classiﬁ cation of Capital 146 3.4.1 Growth in Developing Economies and the Washington 3.2 Theories and Perspectives on Economic Growth 147 Consensus 166 3.2.1 Rostow’s Stages- of- Growth Model 147 3.4.2 Sustainability in Practice: The Cases of Kerala and 3.2.2 Linear Stages- of- Growth Models: The Harrod- Domar Costa Rica 168 Model 148 3.5 What Lies Ahead for Economic Growth and Development in 3.2.3 Structural- Change Models 148 Industrialized and Developing Economies? 170 3.2.4 The International- Dependence Perspective 149 3.5.1 The End of Sustainable Growth? 170 3.2.5 Neoclassical Growth Theory: The Solow Model 150 3.5.2 The Impact of Economic Growth on Employment in the 3.2.6 New Growth Theory: Romer’s Model 151 Developed World 171 3.2.7 The Ayres- Warr Analysis 153 3.5.3 The Next Industrial Revolution? 172 3.2.8 Implicit Assumptions about Technological Innovation in 3.5.4 Broadening Capital Own ership and Its Effects on Neoclassical Environmental and Ecological Economics 154 Consumption- Led Growth, Sustainable Livelihoods, and the 3.2.9 Peak Oil and Economic Growth 155 Environment 173 3.3 Technological Development and Growth Theory 156 3.6 The New Economics 173 3.3.1 Technological Change 156 3.7 Notes 179 3.3.2 Joseph Schumpeter’s “Creative Destruction” 163 3.8 Additional Readings 179 3.3.3 Market Structure and Innovation 164 3.9 References 179

3.1 THE MEANING OF ECONOMIC fi ted or profi ted from the activity. Increased eco- DEVELOPMENT nomic activity (involving expenditures for goods and services) necessitated by natural or human-made di- 3.1.1 Growth and Development Distinguished sasters are not part of any deliberate growth strategy n Chapter 1, we discussed fundamental concepts of government in its trusteeship role for its people. of economic growth and the metrics that might Thus there are “good GDP” and “bad GDP.” On the be used to mea sure that growth in terms of in- other hand, other positive attributes of development creased GNP and GDP. We also argued that not are not captured by GNP and GDP.* For this reason, all increases in these metrics were necessarily other indexes of human development† have also re- Igood. For example, the GDP of a region might go up as a result of activities related to digging out of a * See Section 3.3.1.2 for a deeper discussion of problems blizzard or rescuing people in a fl ood, but no one of mea sure ment in a postindustrial society. would argue that more of this kind of increase in † See Daly (1994) for a discussion of the distinction between growth and development that applies to developed as well GDP was good, even if some fi rms and people bene- as developing countries. —-1 —0 —+1

561-45401_ch01_8P.indd 145 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 146

ceived attention (see Section 1.1.1 in Chapter 1). • To expand the range of economic and social choices Nonetheless, many contributions to GNP and GDP available to individuals and nations by freeing them growth are desirable and concern a government’s from dependence on other nations, but also from economic or industrial policy. In this chapter, we fi rst the forces of ignorance and human misery focus on understanding the historical patterns and The role of national governments in the context of determinants of economic growth in the positive economic development is essential. Contrary to the sense, ignoring for the moment the undesirable ex- view of many economists of the neoclassical main- ternalities that might fl ow from that growth. We then stream, we argue that this role should not be limited summarize critiques of what has come to be called to ensuring the proper functioning of markets and “the Northern model” of development. the correction of market failures. Long-run economic growth has been at the heart Traditional economics focuses on the effi cient, of economic analysis since the fi rst founding docu- least- cost allocation of scarce resources and the op- ments of economic theory. Economic growth was, in timal growth of these resources over time in order to essence, the topic of Adam Smith’s treatise The produce an expanding range of goods and ser vices Wealth of Nations. Growth, however, should not be (Todaro and Smith 2009). Furthermore, traditional considered as an end in itself. Economists have fo- economics also focuses on neoclassical economics as cused their efforts on analyzing the causes of growth taught in introductory and intermediate economics for centuries because it has the potential to decrease textbooks in universities (Söderbaum 2008). Mar- poverty, increase the standard of living, support goals kets, in that context, are considered to be “perfect,” such as education and health care, and substantially while the consumer is perceived as a rational utility affect the quality of life of the citizenry. maximizer. It is essential to note that as an area of study of On the other hand, development economics has a national economies, development is generally distin- more extensive scope. Apart from being concerned guished from economic growth. Economic growth is with the optimal allocation of scarce resources and mea sured in “economic” terms— for example, GNP, with their sustained growth over time, development GDP, and other economic metrics—and does not economics also deals with the economic, social, po- account for nontraded goods, services, and cultural liti cal, and institutional mechanisms necessary to bring attributes. Development is not a purely economic phe- about rapid, large-scale improvements for develop- nomenon. According to Todaro and Smith (2009, p. ing countries (Todaro and Smith 2009). In this con- 16), “Development must . . . be conceived of as a multi- text, market imperfections are the rule rather than dimensional process involving major changes in social the exception, and limited consumer rationality is structures, popu lar attitudes, and national institutions, taken as a given, while disequilibriums often prevail as well as the acceleration of economic growth, the re- in the economy. duction of ine qual ity, and the eradication of poverty. Formal economic thinking remains essentially Development, in its essence, must represent the whole confi ned to static equilibrium instead of examining gamut of change by which an entire social system, the dynamics of the economy (Niehans 1990). The his- tuned to the diverse basic needs and desires of indi- torical perspective and the empirical observations of viduals and social groups within that system, moves the fi rst classical economists (Adam Smith, David away from a condition of life widely perceived as un- Ricardo, and Karl Marx, among others) led to some satisfactory toward a situation or condition of life re- key intuitions about the growth process but not to garded as materially and spiritually better.” coherent theories of economic growth (ibid.). How- According to Todaro and Smith (2009, p. 22), eco- ever, this was something that was destined to change nomic and social development in all societies should in the era of model building, through the contribu- have at least the following three objectives:* tions of a series of scholars who dramatically shifted the way their contemporaries ended up viewing the • To increase the availability and widen the distribution of basic life- sustaining goods such as food, pro cess of economic growth. shelter, health, and protection • To raise the quality of life (securing more mean- 3.1.2 Factor Endowments and the Classifi cation ingful jobs and enhancing cultural and human of Capital values) Economic historians speak in terms of “factor endow- -1— * See Section 3.4 for the contributions of Seers (1979) ments” that nations might possess to explain their 0— and Sen (1999) to the discussion of development. economic growth. Early lists included land, material +1—

561-45401_ch01_8P.indd 146 6/23/11 9:50 AM Economic Development and Prosperity: Current Theory and Debate 147

resources, energy, and a physically strong labor force. of successive industrial development that have oc- When nations were essentially agricultural, land was curred and are discussed later in this chapter. the most highly valued factor—and thus the driving force behind colonialism— and only after the Indus- 3.2 THEORIES AND PERSPECTIVES ON trial Revolution did material resources, energy, and ECONOMIC GROWTH more skilled labor take on importance. Advanced nations are often described now as be- The relationship between different factor endow- ing in the postindustrial era, in which services, rather ments or types of capital and economic growth has than manufacturing, become increasingly important been the subject of volumes of analysis, predictions, and “knowledge-based” work replaces physical work. and reinterpretations. It is beyond the scope of this Today an expanded list of factor endowments might book to provide a comprehensive review of that liter- include the following: ature. What we do provide is the salient evolution of major thinking that has guided economic and indus- • Land trial policy from Adam Smith to David Ricardo to • Material Resources (natural and physical capital) current innovation-based perspectives, including the • Energy so-called knowledge-based economy. This section • Labor capable of performing physical work draws heavily on the scholarship of R. Ayres and Warr • Know- how (intellectual human capital) (2009), Drucker (1994, 1999), Niehans (1990), Schum- peter (1939), and Todaro and Smith (2009). • [Innovation systems]* • Built capital (that is, infrastructure, such as rail- ways, bridges, roads, ports, airports, and dams) 3.2.1 Rostow’s Stages- of- Growth Model • Information and communication technology (ICT) After the end of World War II, concern with theo- • (Health and the environment)† ries of growth became particularly prevalent, espe- • Structural capital (knowledge and productive rou- cially in the case of poor or underdeveloped countries. tines held by organizations) Western economists, however, only had one eco- • Networks and outsiders (linking organizations, nomic growth paradigm to draw conclusions from— people, and entrepreneurs) that of the economic development of the Western • Social capital (knowledge held by consumers and world. Their rationale lay in the fact that all devel- citizens) oped Western societies were in essence agrarian at some point of their histories, but industrialized Although these factors are not listed in order of im- through a series of steps or stages. portance nor in strictly chronological order of their Out of this intellectual environment came the emergence as important for growth, this list does stages- of- growth model of development, the most describe an unfolding of factor endowments and outspoken proponent of which was the American characteristics that more or less parallels the phases economist Walter Rostow (Todaro and Smith 2009). The rationale of this model was fairly obvious. All industrialized countries, Rostow argued, had already * Innovation systems are discussed in Chapter 6 in the completed a stage of “takeoff” and had moved to- context of the institutions that foster technological innovation. ward “self-sustaining growth.” The underdeveloped We place this asset in square brackets to serve as a reminder that world, according to this mind-set, was still in either unlike other factors that can be easily acquired, this describes a complex system of interacting determinants that refl ect different the traditional society or the “preconditions” stage po liti cal, social, and economic development cultures and tradi- and thus had to follow a par tic u lar set of prescriptive tions. In general, industrialized nations have highly developed policies in order to move to the next stage (ibid.). innovation systems, while developing countries differ markedly in their infrastructure, legal institutions, and politi cal systems Generally, the success in rebuilding Europe through that could enhance more optimal use of the other factor endow- massive fi nancial aid in the Marshall Plan suggested ments that they possess. See Rodrik (2007), who argues for more that a similar infl ux of capital was needed to advance “self-discovery,” coordination of government policies, and gov- the faltering economies of Asia, Africa, and Latin ernment–private- sector communication in developing nations. † Good human health (both physical and mental) and an America. Thus par tic u lar emphasis was placed on ac- unpolluted and preserved environment (what could be called celerated capital accumulation (Todaro and Smith “environmental capital”) are increasingly regarded as essential 2009), which is also known as “capital fundamental- for maintaining the productiveness of human and natural/physical capital even if they are not factors of production per se. For ism.” Furthermore, the fundamental strategy of de- —-1 this reason we place them in parentheses. velopment necessary for economic takeoff had to be —0 —+1

561-45401_ch01_8P.indd 147 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 148

rooted in the mobilization of domestic and foreign surpasses the natural rate, actual growth must fall saving, which would then generate suffi cient invest- short of warranted growth most of the time, with the ment to increase economic growth (ibid.). consequence that depressions will be long and con- siderable, while booms will be ephemeral. Aside from its potentially inadequate descriptive 3.2.2 Linear Stages- of- Growth Models: capacities, the model appeared to have other limita- The Harrod- Domar Model tions. Labor- force growth and technological prog- In the context of the stages-of- growth analysis, the ress constitute two other components of economic mobilization of foreign investment and domestic sav- growth, apart from savings and investment. Labor- ing was also deemed necessary for economic growth. force growth is omitted from the Harrod- Domar The Harrod-Domar model offers a description of model, and labor is assumed to be abundant, an as- the economic mechanism by which increases in sav- sumption that can be valid in the developing- country ing and investing would lead to accelerated growth. context, though not always (Todaro and Smith 2009). The Harrod-Domar model—today often cited as Technological progress can be expressed in the con- the AK model because of the employment of a linear text of the Harrod- Domar model as a decrease in the production function with output of the economy (Y) required capital/output ratio for a specifi c growth- defi ned as the product of the capital stock (K) times rate target. Nevertheless, the fi xed capital/output ra- a constant (A)— was one of the fi rst models to sug- tio does not allow for the most effi cient use of each gest that the economy could grow in perpetuity (To- factor of production. However, this limitation of the daro and Smith 2009).* The main point of the model Harrod-Domar model was one of the driving forces is that if actual growth is above the warranted (ex- behind the introduction of Solow’s model, which is pected or achievable) growth, the existing produc- examined later. tion of capital goods is below the required (that is, Although the linear stages- of- growth model may demanded) level of capital goods; hence growth will be incomplete, it could be argued that high domestic be stimulated through increases in orders. If growth, savings and/or the injection of foreign capital are on the other hand, appears to be sluggish, the capital necessary, though not suffi cient, conditions for eco- stock will appear to be underutilized, and growth nomic growth in an underdeveloped economy. will be further slowed (Niehans 1990). Hence the growth path appears to be on a knife’s edge, with 3.2.3 Structural- Change Models signifi cant centrifugal forces at work. Furthermore, the stability problem of the model Structural-change models focus on the mechanism also relates to the full employment of labor. For by which poor or underdeveloped economies man- given rates of population growth and technical prog- age to transform their domestic economic structures ress, continued full employment will result in a cer- from agrarian to more modern and industrially di- tain rate of output growth, or a “natural rate.” If the verse manufacturing and service economies (Todaro warranted rate appears to be less than the natural and Smith 2009). The best- known and most repre- rate, the implication of the model is that there is no sentative example of the structural- change approach reason that the economy should not enjoy boom con- is the “two-sector surplus labor” theoretical model ditions, which can also be potentially infl ationary of W. Arthur Lewis. Lewis’s model focused on the (Niehans 1990). Nevertheless, if the warranted rate structural transformation of a primarily subsistence economy and became the general theory of the de- ΔY s velopment process in surplus-labor developing na- * The equation = is a simplifi ed version of the Y k tions during most of the 1960s and 1970s; it still has famous equation in the Harrod-Domar model of economic many adherents today (ibid.). growth. The equation states that the GDP growth rate (ΔY/Y) is determined by the net national savings ratio s and the national According to Todaro and Smith’s (2009, p. 115) capital/output ratio k, which is fi xed in the Harrod-Domar model. analysis, “In the Lewis model, the underdeveloped In fact, this equation can be interpreted simply as determining economy consists of two sectors: a traditional, over- the savings necessary to achieve a certain growth rate depending populated rural subsistence sector characterized by on the capital/output ratio. One of the fundamental intuitions of the model was that doubling the savings rate would double the zero marginal labor productivity— a situation that rate of economic growth for a given capital/output ratio. An in- permits Lewis to classify this as surplus labor in the crease in the propensity to save and in the average productivity of sense that it can be withdrawn from the traditional capital appeared to be a sine qua non of rapid economic growth -1— (Niehans 1990). For a given k, the corresponding growth rate is agricultural sector without any loss of output—and 0— the warranted or justifi ed rate of growth. a high- productivity modern urban industrial sector +1—

561-45401_ch01_8P.indd 148 6/23/11 9:50 AM Economic Development and Prosperity: Current Theory and Debate 149

into which labor from the subsistence sector is grad- levels of open modern-sector unemployment and ually transferred. The primary focus of the model is low or zero marginal productivity in agriculture.” on both the process of labor transfer and the growth This was due to a series of institutional factors, of output and employment in the modern sector.” such as unionization and civil ser vice wage scales. The key point of the model is that the pro cess of 4. Finally, Lewis made the assumption of diminish- self-sustaining growth of the modern sector, along ing returns in the modern industrial sector. How- ever, evidence suggests that increasing rather than with employment expansion, will continue until all diminishing returns prevail in that sector. surplus rural labor is absorbed into the new industrial sector. After that point, additional workers can Technological displacement (or the tendency of tech- be withdrawn from the agricultural sector only at nology transfer to be biased toward labor- saving the cost of lost food production. This process shifts changes) may offset technology gains that accrue to the balance of economic activity from traditional ru- workers. Finally, this model, as well as others, may ral agriculture to modern industries (Todaro and not apply uniformly in all developing countries Smith 2009). (Rodrik 2007). However, even though the Lewis model refl ects the historical experience of economic growth in in- 3.2.4 The International-Dependence Perspective dustrialized nations, a series of concerns have been voiced about the descriptive capacity of the model in International- dependence models gained increasing the context of contemporary developing countries. support during the 1970s as a result of increasing Todaro and Smith (2009, pp. 118–120) focus on four disenchantment with the linear stages-of- growth and different points of criticism: the structural- change models (Todaro and Smith 2009). Even though this theory became less main- 1. The model implicitly assumes that the rate of stream in the 1980s and 1990s, it has resurfaced in labor transfer and employment creation in the modern sector is proportional to the rate of modern- various versions in the past de cade and has been ad- sector capital accumulation. However, Todaro and opted by proponents of the antiglobalization move- Smith note that if capitalist profi ts are reinvested in ment. The main intuition of these models is that more sophisticated labor-saving capital equipment developing countries are “beset by institutional, po- rather than just duplicating the existing capital, liti cal and economic rigidities, both domestic and in- then, even though output does increase, wages and ternational, and caught up in a dependence and employment rates remain unchanged, and all the dominance relationship with rich countries” (ibid., extra output accrues to capitalists in the form of p. 122). There are three major streams of thought in profi ts. This is a process that some have described as “antidevelopmental economic growth,” with the context of the international dependence models: all the extra input and output growth distributed • The neocolonial-dependence model to the own ers of capital rather than the working classes.* • The false- paradigm model 2. The assumption of the Lewis model that surplus • The dualistic- development thesis labor exists in rural areas while there is full em- The neocolonial- dependence model is a direct by- ployment in the urban areas is contradicted by the product of Marxist analysis. Its basic thesis is that latest research, which indicates that there is little surplus labor in rural locations. the existence of underdeveloped countries is a direct consequence of the highly unequal capitalist system. 3. An additional questionable assumption is linked Even though it might not be the case that rich coun- to the notion of a competitive modern-sector labor market that can guarantee the continued exis- tries intentionally exploit poor and less developed tence of constant real urban wages up to the point countries, the very structure of the system, which is where the supply of rural surplus labor is ex- dominated by unequal power relationships between hausted. Todaro and Smith (2009, p. 120) note that the center and the periphery (the developed and the until the 1980s, “a striking feature of urban labor underdeveloped nations), makes any attempt of poor markets and wage determination in almost all de- nations to be self-reliant and inde pen dent diffi cult or veloping countries was the tendency for these even unattainable (Todaro and Smith 2009). wages to rise substantially over time (both in real and nominal terms), even in the presence of rising On the other hand, the false- paradigm model does not attribute underdevelopment to the inherent structure of the global economic system, but * For an alternative model of capital accumulation, see rather to “faulty and inappropriate advice provided —-1 Section 12.11 in Chapter 12 for a discussion of binary economics. —0 —+1

561-45401_ch01_8P.indd 149 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 150

by well- meaning but often uninformed, biased and duction in a different way from that of the Harrod- ethnocentric international ‘expert’ advisers from Domar model, which did not allow for the substitution developed-country assistance agencies and multina- of labor for capital in production. The labor/capital tional donor organizations” (Todaro and Smith 2009, ratio was fi xed in the Harrod- Domar model, and p. 124). These experts are considered to offer com- steady growth occurred only under certain specifi c plex and theoretically sound but often faulty and mis- conditions. Solow substituted the fi xed labor/capital leading models of development that often lead to ratio with a production function in which both capi- inappropriate or incorrect policy approaches. tal and labor could vary. This had signifi cant advan- Central to the understanding of the dualistic- tages. First, it allowed the producer to switch from development thesis is the notion of dualism. Dualism capital to labor when capital became too expensive, is “a concept widely discussed in development eco- and vice versa (Warsh 2006). Furthermore, the model nomics. It represents the existence and per sis tence of also allowed for an exogenous param e ter that de- substantial and even increasing divergence between scribed the rate of technical change. Because the rich and poor nations and rich and poor peoples on rate of technological progress is given exogenously, various levels” (Todaro and Smith 2009, p. 124). This the Solow neoclassical model is sometimes called an notion underlines that different sets of conditions— exogenous growth model. Thus the model has no ex- some superior and some inferior—can coexist in a planatory power with respect to the source of techni- given space. Wealthy, educated elites, for instance, can cal change. coexist with poor, uneducated masses. According to The key implication of the Solow model is that the dualistic- development thesis, this coexistence is unlike the Harrod-Domar model, an increase in sav- not a mere systemic transition but is actually chronic ings in the Solow model will not by itself increase and hardwired in underdeveloped societies. growth in the long run. In fact, according to the In developed nations, the growth of an “underclass” model, growth depends only on population and tech- parallels this dualism, with one part of a nation’s econ- nology. An increase as a result of increased savings omy linking producers, workers, and consumers (even will occur, but it will be only temporary, and the across borders), and another part of the nation’s econ- economy will eventually return to the level of steady- omy consisting of low-wage workers or the unem- state growth. An increase in savings, on the other ployed, possibly but not necessarily subsidized by hand, will increase only the equilibrium level of cap- welfare programs of the state. ital (Todaro and Smith 2009). However, Mankiw, Romer, et al. (1992), from analysis of cross- national data, note that it appears that if the rate of savings is 3.2.5 Neoclassical Growth Theory: increased, then the economy may not return even The Solow Model halfway to its former lower steady state for decades. The Solow neoclassical growth model, for which Furthermore, even though the model predicts that Robert Solow received the Nobel Prize in economics an increase in savings does not change the equilib- in 1987, encapsulates the main features of the neo- rium rate of growth, it does increase the equilibrium classical growth theory and is probably the most fa- output per person. Hence from an empirical stand- mous model of economic growth to date.* Solow’s point, even if the Solow model does depict the econ- basic innovation was to construct his model of pro- omy accurately, Mankiw, Romer, et al. (1992) argue that an increase in the savings rate can boost the rate of economic growth for de cades. This expectation, * The equation Δk = sf(k) − (δ + n)k is the fundamental equation of the Solow model. The intuition behind this equation however, remains controversial for some develop- is that the change in the capital/labor ratio k (or growth in capital mental economists (see Todaro and Smith 2009). intensity in the course of time) depends on aggregate savings Another key point in Solow’s analysis was the es- sf(k) (savings rate s times f(k), which is the output of the economy) after allowing for the amount of capital required to ser vice timated contribution of technical change to the rate depreciation, δk, and after providing the existing amount of capi- of U.S. GDP growth over the period 1909–1949. tal per worker to new workers joining the labor force, nk (Todaro Through the use of a modifi ed production function = δ + and Smith 2009). If sf(k*) ( n)k*, then the capital intensity Y = f(K, L, t), where K is capital, L is labor, and t rep- remains unchanged, and the economy grows without any change in its structure. This, according to the model, is the path of bal- resents technical change over time, Solow found that anced growth (Niehans 1990). technical change accounted for approximately 50 The notation k* denotes the level of capital per worker when the economy is in steady state. Solow deemed this equilibrium -1— level of capital to be stable. If k < k*, then (n + δ)k < sf(k). But result, k in the economy will grow toward the equilibrium level 0— from the equation we see that when (n + δ)k < sf(k), Δk > 0. As a k* (Todaro and Smith 2009). Similar reasoning applies when k > k*. +1—

561-45401_ch01_8P.indd 150 6/23/11 9:50 AM Economic Development and Prosperity: Current Theory and Debate 151

percent of the increase in output per capita, which Endogenous growth simply means technological corresponded to a contribution to GNP growth of change generated from within a system, as opposed the nonfarm sector of about 1.5 percent a year (To- to technological change that is treated as a “black daro and Smith 2009). Solow’s fi nding underlined box” in exogenous growth models. In the 1990s, out- the importance and provided a means of including put was much higher than it was in the 1890s. Eco- technical change explicitly (even though only as a nomics needed some economic theory to account for residual) in the mathematical modeling of economic that level of growth. In 1990, output per hour worked growth. in the United States was calculated as ten times as valuable as output per hour worked one hundred years before (Romer 1990). Technological progress 3.2.6 New Growth Theory: Romer’s Model provided a good- quality explanation for that level of New or endogenous growth theory was developed growth, along with the growth in human capital, or during the late 1980s by Paul Romer, but many of its the development of an effective labor force. basic elements and intuitions were already present in Romer’s (1986) and (1990) articles, which some the work of Joseph Schumpeter. The motivation be- regard as the centerpieces of the new growth theory, hind the introduction of this new theory originated emanated from a main contradiction lying at the from the limitations of the neoclassical theories in heart of economic theory since Adam Smith’s Wealth illuminating the sources of long-term economic growth of Nations was published in 1776, (see Box 3.1). Smith’s (Todaro and Smith 2009). In these models, techno- central point was the increases in productivity that logical change is treated as mostly exogenous. In con- could be achieved both through competition among trast, Romer’s (1990) model treats technical change economic actors and through the division of labor, as endogenous. which was illustrated by the now-famous example of

BOX 3.1: ADAM SMITH (1723– 1790)

Adam Smith is regarded as the patriarch of classical economic growth theory. In his magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations, which is considered the founding document of the science of economics, Smith linked the division of labor and the pursuit of self- interest to the general welfare of society and outlined the guiding principles behind the allocation of resources in a growing economy. Perhaps the most famous phrase that emerges from his book is Smith’s “invisible hand,” a term that describes a pro cess that advances the interests of a society through the individual’s search of self- interest and self- advantage. Thus what Smith essentially argued was that greed will drive actors to socially benefi cial behavior. This is nothing different from the pro cess of “competition,” working though the interdependent system of prices and quantities that is known today as the price system. Smith’s central message with respect to growth was that the division of labor increases labor productivity. In his analysis, Smith used the examples of workers in several different disciplines to make the case that under an optimal division of labor, they would end up producing more output than they would produce if they worked in de pen dently to satisfy their various needs. In Smith’s view, this was the locomotive behind increasing productivity and improving standards of living. At its core, Smith’s growth model is an optimistic one. In Smith’s viewpoint, an increased division of labor will lead to increases in productivity, incomes, and consequent increases in demand that will increase the size of markets and, through this virtuous spiral, cause further increases in the division of labor, productivity, and so on. However, this pro cess was neither automatic nor inevitable. “Good government” was necessary in order to maintain a competitive environment and avoid the emergence of monopolies, which would restrict output in order to increase prices and, consequently, their profi ts. Even though the role of the government was not needed for the functioning of the market for Smith, except to maintain a competitive economy and avoid monopoly, it played a central role in other areas such as defense, administration of justice, and the consolidation of public institutions. He also made a forceful case for the mutual benefi ts of free trade among nations, introducing the principle of comparative advantage. For him, it was better to buy a cheaper commodity from another country and pay for it with the resources obtained from a local industry with some advantage in comparison to other countries. The concept of comparative advantage was later further developed by David Ricardo. —-1 —0 —+1

561-45401_ch01_8P.indd 151 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 152

BOX 3.2: DAVID RICARDO (1772– 1823)

David Ricardo’s most famous contribution to economics is the theory of comparative advantage.* Ricardo’s theory argues that a nation is eco nom ical ly best off if it does what ever it is best at, even if others are better at it. According to that perspective, if two countries specialize in the production of those goods for which they have a comparative advantage, and trade ensues, there is an absolute gain in welfare for both economies (Gill and Law 1988). This theory, however, appears to have signifi cant limitations. In globalization, foreign direct investment is the rule rather than the exception. Hence the export sector of one nation can be owned by capitalists from another, and nothing prevents these foreign own ers from repatriating most of their profi ts (Gill and Law 1988). This was exactly the case for countries like India, most of whose resources were depleted by En gland. In general, relying on trade for economic growth can be problematic, especially in the case of developing countries. This does not mean that growth cannot be achieved in that scenario. However, it can be achieved only at the cost of escalating international, North- South, and internal inequalities, along with increasing dependence on transnational fi rms (ibid.). Unlike Smith, Ricardo did not offer a new model of economic growth. While Smith had tried to explain the growth of wealth, Ricardo deemed that the proper task of an economist was to study the distribution of wealth among the three major classes of society: the workers, the landowners, and the capitalists (Warsh 2006). However, Ricardo did modify Smith’s existing model of economic growth to include diminishing returns to land. According to his analysis, unlike labor, the output of which could be increased through increases in productivity, Ricardo deemed land to be “variable in quality and fi xed in supply.” Hence as growth increases, more land is necessary, but land cannot just be created, because it already exists in limited supply. This signifi cantly affects growth. First, the limited supply of land will lead to increases in rents and consequently decrease entrepreneurial profi ts. Furthermore, the prices of agricultural goods will increase over time, and this will lead to workers requiring wage increases. This leads to a quicker barrier to growth than Smith allowed for, but Ricardo also claimed that this decline can be happily checked by technological improvements in machinery and the specialization brought by trade.

* See also see Section 4.4.1 in Chapter 4 for a discussion of comparative advantage in the context of a barter economy.

the pin factory, whose employees, by focusing on is the expectation of increasing returns on capital narrow tasks, end up producing more output than because of technological change (Warsh 2006). they could if each worked in de pen dently. This point, This model fi lls the gap unexplained by the neoclas- however, hid a contradiction. The example of the pin sical theory that considers technological progress as factory describes the reality of an increasing return being in de pen dent of decisions of economic agents. to scale: more workers produce a bigger factory and Neoclassical theory also fails to explain big differences consequently more pins. Moreover, increasing re- in growth among countries with similar technologies. turns to scale are associated with the emergence of Furthermore, at the core of endogenous growth the- natural monopolies because a larger business can ory lies a criticism of globalized trade. In traditional achieve lower costs through the advantages of scale. neoclassical models, growth emanates from trade. This is the opposite of Adam Smith’s description of Neoliberal economists have interpreted the associa- the “invisible hand,” which requires a large number tion between higher growth rates and a larger volume of competitors and the absence of monopoly power. of trade as one where causality fl ows from the second In the theory of perfect competition, the idea that to the fi rst rather than the other way around (Gill and free markets operate smoothly and optimally largely Law 1988). However, as the criticisms of Ricardo’s depends on the assumption of diminishing returns to theory of comparative advantage (see Box 3.2) sug- scale. Even if the emergence of a natural monopoly gest, an increasing volume of trade does not neces- were possible, the scale advantages of a natural mo- sarily lead to sustainable growth. What endogenous nopoly could be offset by greater incentives for growth theory did was to show how countries can work profi t- seeking competitors who try harder (this as- in the context of a globalizing economy to focus on sumes that there are low barriers to entry). Also, complementary activities, such as education and re- neoclassical economics predicts that competitive training, and coherent regulatory frameworks, which prices are generally lower and output greater than can facilitate their economic development. -1— under monopoly conditions. The most important In his 1986 article “Increasing Returns and Long- 0— fact assumed by the new endogenous growth theory Run Growth,” Paul Romer essentially laid the foun- +1—

561-45401_ch01_8P.indd 152 6/23/11 9:50 AM Economic Development and Prosperity: Current Theory and Debate 153

dations of endogenous growth theory. In that article, faster than developed economies, and that economic he proposed a model where economic growth is driven convergence will be the realistic result. Nonetheless, by the accumulation of knowledge, which is the really this fact is widely disputed because most scholars be- important form of capital (Romer 1986). Romer es- lieve that convergence has not been observed in reality sentially tried to discard the neoclassical hypothesis (R. Ayres and Warr 2009; Clark 2007). Romer’s model of diminishing marginal returns in capital investments, essentially tried to build on Solow while endogenizing permitting increasing returns in aggregate production the standard theory—without, however, making fun- and focusing on the role of externalities (specifi cally, damentally drastic alterations. As R. Ayres and Warr knowledge spillover effects) in determining the rate (2009, pp. 162–163) explain: “Although not empha- of return on capital investments (Todaro and Smith sized in neoclassical growth theory, there is an endog- 2009). According to Romer, investment in knowl- enous mechanism that can explain a part of this edge leads to increasing returns in marginal prod- residual, that is, beyond that which is accounted for ucts because technological innovation can lead to by labor and capital accumulation. The part that can the deployment of new technologies, which can re- be explained without radical (structure-changing) duce the cost of production and put one company technological innovations is due to learning, econo- ahead of its competition. Romer’s last point in his mies of scale and the accumulation of general knowl- 1986 article was that knowledge has what he described edge (for example, computer literacy) that leads to as a “natural externality” because it cannot be per- cost savings and product improvements.” fectly patented or kept secret. Hence new knowledge Romer puts forward a trade-off between current has a spillover effect on the production possibilities of consumption and investment in knowledge. He fur- other fi rms as well. ther makes the assumption that knowledge can be In his 1990 article “Endogenous Technological monopolized long enough to be profi table to the dis- Change,” Romer (1990) set out the preconditions for coverer, but it is also possible that the knowledge the deployment of endogenous growth. His model has becomes available as a free good (R. Ayres and Warr four basic inputs: capital, labor, human capital (educa- 2009). The central point of Romer’s analysis lies in tion, training) and an index of the level of technology. the fact that positive returns to scale constitute the Romer’s key intuition is that the most important pre- main explanation behind economic growth. Romer, condition of growth lies not in population dynamics however, puts forward an additional point. He postu- but in human capital dynamics. Hence it is investments lates that economic growth essentially takes place in new research, education, and human capital rather when people take resources and rearrange them in than investments in physical capital accumulation ways that are more valuable, thus creating new eco- that should be fostered. nomic “recipes.” From his analysis, as R. Ayres and In general, endogenous growth theory, by focus- Warr (2009) underline, Romer seems to believe that ing on knowledge and externalities, provides a way the magnitude of knowledge capital and the rate of for countries to enter the new knowledge economy by growth depend on the number of new “recipes” dis- making the best use of their available resources. The covered instead of the quality or sector of applica- main weakness of this model, however, is that it over- tion. However, knowledge capital does not constitute looks ineffi ciencies that arise in developing countries a homogeneous entity, because some ideas and some (poor infrastructure and poor capital and goods mar- sectors are fundamentally more productive than oth- kets) that can signifi cantly affect one country’s growth ers (ibid.). prospects. R. Ayres and Warr (2009) opine that growth without energy (or with less of it) is not possible. They argue that past growth was driven not by globalization 3.2.7 The Ayres- Warr Analysis or consumer spending but by the ever-declining price Although new growth theory has been widely con- of energy or energy ser vices (performing useful work) sidered to complement the fundamental weakness of since the start of the Industrial Revolution. They also the Solow model— that is, that Solow merely assumes suppose that it is the technology of energy conversion growth rather than explains it—a series of scholars and utilization, rather than technology in general, that believe that Romer’s analysis still displays signifi cant drives growth. This approach portends serious im- weaknesses. pediments to growth for the near future. Neoclassical As elaborated earlier, Solow’s model entails that economists argue that energy is not an important fac- capital displays diminishing returns. Fundamentally, tor of growth because its cost share is so small, but —-1 this implies that developing economies will grow this is based on the questionable assumption that —0 —+1

561-45401_ch01_8P.indd 153 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 154

there are no real constraints on substitution between technological innovation (either in the realm of capital, labor, and energy (see Mankiw, Romer, et al. resource- extraction technology or product/material 1992). The output elasticity of energy, or of useful development) is not able to provide a substitute— and work, can be—and eventually is—much larger than the incumbent resource is essential— then the re- the cost share. source is likely to be used until an ecological limit is Thus R. Ayres and Warr (2009) have put forward reached, after which the environment will be irrepa- an alternative model of economic growth that man- rably damaged. This point highlights the major differ- ages to account for useful work or exergy (energy ence between neoclassical and ecological economics. accounting for effi ciency) as a factor of production. Neoclassical economics is not directly concerned As they note (ibid., p. 218): about ecological limits per se, whereas identifying these limits and living within them are primary foci of A strong implication of our main results is that ecological economics. future economic growth depends either on continued declines in the cost of primary exergy or on an Like neoclassical economics, ecological econom- accelerated increase in the output of useful work from ics does not explicitly address the process of tech- a decreasing exergy input, that is, increasing exergy- nological (or system) innovation. It assumes that if to- work conversion effi ciency. Energy prices have it is possible to set ecological limits, then technol- increased signifi cantly in the last few years and are ogy will somehow adjust (using pricing or other eco- almost certain to increase further, both because of nomic or legal instruments) to operate within these increased demand and because of the need to cut limits. One approach that ecological economists green house gas emissions. If the rate of technological progress in conversion effi ciency slows down, we might use to address the problem of global warming believe that economic growth will necessarily slow is capping global CO2 emissions and establishing a down as well. Hence, it can no longer be assumed, mechanism to trade emission rights. However, there without question or doubt, that growth along the is evidence to suggest that emission-trading schemes “trend” will continue indefi nitely and that “our do not encourage technological innovation, but rather grandchildren will be much richer than we are” as the diffusion of existing technology (N. A. Ashford some economists have asserted. and Caldart 2008; Driesen 2004; Kemp 2000). If It is interesting to note that their perspective is con- improvement in effi ciency by a factor of ten or more sistent with the effect of energy price spikes on eco- is what is required to transition toward sustainable nomic growth and with job losses through process development, then simply diffusing existing tech- innovations on behalf of big fi rms, which manage to nology is not likely to be suffi cient (see Section 1.3.3 sustain output with fewer employees. in Chapter 1 for a discussion of the “factor X” debate). A tenuous argument—based on the notion of a 3.2.8 Implicit Assumptions about Technological Faustian pact—against the idea of living within eco- Innovation in Neoclassical Environmental logical limits is that given the societal benefi t re- and Ecological Economics ceived from a par tic u lar sociotechnical system (such Environmental and ecological economics implicitly as the transportation or energy systems), societies adopt or assume contrasting views on the ability of around the world might be willing to tolerate a cer- technology to overcome social and environmental tain amount of environmental degradation (for ex- problems stemming from economic (or human) ac- ample, global climate change) to continue receiving tivity. Whereas neoclassical economics leans toward an important service (such as mobility or electricity). technological optimism, ecological economics is more One way to avoid the debate over whether we should pessimistic about the ability of new technology to stress ecological limits is to ask how much we can address negative externalities (or spillovers) without make technology into a driver for sustainable devel- extensive government intervention. opment. Focusing on technology as a driver raises In neoclassical economics, technology is treated several important questions. Do we need incremen- as an exogenous factor in the economy (Huber 2004), tal, revolutionary, or disrupting forms of change? and the price of resources is determined using static Are marginal changes to large-scale sociotechnical rather than dynamic effi ciency (see Section 9.3 in systems adequate? For the most part, disrupting Chapter 9). As resources become scarce, prices will technology was originally discussed in the realm of rise until they reach a level (an upper limit) that will products displacing other products (Christensen -1— enable a substitute to enter the market— this idea fol- 1997); how can disrupting technology lead to a pro- 0— lows Solow’s (1993) notion of resource fungibility. If cess change or further to a system innovation? The +1—

561-45401_ch01_8P.indd 154 6/23/11 9:50 AM Economic Development and Prosperity: Current Theory and Debate 155

answers to such questions are explored in Chapters • Recent peak oil worries are only the latest install- 6, 7, and 8. ment in a long history of failed peak forecasts. The proponents claim that this time the circumstances are not the same and their forecasts will not miss 3.2.9 Peak Oil and Economic Growth the mark, which “mixes correct observations with untenable assumptions.” Despite the fact that most models of economic growth • Finally, when one contemplates a world with little omit energy from their analysis, some analysts de- or no oil, a gradual decline of global oil production scribe growth as being increasingly energy dependent does not have to translate into economic and social (R. Ayres and Warr 2009). An interesting empirical catastrophes. observation is the fact that signifi cant recessions have taken place following past oil crises. Even in the con- Thus Smil’s (2008) principal arguments are that text of the 2008–2009 fi nancial crisis, many experts estimates of EUR are just that—estimates—and they have argued that the spike in energy prices, and espe- have been systematically revised upward historically. cially that of oil, contributed signifi cantly to the re- No one really knows what the real EUR is. In addi- cent recession, augmenting the effects of the burst of tion, there is no fundamental reason that the recov- the housing bubble. ery curve should be bell shaped over time. We may How long will oil last? This fairly simple question very well decline to a plateau—rather than experienc- has generated an extremely heated debate for de- ing a steep decline— as technology advances, energy- cades. Nonetheless, Smil (2008) notes that most of relevant effi ciency increases, and the demand for oil the debate does not occur because of this question decreases. Although Smil (ibid., pp. 176–177) ad- as such, because we certainly know that commercial mits that the occurrence of an oil peak, along with production of crude oil will persist throughout the major energy transitions, would wreak havoc on cur- twenty-fi rst century. The central issue lies in what is rent energy producers and could lead to severe so- widely known as “peak oil theory.” Peak oil is the cioeconomic dislocations, he still does not believe point when the maximum rate of global petroleum that serious concern is justifi ed. Smil (ibid., p. 182) extraction is reached. After this point, according to offers that “with the exception of fl ying and long- the theory, the rate of production will enter a phase distance land and maritime transport . . . everything of terminal long- term decline. The basic assumption that is done with liquid fuels can be done with gases.” of the proponents of the peak oil theory states that He argues, “The combination of non-conventional when we compare the total volume of the estimated oil, natural gas, and gas- to- liquid conversions means ultimate recovery (EUR) of oil with the worldwide that hydrocarbons should be with us as major sources cumulative production, half of the EUR has already of global energy supply far beyond the middle of the been extracted or will be in a matter of years (Smil century” (ibid., p. 186). 2008). Should peak oil simply be dismissed as a nonis- The decline in oil production has been treated by sue, raised by alarmists who have a skewed view of many theorists as extremely important—some have reality? Not quite. The increasing use of cheap en- gone so far as to describe it as the “doomsday” of ergy and particularly fossil fuels was the catalyst of modern civilization— while others have merely treated the Industrial Revolution and historically has been it as a relatively minor issue, given the rate of techno- one of the most important factors behind economic logical innovation. The peak oil alarmists, as they growth and prosperity. The impact of peak oil on are called, have their detractors. Among them, Va- economic growth will generally depend on the exact clav Smil paints a more optimistic picture, referring rate of decline and on the development and speed of to similar false alarms levied at coal. His critique is adoption of viable alternatives (or backstop technol- rooted in the following observations (Smil 2008, p. ogies). 165): In 2005, the U.S. Department of Energy published a report titled Peaking of World Oil Produc- • The values of EUR are anything but certain and tion. This report, known as the Hirsch report tend to rise with better understanding of petro- (Hirsch, Bezdek, et al. 2005), noted that “the peak- leum geology, with frontier exploration, and with ing of world oil production presents the United enhanced recovery techniques. States and the world with an unprece dented risk man- • The proponents of an imminent peak of global oil agement problem. As peaking is approached, liquid extraction disregard the role of prices, ignore his- fuel prices and price volatility will increase dramati- torical perspectives, and presuppose the end of hu- —-1 cally, and, without timely mitigation, the economic, man inventiveness and adaptability. —0 —+1

561-45401_ch01_8P.indd 155 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 156

social, and politi cal costs will be unprece dented. Vi- Revolution and those used by hunter-gatherer and able mitigation options exist on both the supply and agricultural societies concerns the energy sources on demand sides, but to have substantial impact, they which technologies depend. Modern technology is must be initiated more than a decade in advance of predominantly dependent on fossil fuels and other peaking.” sources of nonrenewable energy (oil, coal, gas, and In general, the economic growth of the past de- nuclear), whereas the more primitive technologies cades has been fueled by cheap energy prices. In that were powered by the three Ws— wind, water, and context, peak oil, when met with increased energy wood (Wetlesen 1999).* In this regard, the fi rst in- demand from industrializing countries, will quite dustrial revolution was primarily an energy revolu- possibly create a situation that, depending on the tion. Perhaps a future industrial transformation will speed of deployment of viable alternatives, will cre- be characterized by a shift to renewable energy sources ate signifi cant limits to growth. As the Hirsch report and away from a reliance on nonrenewable supplies underlines, oil is going to peak at some point (or al- (Jänicke and Jacob 2008). ready has). Thus the main issue lies in the mitigation effort that will need to take place in order for the 3.3.1.1 The Long Waves world to experience the least possible impact. The fi rst person to identify the occurrence of major The reader may want to read R. Ayres and Warr technological transitions during the nineteenth and (2009), Hirsch, Bezdek, et al. (2005), and Smil (2008) twentieth centuries was the Russian economist Nikolai in order to have a fi rmer base for judging. Techno- Kondratieff (Kondratieff 1935 [1925]). Kondratieff’s logical optimism clearly underlies Smil’s analysis. notion of a long-wave cycle (known as a Kondratieff Whether R. Ayres and Warr are unnecessarily pes- wave, or K-wave) was originally used to describe long- simistic remains to be seen. As with other potential wave economic cycles, or structural changes in the impending crises, the precautionary principle needs world economy.1 By observing the behavior of prices to be brought into the policy choices in this area of and interest rates in the United Kingdom and the substantial future uncertainty. United States between 1789 and 1925, Kondratieff identifi ed long-wave cycles of S-shaped growth (that 3.3 TECHNOLOGICAL DEVELOPMENT is, initial slow growth that is followed by a period of AND GROWTH THEORY rapid growth toward saturation) that occurred over a period of fi fty to sixty years. His ideas were later ad- 3.3.1 Technological Change opted and further elaborated by the Austrian econo- Technology and society are forces that together mist Joseph Schumpeter (1939), who argued that shape the world in which we live, shifting its con- K-waves were caused by the clustering of innovations tours and rearranging its parts, just as oceans move that led to rapid technology-based economic growth, sand dunes. . . . To thrive amidst these waves of change requires both a sense of direction and an which either opened up new markets or disrupted ex- ability to understand how change works. Westrum, isting ones (see the discussion in Section 3.3.2).† Technologies and Society: The Shaping of People and Things, 1991, p. 4 * However, the muscle power of humans and domestic animals also played an important role in helping these societies For almost three centuries, societies have experi- achieve their objectives (Wetlesen 1999). enced the transformative power of technological in- † Schumpeter (1934 [1912]) was the fi rst person to distinguish diffusion from invention and innovation by describing novation. This section looks at why technological technological innovation as the linear process of invention- innovation has been and is such an important driver innovation- diffusion. His theory was that entrepreneurs inno- of progress, especially during the last one hundred vate not only by taking an invention to market but also by creating new manufacturing processes (for example, Eli Whitney’s “Amer- years, which has been an era of unprece dented tech- ican system” of manufacture of interchangeable parts), identify- nological change. Technology—defi ned here as the ing products for new consumer markets, and developing new application of science for the achievement of practical forms of industrial orga ni za tion. However, a limitation of Schum- purposes (Dorf 2001)—is considered in the context of peter’s theories is that he was preoccupied “with the individual entrepreneur and the individual innovation” and was reluctant to society, the economy, employment, the environment, “conceptualize invention, innovation, and technology accumula- and national governance. tion as a social pro cess” (Freeman 1990, p. 24). Schumpeter (1934 The characteristics and capabilities of modern [1912], p. 228) explained clustering by stating that “the appearance of one or a few entrepreneurs facilitates the appearance of technology far surpass any forms of technology that others,” and he provided no real explanation of what caused clus- -1— supported earlier societies. One major point of dis- tering or why Kondratieff’s long-wave cycles occurred in nonuni- 0— tinction between the technologies of the Industrial form but necessarily periodic intervals (Ruttan 1959). Today it is +1—

561-45401_ch01_8P.indd 156 6/23/11 9:50 AM Economic Development and Prosperity: Current Theory and Debate 157

Kaplinsky (2005, pp. 225– 228) describes the work tial growth sector that has been added to Table 3.1 is of Perez (2002) which offers an alternative explanation the NBIC convergence (that is, the convergence of to innovation clusters causing surges in growth and nanotechnology, biotechnology, information and com- emphasizing a “rejuvenation of all economic activi- munication technology, and cognitive sciences into ties” by across- the- board deepening and broadening major new areas of research and development). Impor- of those activities by new technology, for example, ICT tant emerging technologies that have been added to technology. Perez’s conceptualization involves four the list in Table 3.1 are nanotechnology and ubiquitous phases: (1) “irruption,” which offers the possibility of computing— that is, computers/technologies that are dramatic changes in otherwise mature industries with embedded and networked into all aspects of our lives market saturation; (2) a “frenzy” of investment lead- to such an extent that we are not fully aware of their ing to the creation of a fi nancial bubble (with the po- existence or simply take them for granted. tential to create excess productive capacity), followed Perhaps what is most striking about the waves of by its collapse; (3) diffusion of the technology; and (4) economic development (represented by the pace of maturation and saturation of markets, creating vulner- innovation) is how the scientifi c and technological ability to subsequent technological displacement and breakthroughs that fueled them have also shaped the disruption. Perez argues that the disjuncture between modern era by improving public health and chang- fi nancial capital and production capital (the latter is ing the fabric of modern society (Langford 2004). important in moving from phase 2 to phase 3) resulted From the steam engine to the combustion engine and in structural overcapacity and falling prices that ex- from the telegraph to satellite and laser communica- plain, for example, price and profi t squeezes, default tions, each transition has provided new opportunities on investment loans, and the ultimate collapse of the to improve our quality of life. These transitions in dot .com industry. Although Perez’s conceptualization technology have been paralleled by major scientifi c may well explain historical surges in the growth of in- advances in such areas as medicine and gene tic engi- dustrial economies, and her ideas may well describe neering, which have improved the health of those so- the pathology of the “dot.com surge,” it has little to do cieties with access to the new medicines or knowledge. with the fi nancial crisis of 2008, which was fed by both With each transition, the complexity of new tech- the circulation of illusory fi nancial instruments and nological systems is increasing and is placing greater the unjustifi ed expansion of credit markets.* demands on our ability to understand how these new Within the modern era of technological develop- systems interact and behave. The task of defi ning and ment, there have been four distinct sixty- to seventy- understanding the dynamic and evolving nature of year K-waves (or periods) of technology-driven technological systems will be a major undertaking of economic development (Grübler and Nowotny 1990). the twenty- fi rst century. One might argue that our in- Each of these waves can be characterized by growth ability to understand or predict, and then to counter- sectors, emerging technologies, and new concepts of act or respond to, the behavior of these systems is the management and industrial orga ni za tion (Table 3.1). main reason that there exists so much concern about In each case, the emergence of new technologies re- the future prospects of developed societies on the part sulted in a technological transition that tended to fol- of those analysts concerned with safety.‡ We need not low a sigmoid curve (S-curve) (Figure 3.1). Although look far to see numerous events that have devastated the fi fth technological cycle of development (1985– communities and the natural world as a result of tech- 2050) is in the process of being defi ned, the items/ nological and scientifi c advances.§ Nonetheless, the characteristics identifi ed are those emerging in many industrial societies today, with the possible exception these four factors are adequately addressed, the nuclear sector of the nuclear sector being a growth sector.† A poten- might experience a resurgence (Deutch, Moniz, et al. 2003; Nut- tall 2004). In any event, nuclear power is likely to remain a highly controversial energy option. widely recognized that the institutional or legislative framework ‡ See the discussion in the next section of the informa- within which businesses operate (what might be called “institution revolution, which raises the question whether its advances tional capital”) plays an infl uential role in the formation of inno- can be mea sured by the metrics developed for the fi rst and sec- vation clusters (Freeman 1990; Kingston 2004). ond industrial revolutions. * For an in-depth explanation of the 2008 fi nancial crisis § A few salient examples include the 1969 oil spills and and its aftermath, see especially Stiglitz (2010). subsequent fi re on the Cuyahoga River in Ohio and off the coast of † Public unease about the safety of nuclear technology, Santa Barbara, California; the 1979 Three Mile Island nuclear ac- nuclear proliferation, long- term waste- management require- cident in Pennsylvania; the 1984 incident where a leak of deadly ments, and life-cycle costs are four important factors limiting the methyl isocyanate at a Union Carbide pesticide plant in Bhopal, growth of the nuclear sector. However, if greater emphasis is India, killed some 3,800 people; the 1986 nuclear reactor meltdown —-1

placed on electricity production that does not produce CO2 and at the Chernobyl power station that released radioactive material —0 —+1

561-45401_ch01_8P.indd 157 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 158

TABLE 3.1: CHARACTERISTICS OF MAJOR TECHNOLOGICAL COMPLEXES

First Wave Second Wave Third Wave Fourth Wave Fifth Wave 1770–1830 1820–1890 1880–1945 1935–1995 1985–2050

Growth sectors Water power Coal Cars Electric power Gas Ships Railroads Trucks Oil Nuclear Canals Steam power Trolleys Airplanes Information Mechanical Chemical industry Radio and Telecommunications equipment Metallurgical Tele vi sion Satellite and laser processes Instruments and communications controls [NBIC] Emerging Mechanical Electricity Electronics Nuclear Biotechnology technologies equipment Internal Jet engines Computers Artiﬁ cial intelligence Coal combustion Air transport Gas Telecom- Space communication Stationary Telegraph munications and transport steam power Steam shipping [Nanotechnology Ubiquitous computing] Management Economy of Administrative Professional Participatory and scale management management interconnected Interchangeable systems manage- parts ment Industrial Concept of the Concept of mass Concept of manage- Concept of Concept of systems o r g a n i z a t i o n industrial ﬁ rm production ment structure decentraliza- structure Division of labor Interchangeable and delegation tion parts

Source: Grübler and Nowotny (1990), reproduced in NRC (2002, p. 73).

Pace of ? InnovaƟon

First Wave Second Wave Third Wave Fourth Wave Fih Wave

Time FIGURE 3.1: STYLIZED GRAPH OF SCHUMPETER’S WAVES OF TECHNOLOGY- BASED ECONOMIC DEVELOPMENT Note: This fi gure is based on a similar diagram presented in Jowitt (2004, p. 81). However, an important difference is that Jowitt’s graph depicts a reduction in the duration of each subsequent wave of innovation (i.e., the fi rst wave is sixty years in length, the second wave is fi fty- fi ve years in length, and so on until the fi fth wave, which is predicted to be thirty years in length). If we look at specifi c technologies there is evidence to suggest that the rate at which society adopts new technology is increasing. See, for example, Christensen’s book The Innovator’s Dilemma (1997), in which he charts the rapid advance of disk- drive technology that occurred over a contracted time period. Source: Adapted from Jowitt (2004, p. 81).

idea that technology has played, and will continue to determinism— a technology- led theory of social play, an infl uential role in shaping modern industrial change—can be traced back to the early stages of the societies predominates. This idea of technological Industrial Revolution.*

throughout the Northern Hemi sphere; the 1989 Exxon Valdez oil * Smith (1994) provides an insightful discussion of how spill that released 11 million gallons of oil into Alaska’s Prince Wil- technological determinism, initially conceived in Europe, found a liam Sound; and the 2010 BP Gulf oil spill. Although preventing fertile ground in the newly inde pen dent United States as a result such disasters is a primary objective of systems engineering, some of its desire for progress. He argues that Benjamin Franklin and argue that no matter how many warnings and safeguards are de- Thomas Jefferson were the “nation’s prophets of progress” who signed into our modern large-scale technological systems (such as a sought new mechanical technologies as a means to realize the vi- nuclear power or petrochemical plant), growing systems complex- sion of a “virtuous and prosperous republican society” (ibid., ity means that failures are inevitable (Perrow 1999). Of course, p. 3). Smith suggests that to Franklin and Jefferson, “progress what are missing from the preceding list are incidents that occurred meant the pursuit of technology and science in the interest of hu- -1— through the intentional use of nuclear, chemical, biological, and man betterment (intellectual, moral, spiritual) and material pros- 0— conventional weapons. perity” (ibid.). However, Smith (1994) describes how, at the turn +1—

561-45401_ch01_8P.indd 158 6/23/11 9:50 AM Economic Development and Prosperity: Current Theory and Debate 159

3.3.1.2 The Information or Postindustrial Revolution domestic servants (Drucker 1994, p. 54). By the 1950s, the Industrial Revolution—triggered by emerging It is now apparent, at the turn of the twenty- fi rst cen- technologies such as the steam engine—had gathered tury, that developed economies are transitioning to- full momentum, and industrial workers now formed ward a postindustrial, or information-based, society the single largest group in developed nations (ibid., p. (Castells 1999). Bell (1999) describes a postindustrial 56). The core tasks of these workers were manufactur- society as one that relies on the economics of infor- ing and serving the products of manufacturing (such as mation (or intellectual capital) as opposed to the eco- car and appliance repair). Interestingly, the skills that nomics of goods (from manufacturing) or reliance on agricultural workers and domestic servants brought to the ser vices sector of production versus the manufac- their new “industrial” positions meant that they were turing sector of production. Where the steam engine often overskilled for their jobs. At the turn of the mil- was argued to be the catalyst for the Industrial Revo- lennium, the traditional industrial worker began to be lution, global information technology is argued to be replaced by the technologist—“someone who works the catalyst for the information revolution. Therefore, both with hands and with theoretical knowledge” the signs of an emerging postindustrial society are a (ibid.). Good examples of technologists are dentists growing ser vices sector and an increasing reliance on and computer and X-ray technicians. More generally, information technology. However, the postindustrial Drucker (ibid., p. 62) refers to the newly emerging society will not displace the older one; instead, it will dominant group as “knowledge workers.” He argues overlie some of the previous layers, just as the indus- that although the foundation of the knowledge worker trial society did not eliminate the agricultural sectors is a formal education, this is only the beginning. If the of society (ibid.). People will still rely on agriculture new comparative advantage lies in the application of and manufacturing to survive. The development of knowledge, this means that the knowledge worker new technological forms for the postindustrial soci- must be able to learn continuously to bring value to ety will need to respond to this new era of human his or her fi rm or business (ibid., pp. 62–63). Modern- development, where information and products and day knowledge-based workers form what is now ser vices become intertwined. termed the “service industry,” which includes (1) In the insightful article “The Age of Social Trans- health-care ser vices (such as dentistry and medicine), formations,” Drucker (1994) charts the major changes (2) knowledge-based services (such as banking and in- that have occurred in the structure of society from formation management), and (3) food and retail ser- the early agricultural to the new knowledge- based vices. However, it should be recognized that the fi rst societies. In partic u lar, he describes how two two job categories are likely to require higher levels of technology- based shifts in the nature of employment educational achievement than the third category. have occurred. Drucker (1994) argues that the problem with this It is evident that before World War I, the single larg- latest transition is that displaced industrial workers est group in every country consisted of traditional cannot simply move into knowledge- based or ser vice farmers, followed in developed nations by live- in employment because they lack the education necessary to do such tasks. Hence if industrial workers are to succeed in knowledge-based employment, they of the nineteenth century, Franklin and Jefferson’s views failed to prevail because of the emergence of a more technocratic vision of must “change their basic attitudes, values, and be- progress espoused by Alexander Hamilton and Tench Coxe. This liefs” (ibid., p. 62). The transition also means that technocratic view grew from the belief that America’s politi cal good education and a capacity for lifelong learning inde pen dence rested on economic inde pen dence. The early success of machine- based manufacturing convinced Hamilton and become paramount. Coxe that technology would be the means by which economic in- What Drucker fails to acknowledge, though, is depen dence could be achieved. In addition, with the nation’s that displaced industrial workers may have no choice abundant resources and a limited populace to exploit them, if America was to surpass Britain and Europe in technological but to accept low- wage employment in the ser vice prowess, then new technology and machines would be required sector (Berger 2005) (see Section 1.1.3.1). Although (Pursell 1996). During the following century and a half, Ameri- working in a fast- food establishment, for instance, ca’s decision to focus on technological advance laid the ground- will bring in some income, it is debatable whether work for major advances in manufacturing that had a signifi cant infl uence on American culture (Pursell 1996; Smith and Marx such employment is fulfi lling to the worker, given his 1994). An example of two infl uential innovations produced dur- training and preferences (see Section 1.1.3.2). Hence ing this period were Eli Whitney’s “American system” of manu- the future does not look particularly promising for facture of interchangeable parts (Smith 1994) and Henry Ford’s triumph of the automobile (Flink 2001). See Pursell (1996) for an those industrial workers caught in the transition be- —-1 insightful discussion of infl uential technologies from America. tween the industrial economy and the ser vice economy, —0 —+1

561-45401_ch01_8P.indd 159 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 160

although the economy as a whole showed great prom- saying, “The use of ICT may be increasing the effi - ise at the time. ciency of innovation, further contributing to long- Productivity growth in the United States in the term growth potential.” The OECD’s optimism has second half of the 1990s had been attributed to the not waned, even in the light of the 2008 fi nancial information revolution, and Eu rope adopted its fa- crisis OECD (2010a, 2010b). mous Lisbon Strategy in 2000 to emulate the ICT- ICT is identifi ed as a general-purpose technology driven knowledge- based economy as explaining the (GPT) that may take a long time to become manifest apparent cause of the U.S. economic success (Hage- in macroeconomic growth and productivity data. mann 2008). However, there have been many disap- Alan Greenspan’s characterization of the large price- pointments associated with the perfor mance of the to- earnings ratio in the late 1990s as “irrational exu- information revolution. The tech bubble burst in berance” following Robert J. Shiller’s analysis in his 2001 and the ICT productivity “miracle” may have book of the same title (Shiller 2000), published just imploded at the same time. Solow (1987) famously before the 2000 stock-market crash,† represented said, “You can see the computer age everywhere but further doubt about ICT as a source of signifi cant in the productivity statistics,” giving rise to the pro- economic growth. Another doubt stemmed from a ductivity or Solow paradox. In 1997 in the Financial failure to fi nd rises in multifactor productivity (MFP) Times, Stephen Roach, chief economist for Morgan that varied across countries and could have been Stanley, opined: “The productivity gains of the In- attributed to increases in R&D and or gan i za tion al formation Age are just a myth” (Griffi th 1997). Ac- innovations rather than directly to ICT (Hagemann knowledging the greater productivity growth in 2008). the United States than in Europe, Roach attributed Hagemann (2008, p. 61) offers three possible ex- greater output to longer working hours in the United planations for the Solow paradox: States. 1. Some of the benefi ts of ICT may not be picked up Lynch (2008) argues that investments in human by the productivity statistics, such as improve- capital, information technology, R&D, and physical ments in the quality and diversity of ser vices. capital appear to be complementary to investments 2. The benefi ts of ICT, such as or gan i za tion al change in or gan i za tion al innovation. She observes that and the upskilling of workers, may be slow to “even after accounting for capital deepening, total emerge. productivity growth has been a very important de- 3. The creation and expansion of networks take time terminant of the growth of average labor productiv- to occur and may not show up in the statistics. ity.” Citing her earlier work (Black and Lynch 2004, 2005), she repeats her argument that during the Liagouras (2005), on the other hand, raises more 1990s, changes in organ i za tion al innovation may have fundamental questions about the usefulness of met- accounted for as much as 30 percent of output growth rics of progress that had been developed for indus- in U.S. manufacturing.* trial societies in “postindustrial capitalism”: In examining the relationship between ICT and Perhaps the most serious diffi culty is to fi nd conve nient trends in labor productivity and employment in the indicators in order to mea sure what is intangible or 1990s in Eu rope and the United States, van Ark, invisible. . . . This is a more general problem, which Inklaar, et al. (2003, p. 86) found: “The inverse rela- concerns not only investment but also all basic con- tionship between employment and productivity cepts, such as product, productivity, growth, etc., which growth has been much more prominent in manufac- we inherited from the industrial era. (ibid., p. 24) turing industries than in ser vice industries. Sec- The essentials of business or ga ni za tion in industrial capitalism can . . . be found in the writings of ondly, during the 1990’s, the relationship has turned classical economists: the long- term per for mance of the positive in many industries, in partic u lar ICT-using in- enterprise is identifi ed with productivity. And dustries in the service sector. Finally, the employment- productivity is obtained in three correlated ways: the reducing effects of productivity growth have remained deepening of the (technical) division of labour, the considerably stronger in Eu rope than in the U.S.” mechanization of the labour pro cess, and economies Commenting on the sources of economic growth of scale. (ibid., p. 23) in the 1990s, in 2003 the OECD (2003, p. 14) nonetheless voiced optimism about the new economy, † The 2008 global stock- market crash and fi nancial crisis are generally acknowledged to have stemmed from excessive -1— * See Chapter 7 for a discussion or or gan i za tion al inno- borrowing driven by unjustifi able optimism in continual high 0— vation and learning. growth of both housing and fi nancial markets. +1—

561-45401_ch01_8P.indd 160 6/23/11 9:50 AM Economic Development and Prosperity: Current Theory and Debate 161

The notion of productivity no longer makes sense in In conclusion, the more we move towards post- an economic context where quality and variety take industrial society, the more the notions of growth, prece dence over quantity. Investment in intangible output, and productivity that we inherited from capital (R&D, training, software, and long- term industrial capitalism will become obsolete. This marketing positioning) becomes more important than means also that, with time, it will be necessary to the mechanization of labour pro cesses. Last, but not invent a new national accounts system, and not least, the secular tendencies towards specialization and simply improve on the existing one. Note however de-qualifi cation of labour— and the vertical- horizontal that the elaboration of new conventions for post- expansion of the fi rm— are clearly reversed. (ibid.) industrial economic per for mance go far beyond mea sure ment issues. The ultimate question is what In commenting on the currency of the need to re- kind of (post- materialist) development do we want, solve the Solow paradox, in which large investments and in what kind of (postindustrial) society do we in ICT have not shown up in the productivity statis- want to live? (ibid.) tics, Liagouras (2005) asks: These observations bring into question whether all If the inventions in ICTs and in biotechnologies are so the attempts to develop sustainability metrics may, revolutionary as it is said, why after two de cades of in the end, be inadequate to track failures and suc- unpre ce dented technical progress is this not refl ected cesses in transformational initiatives. (See Section in output and productivity statistics? (ibid., p. 29) 3.4.2 for a related discussion of the measures used to The fi rst explanation concerns the incapacity of track development in Kerala, India, and in Costa Rica.) national account systems, constructed within and for industrial capitalism, to measure the economic An important metric relevant to employment is perfor mance of post-industrial societies. In industrial inherent lower cost, which measures the cost savings societies, the wealth of individuals and nations takes that can be attributed to enhanced capital, labor, and the form of an accumulation of standardized commod- labor- capital- interface* productiveness. Here produc- ity goods. The production of the latter is achieved tiveness should not be confused with productivity. through the use of other goods like machines and Productivity is found by dividing an output by a fac- materials. In this schema of “production of commodi- tor of input—that is, it is the amount of output per ties by means of commodities,” even work is reduced to unqualifi ed (simple) labour and then to the goods unit of input. Productiveness is a measure of the required for its reproduction. Thus, increases in the quality of being productive or the capacity for pro- wealth of individuals and nations are identifi ed with ducing. Examples are a more productive machine increases in the quantities of goods that they produce that is capable of faster output and a more produc- and sell. However, given that the value of the total tive worker who is capable of more creative or faster product also depends on the evolution of prices of work and higher- quality outputs if his or her skills different goods, the elaboration of cost- of- living have been enhanced. Therefore, labor productivity indexes— like the Consumer Price Index (CPI)— can be enhanced by the use of more productive capi- permits the isolation of the quantity-effect from the price-effect, and thus the measure ment of the real tal (such as a smarter machine) or more productive growth of output. Still, the above framework becomes workers. As a result, it is important to measure the problematic when (a) there are important and/or productiveness of labor, capital, and the labor- capital continuous changes in the quality, variety, and interface because this provides a more accurate mea- conve nience of the goods, (b) new goods are intro- sure of where a company’s/nation’s competitiveness duced very often, (c) investment in different forms of lies— in its capital, its labor, the interface between intangible capital becomes important, and (d) ser vice the two, or a mixture of two or more of these ele- relationships become dominant in the whole economy ments. The problem with conventional mea sures of (and not only in the service sector). This means that what exactly characterizes postindustrial capitalism labor productivity—such as that included in the 2006 cannot be easily measured, and by consequence, United Nations Commission on Sustainable Devel- contemporary national accounts overstate infl ation and opment (UNCSD) framework (Ekins and Medhurst understate growth in output and in productivity. (ibid.) 2006) (which divides output by a labor factor input, In activities like healthcare, education, culture, such as number of hours worked or wages paid)— is insurance, knowledge- intensive business ser vices and that it fails to identify who or what is responsible for environmental ser vices, the objective is not to the production/competitiveness. accumulate commodities, but to maintain and ameliorate the state of a human or a natural system in the long run. This implies fi rst of all that long- run * The labor-capital interface is the match between a par- outcomes cannot be reduced to a mea sur able immedi- ticu lar technology and a person for a given production scenario. ate output— as is the case with manufacturing and For example, ergonomically designed workstations are a better —-1 agricultural goods. (ibid., p. 30) match than poorly designed ones. —0 —+1

561-45401_ch01_8P.indd 161 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 162

Another interesting indicator or metric is the cost The EU- 15 region ranks 18th in global competitive- savings derived from environmental and social fac- ness among the 40 nations/regions (with a global tors that can be attributed not to production effi cien- competitiveness score of just 52.5, 40 percent below cies, but rather to improvements in environmental, Singapore’s score). Thus, our analysis indicates that the United States is not the runaway leader in global social, and/or employment factors that yield posi- competitiveness that some believe it to be, but still tive fi nancial benefi ts in terms of reduced costs or leads Eu rope. even positive social benefi ts such as more satisfi ed Moreover, strikingly ITIF fi nds that all of the 39 workers. Using the current situation as a baseline, other countries and regions studied have made faster new initiatives/programs can be assessed by how progress toward the new knowledge- based innovation much future expenditure they save. A “lower-cost” economy in recent years than the United States. As analysis takes a broad view of the problem being indicated by the change score, the United States has made the least progress of the 40 nations/regions in addressed. For example, the use of a new pro cess/ improvement in international competitiveness and initiative that reduces accidents and lowers pollu- innovation capacity over the last de cade. The EU- 15 tion levels is likely to avoid health costs associated region has made some improvements over the last with injured or ill workers/bystanders and lower de cade, but slower than the overall average and as a any potential environmental cleanup/remediation result, ranks 29th among the 40 nations/regions. But costs. this is still considerably higher than the United States. Finally, it would be valuable to mea sure how the If the EU- 15 region as a whole continues to improve at performance— which is similar to the quality and this faster rate than the United States, it would surpass the United States in innovation- based competitiveness variety of outputs discussed by Liagouras— of an by 2020. industry sector or products has improved over time. These fi ndings have signifi cant implications for This indicator may refl ect changes in the rate of in- Eu rope and the United States. First, the rise of novation, which is a central determinant of com- global economic competition means that the United petitiveness. States and Eu rope need to . . . put in place national The meaning, sources, and measure ment of com- or continental economic development strategies. This petitiveness continues to draw attention of those particularly applies to the United States, where the scholars, organizations, and institutions concerned prevailing view among many Washington policymak- ers is that the United States has been number 1 for so mainly with economic growth. The Washington- long that it will continue to be number 1. Given this based European-American Business Council ad- situation, the thinking goes, there is no need for the dressed this issue in a 2009 report (Atkinson and United States to develop and implement a national Andes 2009). Noting that capital accumulation and economic development or competitiveness economies of scale were the important drivers in the strategy. . . . Likewise, the Euro pe an Commission old economy and asserting that “in the United needs to expand its efforts to spur economic develop- States . . . virtually all the increase in productivity ment, particularly by increasing its support for science and innovation after 1995 has been due to the use of IT by organiza- and ensuring that its regulatory framework tions” and that better use of IT explains faster supports innovation. growth in the United States than in Eu rope, the re- . . . Nations or regions should: port argues that: 1. Put in place incentives for fi rms to innovate many nations no longer compete principally on low within their borders. These should include robust costs, but instead compete on the basis of innovation R&D tax incentives; incentives, such as acceler- and knowledge as they seek to create, grow and attract ated depreciation, to invest in new equipment, high value- added fi rms. This report assesses nations’ particularly IT; and other policies that spur in- innovation- based, global competitiveness. . . . The 16 indicators used in this study to assess global vestment in the building blocks of growth, such as competitiveness fall into six broad categories: (1) workforce development tax credits. human capital; (2) innovation capacity; (3) entrepre- 2. Be open to high-skill immigration. High skill neurship; (4) IT infrastructure; (5) economic policy; immigrants are the source of many new ideas and (6) economic per for mance. and innovations. Countries that are open to Unlike several recent studies that fi nd that the high skill immigration will be able to better United States is the global leader in innovation and succeed. competitiveness . . . [we fi nd] that the United States ranks sixth overall among the 40 nations/regions (with 3. Foster a digital economy. Nations should not only expand public investments in IT in areas -1— a global competitiveness score of 63.9 that is 15 such as health care, energy systems, transporta- 0— percent below the leader Singapore’s score of 73.4). +1—

561-45401_ch01_8P.indd 162 6/23/11 9:50 AM Economic Development and Prosperity: Current Theory and Debate 163

tion, government, and education, but also put in evolutionary rather than a static process, whose ba- place the right regulatory frameworks to spur, sic drivers of change were not social and natural not limit, digital investment. Nations need to transformations but the introduction of new goods, also consider how existing regulatory and pub- new methods of production and processes, new mar- lic procurement policies can be redesigned to kets, and new forms of industrial or ga ni za tion inher- intentionally spur digital transformation. ent in the capitalist pro cess. 4. Support the kinds of institutions that are criti- Schumpeter considered the forces of creative de- cal to innovation. Nations need to expand struction to be the locomotive of the capitalist process funding not just for university research, but for and the driving force behind economic growth. To the kinds of mechanisms and institutions that disregard creative destruction would be, in Schum- help foster commercialization of research. In peter’s (1962, p. 86) words, similar to having “Hamlet addition, they need to boost support for a host without the Danish prince.” An increasing number of of efforts such as local economic development, economists are arguing that it is conceivable that poli- entrepreneurship development, and workforce cies that would make a national economy more open training. to creative destruction would promote a higher rate of 5. Ensure that regulations and other related gov- economic growth (Diamond 2006). ernment policies support, not retard, inno- Figure 3.2 provides supportive evidence of Schum- vation. Too often, powerful interest groups peter’s conceptual framework of the economy. As (business, civic, and labor) fi ght against change Clark (2007, p. 1) notes: “Before 1800, income per and innovation, often under the guise of the person— the food, clothing, heat, light, and housing public interest, but all too often the result is available per head—varied across societies and ep- that progressive and positive innovation is ochs. But there was no upward trend. A simple but slowed. Nations should ensure that their regu- powerful mechanism, [ . . . ] the Malthusian Trap, en- lations, procurement, and other related policies sured that short- term gains in income through tech- tilt toward innovation.” nological advances were inevitably lost in population growth.” Clark (2007) argues that the average person of 3.3.2 Joseph Schumpeter’s “Creative Destruction” 1800 was essentially as well- off as the average person of 100,000 b.c. Although this assumption might The now-famous term “creative destruction” was initially seem to be mistaken, it is corroborated by coined by Austrian economist Joseph A. Schumpeter the facts. In essence, the median citizen of the 1800 to describe how innovative products and processes world was actually worse off than her remote ances- displace old ones in the context of a dynamic market tors. Life expectancy in the 1800s was as high as it economy (McCraw 2007). Contrary to the Smithian/ was for hunter-gatherers (thirty to thirty-fi ve years), Marshallian description of the economy as being in a while average stature, a measure of health, was actu- state of equilibrium, Schumpeter described capital- ally higher in the Stone Age (ibid.). ism as being “by nature a form or method of eco- Clark (2007) notes that this lack of progress was nomic change . . . [that] not only never is but never due to a mechanism he calls “the Malthusian Trap,” can be stationary” (Schumpeter 1962 [1942], p. 82). Schumpeter’s description of the process of creative destruction challenged the fundamental prem- 12 ise of neoclassical economics with respect to the 10 notion of price competition at the epicenter of the Great Divergence capitalist process. In Capitalism, Socialism, and De- 8 mocracy, Schumpeter argued that the new products and processes that result from technological compe- 6

tition and product and process innovation are more 4 Industrial Revolution important in understanding the essence of capital- Income per person (1800 = 1) ism than the standard model of price competition 2 Malthusian Trap that places emphasis on decentralized markets as the 0 means to lowering prices for a given set of goods and BC 1000 –500 0 500 1000 1500 AD 2000 technologies (Diamond 2006). Capitalism, accord- FIGURE 3.2: WORLD ECONOMIC HISTORY IN ONE PICTURE ing to Schumpeter, could be better understood as an Source: Clark (2007, p. 2). Reprinted with permission. Copyright © —-1 2007 Prince ton University Press. —0 —+1

561-45401_ch01_8P.indd 163 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 164

BOX 3.3: THOMAS ROBERT MALTHUS (1766– 1834)

Malthus’s central contribution to the early discussions of the causes and effects of economic growth was his much- debated 1798 work An Essay on the Principle of Population, as It Affects the Future Improvement of Society, with Remarks on the Speculations of Mr. Goodwin, M. Condorcet, and Other Writers. The historical context sheds signifi - cant light on Malthus’s insights. In the 1800s, the population of London had increased from 200,000 to 900,000 people, and most of the new residents were underprivileged (Warsh 2006). Both Malthus and Ricardo focused on the principle of diminishing returns. The central argument of Malthus’s analysis, however, relied on a single comparison between arithmetic and geometric growth rates. Malthus argued that population increases could be stopped only by misery and vice in the long run. He based his arguments on two variables: population and food. The central claim of his theory, however, was that these two variables had two fundamentally different potential growth rates: geometric and arithmetic. Malthus declared that there was empirical evidence that populations grew with a fi xed amount of time to double. He noted, especially, the resource- rich United States, where he claimed that the population doubled every twenty- fi ve years. This fi xed doubling time is called geometric growth. In contrast to population growth, he asserted that food resources could, at best, exhibit arithmetic growth, which means food increasing by a fi xed absolute amount in a fi xed amount of time. In general, Malthus’s analysis made the case that the actual population has the propensity to push above the food supply. Because of this propensity, any effort to improve the quality of life of the lower classes by increasing their incomes or improving agricultural productivity would be futile, because the extra resources would be entirely absorbed by an induced increase in population. Malthus later proposed a series of practical policies commensurate with his analysis of demographics. His goal was to instill middle- class virtues in the lower classes, which were responsible for boosting the birth rate. His proposed policies included the introduction of universal voting rights, state- run education for the poor, the abolition of the Poor Laws, and the creation of a free nationwide labor market. In his view, once the poor developed a taste for comfort, they would require a better standard of living for themselves before starting a family. Hence Malthus suggested that suffi ciently high incomes might be enough by themselves to reduce the average national birth rate.

named after the person who fi rst described this eco- why it began in En gland. However, most explanations nomic logic, the Reverend Thomas Robert Malthus contain a central element of technological innova- (see Box 3.3). The Malthusian model had three main tion (with the notable exception of R. Ayres and assumptions about the economy (ibid., p. 20): Warr 2009) and lend credence to Schumpeter’s perspective that technology and innovation lie at the 1. Each society has a birth rate, determined by epicenter of economic growth. customs regulating fertility, but increasing with material living standards. 2. The death rate in each society declines as living 3.3.3 Market Structure and Innovation standards increase. In Capitalism, Socialism, and Democracy (1962 3. Material living standards decline as population [1942]), Joseph A. Schumpeter outlined that large increases. fi rms operating in concentrated markets, often en- Hence the main intuition of the model is that any ben- joying monopoly power, are the main engine of tech- efi ts from technological increases before the 1800s nological progress and innovation. An important were absorbed by population increases and were element of the Schumpeterian paradigm was the mo- thus not refl ected in the per capita standard-of- living nopolist’s ability to bear risks, attract the best work- analytics. However, at some point between 1770 and force, and enjoy a superior fi nancial position (Scherer 1860, something occurred. The English population 1992). Schumpeter argued that giant fi rms could af- tripled; however, real incomes, instead of collapsing, ford to gamble on new techniques and were willing increased (Clark 2007). There exist many competing to absorb losses in some of their new ventures be- -1— explanations of why the Industrial Revolution oc- cause they could be confi dent of profi ts in others 0— curred, why it took place in the given time frame, or (McCraw 2007). This position contrasted with the +1—

561-45401_ch01_8P.indd 164 6/23/11 9:50 AM Economic Development and Prosperity: Current Theory and Debate 165

one that he had previously outlined in his Theory of On the whole, there is little empirical support for Economic Development (1934 [1912]), in which he the view that large fi rm size or concentration is di- insisted that innovations emanate from new and rectly associated with a higher degree of innovative characteristically small fi rms.* These fi rms would activity. Even when such a correlation is present, we eventually grow large; however, they would start as are not in a position to be sure about the direction of “outsiders” in Schumpeter’s analysis. causality. In specifi c industries that are research in- Schumpeter, partially infl uenced by the German tensive, such as pharmaceuticals, a high degree of historical school’s approach to economics, which con- concentration or monopoly power may be unavoid- sisted of detailed histories of various industries and able because of the signifi cant fi xed costs and indi- institutions, was not trying to devise elaborate math- visibility of research that are associated with the ematical theories on paper, but rather to observe his characteristics of the specifi c industries in question. surroundings in order to derive tangible conclusions. In the pharmaceutical industry’s case, monopoly power He cited the United States as his most favored exis provided through comprehensive patent rights on ample. Indeed, at the beginning of the twentieth cen- specifi c drugs. Alternatively, Rodrik (2007) argues, tury, fi rms such as General Electric, Eastman Kodak, the results may be context specifi c, refl ecting differ- and DuPont founded research departments explicitly ences in the entirety of governmental policies in dif- for the purpose of developing new technologies and ferent countries. See also the work of van Ark, Inklaar, products. In that way, innovation was made part of et al. (2003), where the growth experience in the their normal business routine, which constituted a “new economy” vis-à-vis large versus small fi rms is profound change in business structures. However, at different in the United States from that in the EU. the same time, new companies continued to bud and The Schumpeterian “more- is- better” hypothesis, innovate alongside the large- scale establishments, as a “one- size- fi ts- all” approach, does not display a which lent support to what Schumpeter had pre- signifi cant level of descriptive capacity in the case of dicted in 1912 but contradicted his stated thesis in industries such as computer software and semicon- Capitalism, Socialism, and Democracy, published in ductors. Industry behavior is better explained in those 1942. cases by the following scenario: Firms with dominant This latter view was particularly radical given the market positions maximize their profi t margins by mainstream economic thought of the era, which was choosing a “leisurely” and inexpensive level of R&D. encapsulated in Adam Smith’s treatise on the merits If smaller rivals or potential entrants threaten profi t of competitive markets and of the invisible hand as making through innovation, dominant fi rms are then heralds of affl uence and prosperity. The Schumpete- provided with incentives to innovate and accelerate rian hypothesis was making exactly the opposite as- their development efforts further (Scherer 1992). The sumption: that innovation, which was the cornerstone theory of “the fast second” relies on this logic. In that of economic progress and prosperity, directly relied theory, dominant incumbents permit smaller rivals to on the expectation of a monopoly position or the be the technological pioneers at the beginning. IBM possession of it. exploited this strategy by repeatedly announcing a Economists appear to be split on the issue. Ken- new product in advance of actual deliveries. This al- neth Arrow and William Fellner have argued that lowed IBM, as the dominant incumbent, to retain its the incentives to innovate are greater in a framework existing customers despite the fact that it marginally of competitive market pricing (Scherer 1992). On the lagged behind rivals in product deliveries. Another other hand, John Kenneth Galbraith suggested that example of this is the extensive leapfrogging activity it is in a strategic interactions environment among by industry leaders such as IBM and Microsoft. The few oligopolists that innovation is optimally fostered “browser wars” between Microsoft and Netscape (ibid.). Moreover, some found evidence for the origi- and the operating- system competition between Mi- nal Schumpeterian assumption of a linear relation- crosoft and Apple easily come to mind as cases ship between fi rm size and R&D, while others, such where Microsoft’s rivals had the initial technologi- as F. M. Scherer, Morton Kamien, and Nancy cal advantage, but where Microsoft managed to em- Schwartz, found an inverted- U relationship, with ulate them effectively by “leapfrogging” the fi rst diseconomies of scale after a certain point (ibid.). mover’s technology.†

† See also the discussion of the computer hard-drive in- * See the discussion in Chapters 6 and 7 of whether radi- dustry by Christensen (1997), where there was constant displace- —-1 cal innovation is more likely to arise in small fi rms. ment of the dominant technological fi rm by a new entrant. —0 —+1

561-45401_ch01_8P.indd 165 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 166

On the other hand, the Schumpeterian hypothesis of the Schumpeterian hypothesis will need to be ques- seems to have increasing explanatory power in the tioned empirically. case of Japa nese and Eu ro pe an industries. Japan’s national industrial strategy appears to be very close to 3.4 CRITIQUES OF, AND ALTERNATIVES the Schumpeterian paradigm in the formation of large TO, THE NORTHERN GROWTH MODEL enterprises that undertake collaborative R&D efforts. At the same time, Japan’s high-technology start- 3.4.1 Growth in Developing Economies and the up sector was limited by the beginning of the 1990s. Washington Consensus However, the Eu ro pe an and particularly the Japa nese Challenging economic orthodoxy, Seers (1997) ques- cases could be attributed to a series of reasons, such tions some of its fundamental precepts in single- as the increasing scale pressure from globalization, mindedly promoting economic growth in developing the possible increases in the cost of conducting R&D, countries: the existence of cultural differences that facilitate such industry structures, and the technical problem in ques- We can, after all, fall back on the supposition that tion that the specifi c or gan i za tion al structures aim to increases in national income, if they are faster than address (Scherer 1992). population growth, sooner or later lead to the solution It is useful to note, however, that although Schum- of social and po liti cal problems. . . . Economic growth may not merely fail to solve social and po liti cal peter wrote about innovation in general, not all in- diffi culties; certain types of growth can actually cause novations are qualitatively the same. Christensen them. (ibid., p. 39) [Seers argues that increases in per (1997) distinguishes between two types of innovative capita income may occur with adverse distributional activities in the product context: (1) sustaining inno- inequities.] vations and (2) disruptive innovations (see the dis- In e qual ity cannot really be reduced so long as cussion in Chapter 6). Sustaining innovations are property own ership is concentrated. (ibid., p. 41) innovations that will be generally valued by the in- In a highly unequal society, personal savings often cumbent fi rm’s customer base (Diamond 2006). This fl ow abroad or go into luxury housing and other investment projects of low or zero priority for develop- is the sort of innovations that the incumbent fi rm is ment. (ibid.) expected to pursue generally by engaging in evolutionary transformations. On the other hand, disrup- Further, he notes that “national income measures tive innovations are generally discontinuous and published for most developing countries have very possibly involve the displacement of dominant fi rms little meaning” (Seers 1997, p. 40). Seers argues that and institutions, with new fi rms catering to a differ- the purpose of economic development is the reduc- ent customer base (N. A. Ashford, Hafkamp, et al. tion of poverty, in e qual ity, and unemployment. 2002; Luiten 2001; Moors 2000; Partidario 2003). According to Nafziger (2006), Amartya Sen (1999) The most recent body of literature has focused on adopts a different defi nition, stating that freedom of modeling the desire of fi rms to innovate. Aghion choice to determine one’s future and pathways to that and Howitt (2005) studied the relation between in- future, instead of development, is the ultimate goal of novation and competition, trying to address the economic life and the most effi cient means of realizing question whether increased competition stimulates general welfare. Actually, Seers (1997) is close to Sen innovation. Their analysis concludes that the effect when he states: “What are the necessary conditions for of competition on innovation decisively depends on a universally acceptable aim [of development]?—the where fi rms are situated relative to the technological realization of the human personality” (ibid., p. 40). frontier. For instance, in sectors where competition is Sen’s defi nition of freedom differs greatly from that signifi cant for fi rms that are close to the technologi- of neoclassical economics. For Sen, “unfreedoms” in- cal frontier, an increase in competition will induce clude hunger, famine, ignorance, unsustainable eco- fi rms with additional incentives to innovate in order nomic life, unemployment and underemployment,* to move ahead and reap some monopoly profi ts. How- barriers to economic fulfi llment by women of minority ever, if fi rms are far from the technological frontier, communities, premature death, violation of politi cal competition discourages innovation because there freedom and basic liberty, threats to the environment, is little profi t to be made from catching up with the and little access to health, sanitation, or clean water front- runners. In sum, empirical evidence on the correlation be- * Again, Seers’s (1997, p. 41) views are complementary: -1— tween market size and innovative activity has pro- “To reduce unemployment is to remove one of the main causes of 0— vided us with mixed results so far, and thus the validity poverty and in e qual ity.” +1—

561-45401_ch01_8P.indd 166 6/23/11 9:50 AM Economic Development and Prosperity: Current Theory and Debate 167

(Nafziger 2006). According to this analysis, freedom Mexico, Brazil, and Argentina did more liberaliza- of exchange, labor contract, social opportunities, and tion, deregulation, and privatization in a few years protective security are not just ends of development than the East Asian countries did in four decades but also the means to it. In general, economic develop- (Rodrik 2007). A similar case could be made for Af- ment constitutes the most powerful instrument for re- rica, where decline persists even though Washington ducing poverty. Although this issue is highly important Consensus policies have been adopted in different for every society, it is, of course, more relevant for the states. South Korea’s and Taiwan’s growth policies developing world. were signifi cantly different from the Washington par- The characteristics of development policy have adigm. Instead of privatizations, both countries in- changed drastically in the past de cades. During the vested in public enterprises. It is interesting to note 1950s and 1960s, “big- push, planning and import- that South Korea also did not permit foreign direct substitution” policies dominated the development investment (FDI) infl ows (ibid.). agenda of reformers in poor nations (Rodrik 2007, p. China and India, the two locomotives of Asian 16). These ideas started losing prominence in the growth, also constitute interesting cases in that re- 1970s, when more market-oriented approaches started spect. It is true, of course, that both countries during being adopted. By the late 1980s, views had converged their growth path departed from previous policy around a set of policies that John Williamson dubbed choices and decided to adopt policy frameworks “the Washington Consensus.”2 As Rodrik notes, these based on markets and private enterprise. However, policies (see Table 3.2) remain at the heart of the con- China never adopted a private-property- rights re- ventional understanding of a desirable policy frame- gime and “merely appended a market system to the work (possibly now rejected), even though they have scaffolding of a planned economy” (Rodrik 2007, been augmented and expanded in recent years. p. 20). At the same time, India deregulated at a par- The original list of Williamson was augmented ticularly slow pace, had signifi cant trade restrictions by a series of second- generation reform policies of until recently, and undertook minimal privatization a more institutional nature than those targeted on (Rodrik 2007). good governance. As Rodrik notes, these second- The picture that emerges from this analysis is generation reforms arose from the growing recogni- quite clear. Although some key elements of success tion that market- oriented policies might be i nadequate are the same in all growth strategies (sustainable without a more fundamental institutional transfor- government fi nances and sound money, a healthy in- mation. stitutional environment, some degree of market ori- Nevertheless, contemporary growth experiences entation), different regions require a different set of do not corroborate the widespread adoption of the policies. Key to this claim is the central message of Washington Consensus as the orthodox growth para- Hernando de Soto’s book The Mystery of Capital digm. The region that made the most determined at- (2000) that most of the world’s potential capital as- tempt to remake itself through the adoption of the sets outside the Western world and Japan are unus- Washington Consensus was none other than Latin able under the legal property system and inaccessible America, which reaped minimal growth benefi ts as collateral for loans or to secure bonds. For Seers from these policy choices. In fact, countries such as (1997), the greatest error of neoclassical economics

TABLE 3.2: RULES OF GOOD BEHAVIOR FOR PROMOTING ECONOMIC GROWTH

ORIGINAL WASHINGTON CONSENSUS AUGMENTED WASHINGTON CONSENSUS

1. Fiscal discipline 11. Corporate governance 2. Re orientation of public expenditures 12. Anticorruption 3. Tax reform 13. Flexible labor markets 4. Interest- rate liberalization 14. Adherence to WTO disciplines 5. Unifi ed and competitive exchange 15. Adherence to international fi nancial codes rates and standards 6. Trade liberalization 16. “Prudent” capital account opening 7. Openness to foreign direct investment 17. Non- intermediate exchange- rate regimes 8. Privatization 18. In de pen dent central banks and infl ation targeting 9. Deregulation 19. Social safety nets 10. Secure property rights 20. Targeted poverty reduction —-1 Source: Rodrik (2007, p. 17). —0 —+1

561-45401_ch01_8P.indd 167 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 168

was the universalization of the West’s development from the GDP per capita statistics. As Parayil (1996) experience.3 The Washington Consensus, in partic u- notes, states with per capita incomes higher than lar, has been catastrophic for the developing world. that of Kerala fared much worse than Kerala in so- It is not accidental that those countries that decided cial indicators of development. In 1991–1992, Pun- to embark on different growth strategies were the jab, which had a GDP per capita twice that of Kerala, ones that showed the highest growth rates and the had a Physical Quality of Life (PQLI) rating 33 most signifi cant poverty reduction. points lower than that of Kerala, underscoring the As this work goes to press, we are in the after- limitations of the GDP and the GDP per capita sta- math of the 2008 fi nancial crisis and the unraveling tistics with respect to economic and social develop- of the global fi nancial system. In a provocative essay ment (ibid.). in the Guardian titled “The Death of the Washing- None of these outcomes occurred by chance. On ton Consensus? Paul Krugman’s Nobel Prize for the contrary, they are the direct result of a set of Economics Signals the Intellectual Tide Is Turning policy choices by Kerala’s liberal administrations, against Unrestricted Free Trade,” Kevin Gallagher which have a policy priority of investing in a welfare (2008) recites Krugman’s and others’ argument that state. Kerala spends 46 percent more on health and “tariffs and subsidies to domestic industries can di- 36 percent more on education than the average In- vert profi ts away from foreign fi rms and increase a dian state (Deparle 2007). Hence if there is one nation’s income,” challenging the orthodoxy of mar- point to be made about the Kerala model, it is that it ket fundamentalism in the context of the benefi ts of constitutes a clear example of how the quality of life trade to developing countries. Although this is cer- of the citizenry can be improved through govern- tainly not the last word in the debate, the 2008 fi nan- ment intervention in the economy, without a primary cial crisis compels a reexamination of neoliberal focus on encouraging economic growth. doctrine.4 The model, however, appears to have limitations. Kerala has been suffering from elevated rates of sustained unemployment, with many Keralites prefer- 3.4.2 Sustainability in Practice: The Cases of ring to work in jobs in the Persian Gulf, where salaries Kerala and Costa Rica are understandably higher. Unemployment is pres- The Indian state of Kerala, on the southern Indian ently 20 percent, with one out of six workers working coast, has been one of the most widely cited cases abroad, mostly in the Arab emirates. These workers of successfully practicing sustainable development augment the state’s economic output by 25 percent. (Franke and Chasin 1990; Parayil 1996). Kerala is With all its achievements with respect to the welfare one of the twenty-fi ve constituent states of India, state, Kerala has a per capita income of $675, while with a population of 32 million people, occupying India’s nationwide per capita income is $730 (De- about 1 percent of the total land area of the country. parle 2007). But more important, the disparity of A series of statistics make Kerala one of the most income (and wealth) is much less than in other In- interesting case studies in sustainable development dian states. and of alternative paths to social and economic de- Although Kerala appears to be poor from an velopment. Life expectancy for the average Keralite Indian comparison, the average income statistics is seventy-four years, eleven years more than the av- do not take into account the socially important erage Indian life expectancy of sixty- three years nonmonetizables, such as average life expectancy, and approaching the average U.S. life expectancy of education, and health care. Nor do the average fi g- seventy- seven years (Deparle 2007). Furthermore, ures reveal the disparity of wages or wealth in other Kerala has a literacy rate of 91 percent, compared Indian states. A more complete set of criteria of suc- with an Indian average of 65 percent (ibid..). This cess should include not only environmental steward- number is not too far from that in the United States, ship but also politi cal, social, and economic justice, where 99 percent of the population is literate. along with the improvement in the quality of life of According to Parayil (1996, p. 952), “Though Ker- the most vulnerable section of the population and ala has a low throughput, the indicators of social the improvement of women’s rights in society (Pa- progress have not suffered because of sustained ef- rayil 1996). forts to limit population growth and social ine qual- In light of Kerala’s huge successes in education ity, to conserve resources frugally and to use them and health care, one must be careful in criticizing -1— on a shared basis.” A particularly interesting facet of the model and must draw the appropriate lessons 0— Kerala’s development is that it is completely hidden from Kerala for sustainable development. If there +1—

561-45401_ch01_8P.indd 168 6/23/11 9:50 AM Economic Development and Prosperity: Current Theory and Debate 169

exists one conclusion that seems indisputable, it is Their job is to fi ght energy ministers who just want that widespread poverty does not exist, giving one to drill for cheap oil. pause to think about whether concentrated wealth But when Costa Rica put one minister in charge can exist without pockets of manifest poverty in a of energy and environment, “it created a very different way of thinking about how to solve prob- growth-oriented economy. Parayil (1996) observes lems,” said Rodríguez, now a regional vice president that “the ‘Kerala model’ is not based on any one of for Conservation International. “The environment the existing theories or models of development and sector was able to infl uence the energy choices by modernization” and that it “should be studied ear- saying: ‘Look, if you want cheap energy, the cheap- nestly for improvements and possible replication.” est energy in the long- run is renewable energy. So The view that perhaps best encapsulates the success let’s not think just about the next six months; let’s of Kerala is that of Samir Amin (1991, p. 29), who think out 25 years.’ ” As a result, Costa Rica hugely invested in hydro- notes that “Kerala’s achievements are the best way electric power, wind and geo- thermal, and today it to prepare for the next stage, if only because they gets more than 95 percent of its energy from these result in strong pop u lar or ga ni za tion, and give rea- renewables. In 1985, it was 50 percent hydro, 50 sons for hope, and something to guard.” While oth- percent oil. More interesting, Costa Rica discovered erwise positive about Kerala, Parayil (1996, p. 952) is its own oil fi ve years ago but decided to ban drill- realistic in noting that “the fact that industrial and ing— so as not to pollute its politics or environment! agricultural growth has to be achieved to improve What country bans oil drilling? the material standards of living for all Keralans is Rodríguez also helped to pioneer the idea that in a country like Costa Rica, dependent on tourism and undeniable; but the high indicators of social develop- agriculture, the services provided by ecosystems were ment and a highly literate populace are conducive to important drivers of growth and had to be paid for. rapid industrialization of the state which is essential Right now, most countries fail to account for the for creating more jobs and material outputs to meet “externalities” of various economic activities. So local needs.” when a factory, farmer or power plant pollutes the air More recently, Costa Rica has been gaining pub- or the river, destroys a wetland, depletes a fi sh stock licity for the sustainable character of its policies. or silts a river— making the water no longer usable— More than 25 percent of the country’s landscape is a that cost is never added to your electric bill or to the price of your shoes. protected area because of a set of policies meant to Costa Rica took the view that landowners who preserve and protect its cornucopia (Friedman keep their forests intact and their rivers clean should 2009). Friedman (2009, p. WK8) notes the following be paid, because the forests maintained the water- with respect to the Costa Rican model of develop- sheds and kept the rivers free of silt— and that ment: benefi ted dam own ers, fi shermen, farmers and eco- tour companies downstream. The forests also [Costa Rica] has created a holistic strategy to think absorbed carbon. about growth, one that demands that everything gets To pay for these environmental services, in 1997 counted. So if a chemical factory sells tons of fertilizer Costa Rica imposed a tax on carbon emissions—3.5 but pollutes a river— or a farm sells bananas but percent of the market value of fossil fuels—which destroys a carbon- absorbing and species- preserving goes into a national forest fund to pay indigenous forest— this is not honest growth. You have to pay for communities for protecting the forests around them. using nature. It is called “payment for environmental And the country imposed a water tax whereby major services”— nobody gets to treat climate, water, coral, water users—hydro-electric dams, farmers and fi sh and forests as free anymore. drinking water providers— had to pay villagers The pro cess began in the 1990s when Costa Rica, upstream to keep their rivers pristine. “We now have which sits at the intersection of two continents and two 7,000 benefi ciaries of water and carbon taxes,” said oceans, came to fully appreciate its incredible bounty Rodríguez. “It has become a major source of income of biodiversity— and that its economic future lay in for poor people. It has also enabled Costa Rica to protecting it. So it did something no country has ever actually reverse deforestation. We now have twice done: It put energy, environment, mines and water all the amount of forest as 20 years ago.” under one minister. As we debate a new energy future, we need to “In Costa Rica, the minister of environment sets remember that nature provides this incredible range of the policy for energy, mines, water and natural economic services— from carbon- fi xation to water resources,” explained Carlos M. Rodríguez, who fi ltration to natural beauty for tourism. If government served in that post from 2002 to 2006. In most policies don’t recognize those ser vices and pay the countries, he noted, “ministers of environment are people who sustain nature’s ability to provide them, marginalized.” They are viewed as people who try to things go haywire. We end up impoverishing both —-1 lock things away, not as people who create value. nature and people. Worse, we start racking up a bill in —0 —+1

561-45401_ch01_8P.indd 169 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 170

the form of climate- changing green house gases, constitute one of the central research initiatives of petro- dictatorships and biodiversity loss that gets the twenty- fi rst century. charged on our kids’ Visa cards to be paid by them According to R. U. Ayres (2006), a series of driv- later. Well, later is over. Later is when it will be too ers of past growth in industrialized countries now late. indicate signs of saturation or exhaustion: Although the two models presented here have sig- 1. Division of labor ( job specialization) nifi cant differences, both have important characteristics of sustainability in the policies that they have 2. International trade (globalization) chosen to pursue. The Kerala model focuses on a 3. Monetization of formerly unpaid domestic and ag- series of pa ram e ters other than GDP growth, such as ricultural labor as a consequence of urbanization literacy rates, education, and health. At the same 4. Saving and investing time, the Costa Rican model places any growth con- 5. Borrowing from the future, which also tends to siderations inside the context of environmental pro- increase consumption in the present without tection and preservation. In general, could a growth added value model that would combine the positive aspects of 6. Extraction of high- quality and irreplaceable nat- Kerala and Costa Rica, without the increased unem- ural resources and destruction of the waste- ployment of Kerala, and that would be applicable to assimilation capacity of nature states with less biodiversity than Costa Rica, be real- 7. Increasing technological effi ciency of converting istic? Whatever the case might be, both Kerala and resource (especially fossil fuel) inputs to useful Costa Rica deserve to be studied and monitored work and power closely. Ayres deemed that the fi rst four trends have largely completed their full effect in the industrial world, 3.5 WHAT LIES AHEAD FOR ECONOMIC even though they have just started making their im- GROWTH AND DEVELOPMENT IN pact in the developing world. According to Ayres, INDUSTRIALIZED AND DEVELOPING the benefi ts of scale from division of labor and inter- ECONOMIES? national trade have probably peaked already, while the monetization of formerly unpaid domestic labor 3.5.1 The End of Sustainable Growth? is now fulfi lled in the OECD countries (R. U. Ayres Perpetual economic growth does not constitute a law 2006). Perhaps the most interesting case is that of of nature, but rather an extrapolation of past trends. saving and investing. According to Ayres, the United Writing before the economic crisis that began in 2008, States essentially stopped saving in the 1990s and Robert Ayres (2006, p. 1188) noted that although “the actually started living on capital and on money bor- economy has a lot of inertia, whence the future is rowed from others, or even by borrowing from the more likely to be a continuation of past trends than future. In the same manner, exploiting nonrenew- otherwise,” a continuation of exponential growth unable natural resources resembles borrowing from na- til 2100 is not to be taken for granted. ture. This form of converting long- term assets into This point of view is vastly different from that of current income is also meeting its limits (ibid.). the economic “optimists” who make the case that Hence this leaves technological effi ciency of con- the pace of technological growth will continue in a verting resource inputs to useful work and power, series of industries, especially those related to the along with unrealized technological progress from so-called converging technologies. Converging tech- newer technologies, as the sole determinants of eco- nologies represent a movement focused on the unifi - nomic growth. Technological effi ciency emanating cation of science and technology and can be defi ned from the conversion of raw materials into useful by interactions among nanotechnology, biotechnol- work boomed during the end of the nineteenth cen- ogy, information technology, and pharmaceutical tury and the fi rst half of the twentieth century, re- technologies. It is argued that, in general, converging sulting to the substitution of labor by machines technologies hold tremendous potential for improve- powered by fossil fuels. This led to signifi cant in- ments in health care, the production of clean water creases in effi ciency. In the past, increases in effi - and energy, and increasing advances in information ciency led to lower costs, which in their turn led to technology and telecommunications. The convergence lower prices and higher demand. The increase in de- of these profoundly transformative technologies and mand was a driver for increases in investment and, -1— technology- enabling scientifi c fi elds can potentially ultimately, increases in supply and even lower costs. 0— +1—

561-45401_ch01_8P.indd 170 6/23/11 9:50 AM Economic Development and Prosperity: Current Theory and Debate 171

This “positive feedback cycle” is none other than the technological advance has not reached any kind of engine of economic growth and has been the pri- natural limit, and (2) a future shift to ecologically mary driver of productivity gains in the last two cen- sustainable technologies will loosen nascent creativ- turies (R. U. Ayres 2006). Nevertheless, sources of ity and that the basis of (post)industrial activity will primary energy are getting more expensive instead change. Still others have challenged how growth and of cheaper, and the rate of increase in efficiency development are mea sured and argue that the met- of energy conversion in industrial societies has de- rics we use are not mea sur ing the actual develop- creased. ment that is occurring (see Section 3.3.1.2.).‡ In the words of Robert Ayres (2006, p. 1195), “All of these [seven] phenomena taken together . . . 3.5.2 The Impact of Economic Growth on suggest that US economic growth is almost certainly Employment in the Developed World decelerating and could soon cease altogether,” a pattern already visible in a series of other countries in Although there has been much discussion about the the developed world. (See Section 3.2.7 for a discus- link between increases in productivity and economic sion of R. Ayres and Warr’s [2009] alternate model growth, the effects of innovation and economic growth of economic growth that includes useful work or ex- on employment have been discussed far less. In fact, ergy [energy accounting for effi ciency] as a factor of perhaps the most central question about the conse- production.) quences of economic growth from a societal per- Jay Forrester, the father of system dynamics, which spective is the issue of increasing unemployment and formed the basis of the work on limits to growth,* underemployment. addressed the question whether crises in sustainabil- Rifkin (2004) states that the old logic that tech- ity would lead to new opportunities for needed technology gains and advances in productivity destroy nological change. Forrester argues that seeing the old jobs but create new ones does not appear to be real opportunities in “the no- growth, no- population true anymore. Productivity has traditionally been rise, no increase-in- industrialization areas” (quoted considered an engine of job creation and economic in Hopkins 2009, p. 10) would require a major (per- prosperity. The economic intuition behind this is that haps fundamental) change in our culture, which as- productivity allows fi rms to produce goods at de- sumes that “technology can solve all problems,” that clining costs, which leads to cheaper goods. These “growth is good and can go on forever,” and that cheaper goods increase demand in the market, which controlling population is “too treacherous a debat- leads to even more production and productivity, which ing area” (ibid., p. 11). Although Forrester does not further simulates demand, and so on. According to explicitly say so, his analysis underscores the need to Schumpeter’s specifi cation, innovation and specifi - engage ourselves not only in technological innova- cally the process of creative destruction constitute tion but in organ i za tion al, institutional, and societal the locomotive of capitalist economic growth through change as well. the introduction of new technologies, processes, and Finally, echoing the perspective of ecological ideas that displace old ones. Thus it is argued that economics,† some critics go so far as to state that sus- even if creative destruction displaces labor in the tainable development cannot be achieved unless the short run, the increase in demand for cheaper prod- current Northern model of economic development is ucts, along with the new industries created through abandoned (Sanders 2006). Again, note that this technological innovation, will ensure that additional writing preceded the economic crisis that began in people will be hired in the medium to long run. 2008. Others are less pessimistic and argue that (1) However, this is only theory. In reality, productivity increases, at least in the United States, have been associated with increasing numbers of unemployed * See the discussion of limits to growth in the extended Primer on Sustainable Development at this book’s website. Also workers and/or lower wages, especially in the manu- see Kleiner (2009). facturing industries. † The Eu ro pe an Society of Ecological Economics held A case in point in the positive feedback cycle of its First Conference on Socially Sustainable Economic Degrowth economic growth is information and communica- for Ecological Sustainability and Social Equity in April 2008 in Paris, in which “degrowth” was explicitly addressed in a series tion technologies (ICT). In fact, the acceleration of of thoughtful papers (see the Journal of Cleaner Production 2010, 18: 511– 606) and pre sen ta tions culminating in a declaration on growth (see www .degrowth .eu/ v1/ index .php ?id = 56, ac- ‡ See also Section 3.5.4, which addresses the idea of cessed May 17, 2010). Also see the discussion of degrowth in the broadening capital ownership in order to increase society’s con- —-1 context of the “new economics” in Section 3.6. sumption of goods and ser vices. —0 —+1

561-45401_ch01_8P.indd 171 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 172

productivity growth in the United States during the international neoliberal economic policies. That is 1990s has been widely attributed to the rapid in- why the digital divide discourse proposed by presti- creases in investment in the ICT industry. Advances gious international organizations sounds like a nice in ICT allegedly have led to decreasing costs, falling excuse for the economic policies they have applied for two decades. If it is an inherent characteristic of prices, and increasing demand.* However, according digital technologies to divide societies, neoliberal to Robert Ayres (2006), the applications of informa- policies are then beyond doubt, and the only solution tion technology outside its own sector seem to have for governments is to spend a bit more on education led to the elimination of more jobs than the ones cre- and training. ated, without corresponding impacts on consumer demand on products and service that would end up creating more jobs. 3.5.3 The Next Industrial Revolution? In their study of the employment effects of the new In an article titled “The NEXT Industrial Revolu- economy, van Ark, Inklaar, et al. (2003) found that tion,” environmentalists McDonough and Braungart this inverse relationship between productivity and em- (1998) argued that the greater use of natural capital ployment growth was much stronger in manufacturing and ecologically sound sources and uses of energy than in services. This result is intuitive and largely de- would spawn a new era of industrial activity to satisfy pends on whether the labor force of a specifi c industry human needs, but they ignored the role of govern- has skills transferable to other industries. To a large ment in achieving this goal. A full decade later, degree, the process of creative destruction is actually refl ecting a Schumpeterian perspective, two estab- inevitable. The point is to acknowledge the effects of lished scholars identifi ed with ecological moderniza- increases in productivity on the average worker of the tion who see a central role for government, Jänicke economy and to implement policies that will alleviate and Jacob (2009 pp. 2–3), described their vision for those effects by social safety nets, labor retraining, and the future: a variety of other options discussed in Section 13.8.3 in Chapter 13.† we assume that after a long phase of technological Commenting on the “digital divide,” Liagouras innovation towards the substitution of fossil energy and (2005, p. 27) notes: exhaustible raw materials, which started with the fi rst oil crisis (1973), a phase of radically accelerated If the vicious cycle of social exclusion is not stopped in transformation now lies ahead. We expect that the the near future, social polarization risks becoming a starting point will be in Europe. In addition to the structural feature of postindustrial economy and technological competence and the necessary capital society. . . . available here, there is also a relatively demanding In e qual ity depends above all on what or gan i za- regulative environment which is simultaneously open tion al and institutional innovations are linked to to innovation. Those are three conditions necessary for digital technologies. On the one hand, the capacities rapid change to occur, but unfortunately they are not required in order to cope with ICTs at a basic level suffi cient to guarantee success. There is a risk that are rather overestimated. As the objective of produc- conventional structures could weaken the dynamic, ers is to sell more and more, most of the new software thereby only allowing for limited or marginal improve- hardware combinations have become so user-friendly ments to the status quo. Finally, such a disruptive that what is primarily required for basic applications development has the risk of devaluing investments and is non- computer- specifi c skills like reading, writing, related skills in currently dominating sectors and counting, communicating and, fi rst of all, motivation. regions. In order to assure that the imminent Third The above skills, on the other hand, are clearly Industrial Revolution will not be accompanied by underestimated by digital divide analysts. Indeed, the distortions and social confl icts similar to those 21st century risks being characterized by the expan- experienced during the First Industrial Revolution, sion of illiteracy in the middle of knowledge abun- there is a need for broad steering and decisive action. dance. Of course this is a complex social The relationship between economic markets and the phenomenon, which defeats monocausal approaches. state, which was for a long time characterized by the From an economic point of view, the main responsible withdrawal of the state from the economic pro cess, agent for social exclusion has been national and needs to be reassessed. Unlike proponents of market fundamentalism,

* Much has been written about the “ICT productivity Jänicke and Jacob (2008) see an important steering paradox” that little productivity growth has actually occurred mechanism for government (see Chapter 8 for an from the adoption of the computer. See Griffi th (1997). extensive discussion of government’s role in indus- -1— † Also see the discussion of degrowth in the context of trial policy). 0— the “new economics” in Section 3.6. +1—

561-45401_ch01_8P.indd 172 6/23/11 9:50 AM Economic Development and Prosperity: Current Theory and Debate 173

3.5.4 Broadening Capital Own ership and Its Effects and middle class will create more consumer demand on Consumption- Led Growth, Sustainable for goods and services than if that capital had been Livelihoods, and the Environment* acquired by the wealthy. In contrast, if capital is acquired by the wealthy, most of the capital earnings Building on the ideas of Louis Kelso, Robert Ash- will, of course, seek investment opportunities, but in ford has argued that poor and middle-class people the context of creating weaker consumer demand. can more fully participate in the so-called labor pro- Thus by increasing their capital- earning capacity, ductivity gains stemming from increasingly capital- this new class of owner-buyers may be expected to intensive production of goods and services if the consume much more than equivalent well-capitalized broadening of capital ownership is included among buyers whose needs to purchase basic and goods and the strategies intended to maintain and enhance the ser vices have already been largely satisfi ed. In other more widespread distribution of earning capacity.† words, the increased purchasing power leading to Although many people are familiar with capital consumer spending that is likely to result from more ownership- broadening programs such as employee broadly distributed capital-earning capacity of the stock own ership plans (ESOPs), 401(k) plans, and economy would be expected to be positively corre- other “ownership- society” approaches, the economic lated with economic activity and growth in both goods analysis that gave rise to ESOPs is much deeper and and services. In effect, by way of voluntary capital ac- more ambitious. Observing that almost all capital is quisition transactions, the binary approach links acquired with the earnings of capital and relatively productivity gains from advancing technology with little capital is acquired with the earnings of labor, increasing consumer demand resulting from more Ashford maintains that the most effi cient way to pre- broadly distributed capital earning capacity. serve individual earning capacity is to broaden capi- By broadening the strategies intended to preserve tal ownership by opening to poor and middle-class and enhance earning capacity to include not only la- people the same fi nancial institutions that presently bor employment but also broadening capital own- enable wealthy people to acquire capital with the ership, society can more comprehensively address the earnings of capital. These are the institutions of cor- practical diffi culties that are presented by the long- term porate fi nance, capital credit, capital credit insur- trend of replacing and supplementing labor-intensive ance, and monetary policy. production increasingly with capital- intensive produc- According to Ashford, because present demand tion. In other words, less work is accomplished by labor for investment in capital and labor depends on antici- and more by capital, but individual earning capacity is pated demand for consumer goods and services in a preserved and enhanced because capital ownership is future period, and because poor and middle- class broadened or “demo cratized.” people spend a greater portion of their earnings on Finally, Ashford argues that the growth stimu- consumption, a voluntary pattern of steadily broad- lated by the broadening of capital acquisition is ening capital acquisition promises more consumer likely to be relatively greener growth—a view that demand for goods and services in future years and is supported by the widely held belief that environ- therefore more demand for the employment of labor mental degradation is linked to poverty. Neverthe- and capital in earlier years. In other words, broaden- less, the increased threats to the environment that ing ownership promises more economic growth. The might result from the increased growth from broader distribution of capital acquisition, own ership, broadening own ership might require governmental and income strengthens the promise of capital to pay policies that link the increased production and for itself out of its future earnings and makes more consumption to environmentally sustainable goods investment profi table and less risky. With funds bor- and services. rowed through investment trusts (not qualitatively different from those that borrow and invest for the wealthy), after the capital-acquisition debt obliga- 3.6 THE NEW ECONOMICS tions of the trusts have been satisfi ed, the distributed Since the economic meltdown in 2008, economists earnings of capital acquired by members of the poor (and others) have been trying to develop new insights into the causes of the crisis and a new theory * These ideas are developed more fully by Robert Ash- of economics for the industrial state upon which to ford in Section 12.11 of Chapter 12, “Financing Sustainable De- build future policy interventions. Of course, the two velopment.” See also R. Ashford (2009). † Earning capacity is often included in the term “sus- are connected, but understanding the causes is eas- —-1 tainable livelihoods” to connote more than wage income. ier than fashioning effective future policy. —0 —+1

561-45401_ch01_8P.indd 173 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 174

Beyond the optimism associated with the en- growing global economy, there is only one way for hancement of ICT innovation in traditional economic the poor to have more: that is for the rich to have systems expressed by the OECD and the ICT indus- less” (Goodwin 2010). This contrasts with Robert try groups, there are a number of contrasting views of Ashford’s rejection of the notion of a zero sum game the “end of exponential growth” (Ayres 2006) and with his advocacy for broadening growth- enhancing the nature of future growth* offered by various schol- ownership via binary economics, by which the poor ars and commentators that are concerned with sus- also have the effective right to acquire capital with tainable growth (although some academics—such as the future earnings of capital.† Georgescu- Roegen—believe that the term “sustain- In addition, Goodwin (2009) states “if labor pro- able growth” is an oxymoron5). These alternative ductivity continues to increase . . . in a post- growth schemes might be characterized as promoting a “new world one result could be even greater unemploy- economy” based on the “new economics.” ment.” Of course, this may be true if the source of A variety of names are offered for the new econom- increased labor productivity continues to be due to ics: “greener growth,” “selective growth” (pop u lar in increased capital productiveness leading to less earn- the Netherlands in the 1970s), “conditioned growth,” ing capacity on the part of labor, with resulting in- “sustainable degrowth” (Harris 2010; Jackson 2009; creases in unemployment in terms of the number of Kallis, Martinez- Alier, et al. 2009; Martinez- Alier, jobs and/or lower wage rates. In contrast, if labor Pascual, et al. 2010; Schor 2010; Victor 2008), “post productivity increases as a result of increased labor growth” (Goodwin 2010; Speth 2008, 2010a, 2010b, productiveness, workers need not earn less, even if 2010c), “agrowth” (van den Bergh 2011), and “policy they work less hours. Increasing labor productive- integration” (Spangenberg 2007). They focus on pro- ness would require increasing the value of labor in moting environmentally and socially sustainable production and ser vices by deliberate design. Good- development through differing combinations of tech- win has argued for a re-conceptualization of eco- nological progress in dematerialization and energy- nomic theory which she calls “contextual economics” effi ciency, decreased overall consumption of products to describe a possible future pathway for industrial and ser vices that are environmentally destructive, economies involving a different and more appropri- reduction of the workweek, and redistribution of ate balance between the private sector, government, wealth or income through a basic income guarantee non-profi ts, communities, and people. Just how this and/or the reduction of individual working time ac- pathway is to be achieved remains unspecifi ed. companied by no decrease in purchasing power, Harris (2010), also at Tufts University, argues spe- thereby retaining existing wages for current employ- cifi cally for an eco-Keynesian approach focusing on ees while adding others to the employment rolls. fostering human- capital- intensive ser vices, invest- Neva Goodwin (2010), co-director of the Global ment in energy- conserving capital, and investment Development and Environment Institute at Tufts Uni- in natural and human capital leading to increases in versity6 analyzes the core problems of a nation being wellbeing without growth in throughput, a major guided by standard economic theory as having a concern of Herman Daly (1996) who long ago advo- preoccupation with wealth creation, as opposed to cated a steady- state economy as the basis for eco- well- being, a bias toward monetary evaluation of logical economics. Harris advocates policies geared non- monetary goods and amenities, discounting, Pa- toward achieving dynamic, rather than static effi - reto optimality rather than distributional equity, a ciency through innovation, and also argues for more preference for markets rather than government in- labor-intensive production, recurrent themes em- tervention, and the dominance of economists in the phasized throughout the present work. Focusing on po liti cal pro cess (issues that have been fully ad- environmentally-friendly technology and social in- dressed in this work). While acknowledging the need vestment [which can bring about disruptive innova- for increased production and consumption in the tion] results in growth of a different kind of economic short- run, she rejects Keynesian spending advocated activity, without growth in resource throughput and by Paul Krugman in a non-growth economy (Krug- harmful ecological consequences. man 2009). Curiously, she asserts that “in a non- The Canadian Peter Victor (2008, 2010b), a self- described ecological economist, in his book Manag- ing Without Growth: Slower By Design, Not Disaster * Victor (2010a) distinguishes green growth, brown growth, black growth, and green degrowth according to whether -1— GNP is increasing or decreasing, alongside changes in green- † See the discussion of binary economics in Section 3.5.4 0— house gas intensity and overall emissions. and Section 12.11 in Chapter 12. +1—

561-45401_ch01_8P.indd 174 6/23/11 9:50 AM Economic Development and Prosperity: Current Theory and Debate 175

presents detailed models purporting to show how a the observation that labor costs make up about 20 good environment, shorter work weeks, greater percent of business costs, while material and energy spending, and wealth accumulation on the part of costs represent over half and 2 percent of business ordinary citizens are possible in a economy that is costs, respectively, Spangenberg (2007, p.32) argues not growing by judicious choices ranging from popu- that by “stimulating resource productivity gains over lation control to tax policies. In a similar vein, Tim labor productivity increases” a reorientation of the Jackson (2009) in Prosperity without Growth: Eco- economy is possible. nomics for a Finite Planet, argues for doing more Of course, dematerialization and reduction of en- with less, but also asserts that striving for labor pro- ergy in production and the provision of ser vices not ductivity at the expense of workers is the most impor- only have the potential to decrease the environmental tant defect of the present economic system in need of footprint, they also offer some possibility of decreas- attention. While concentrating on dematerialization ing the capital and energy content relative to labor in- and eco- effi ciency, Jackson focuses almost entirely puts, providing labor is not shed at the same time. It is on energy, and not on other environmental problems, well-established that whenever modernization of pro- such as toxic pollution and eco-system deterioration. duction and ser vices occurs, management seeks every Like Schor (2010), he joins the cadre of others calling opportunity to shed and deskill labor as well, except for “spreading out the work”—which may result in in a minority of cutting- edge, emerging high- tech en- more employment of people working less hours for terprises. The much heralded opportunities for sig- the time being—but without really addressing an es- nifi cant net job creation through “green jobs” may be sential fl aw in the current industrial state, that of a more grounded in wishful thinking than in reality.† continuing decline in labor hours needed in produc- Sustainable employment requires both increasing the tion and services (see the discussion of structural un- overall claim, through wages, of workers on the profi ts employment below). Without increasing labor content of the enterprises in a nation and achieving a fairer and its value in production and services, labor cannot distribution of job and earning opportunities. In- demand an overall increase in its share of profi t and creasing the wages of some (higher skilled or supply- thereby increase its purchasing power. More people constrained workers) can lead to increasing wage working with smaller wages does not help those with disparities and result in decreases in the total wages diminishing purchasing power, although it spreads paid. Unless wages are subsidized, increasing the to- out the diminished purchasing power—and the re- tal wages paid requires increasing the labor content sulting pain. and value of all those that desire to be employed, Greener growth or “sustainable degrowth”—as hopefully in meaningful and rewarding work, but this some call it— is one thing, but deliberate redistribu- approach requires rethinking the role of labor in the tion of the spoils of the industrial state is another. industrial state. Redistribution options necessitate tax- based trans- Many commentators (e.g., Jackson 2009; Schor fers of wealth and income from more well- endowed 2010; Speth 2010a, 2010b, 2010c) advocate spreading parts of a developed nation’s economy (both well-off out the work without addressing the question of the persons and business entities) to working families level of overall wages paid. Increasing the number of (Spangenberg 2007). Neither (1) the legal (or market- workers employed can effectively redistribute wages based) tools that mandate the internalization of en- among the working and potentially working popula- vironmental damage costs (such as taxing resource tion, but it does nothing or little to redistribute the

consumption, placing caps on CO2 emissions, or es- share of profi ts of industrial production or the provi- tablishing a carbon tax) nor (2) wealth or income sion of ser vices from capital or business own ers to transfers to create more purchasing power in work- workers. Jackson’s (2009) and Schor’s (2010) focus ing families through “spreading the work out,” but on labor productivity sets their contributions apart with fully compensated reduced working time that from many others who ignore not only the impor- maintains wage parity is likely to be greeted enthusi- tance of work for a sustainable society, but also the astically by profi t- and traditional growth-oriented impacts of policy changes on employment. However, enterprises, at least initially.* However, refl ecting on that “sustainable degrowth has at its core a downscaling of economy and believes that economic growth, even if disguised as * The Euro pe an Commission (2010, p. 1) recognizes this sustainable development, will lead to social and ecological col- explicitly in its discussion of sustainable de-growth. An EC news lapse” and “has an obvious disadvantage in that it confronts pow- alert—which carefully states that the opinions expressed therein ers in society.” —-1 “do not necessarily represent those of the Commission”— states † See Section 5.3.2 in Chapter 5 on green employment. —0 —+1

561-45401_ch01_8P.indd 175 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 176

they assume that most improvements in labor pro- Robert Ashford’s (2009) proposal to achieve more ductivity will follow the historical patterns that come broadly distributed capital earning capacity (and from increases in capital, rather than from labor thereby create more consumer purchasing power by productiveness, resulting in fewer hours worked. As effectively extending to all individuals the right to emphasized in this work, productivity and produc- acquire capital with the future earnings of capital tiveness are not the same. Labor productivity can be through voluntary binary economics fi nancing) avoids increased by either capital productiveness, or by la- the pitfalls of both continued wealth or income redis- bor productiveness, or by some combination of both. tribution, and the temporary solutions offered by tra- Other ways to increase labor productivity through in- ditional Keynesian spending. However, the basic creases in labor productiveness of course exist: bet- binary proposition (that the broader distribution of ter training, improved skills, and the redesign of jobs capital acquisition with the earnings of capital will and work. Whether or not the total hours worked fall both broaden the distribution of earning capacity and or not, ceterus parabus, labor would be more highly promote growth) is yet to be embraced conceptually valued and paid as a result. by mainstream economists. In light of environmental Technological advance is only one means to im- concerns, Robert Ashford acknowledges that the fa- prove labor productivity; increasing the contribu- cilitation of ownership-broadening binary-fi nancing tion of labor as a factor of production (and ser vices) may need to be complemented with other govern- is another. Not only are we addicted to GDP and mental policies to ensure that the resulting increased growth as a source of improved welfare—what some purchasing power is not spent in an environmentally describe as a GDP fetish (Stiglitz 2009)— we are destructive way. Increasing purchasing power and also addicted to the idea that only improvements in changing the nature of what is demanded by aggre- technology can advance our development. General gate increases in disposable income needs to be fac- Electric, Siemans, and Toyota sell products, not the tored into a coherent policy. ser vices of people. Corporations own capital; peo- The 2009 Nobel Prize in economics was given to ple own their own labor, an unfortunately diminish- three economists who demonstrated that some un- ing factor in how economies grow and are mea sured. employment is inevitable, even in economies that Jackson describes the contributions of labor to labor are in equilibrium because of “search friction”— productivity as “dismal” in economics parlance. also known as “structural unemployment” or “equi- But labor productiveness in the provision of non- librium unemployment”— because of the mismatch material, non- energy- intensive ser vices can be high, between the skills of the current workforce and the depending on the nature of the activity. Jackson ap- needs of employers (Cho 2010, p. 330). Unemploy- propriately suggests that more community-based ment exists alongside vacancies in jobs. While 2– 3 activities, rather than the production of “stuff” might percent unemployment was at one time considered employ increasingly numbers of people. Not only do structural, equilibrium unemployment seems to have we need to abandon or at least refi ne our measures now approached a number two or three-fold that of well- being in terms of GNP, we also need to as- historical mea sure. sign value to labor productiveness. The only reason An analysis by van Zandweghe (2010) of the that the business enterprise does not care about la- 1981–1982, 1990–1991, and 2007–2008 recessions at- bor productiveness in this context is they cannot tempts to explain “the jobless recovery” in terms of profi t from its deployment or sale, as much as they the structural changes (and a dampening of cyclical- can from improving the productiveness of capital ity) in the labor supply during booms and busts, which they own. Business creates demand through rather than “supply shocks” related to the business advertising. Who will create the demand for cycle. Structural changes are brought about by (1) a community- based ser vices such as education? This reduction in “labor hoarding” (as a result of de- requires a cultural transformation. creases in labor adjustment costs and labor protec- The creation of temporary increases in purchas- tion) whereby labor is used less intensely, but retained, ing power (and consequential consumer demand) by employers during busts and (2) technological through traditional Keynesian spending to “get the changes brought about by ICT that have allowed economy moving” (Krugman 2009) is not a perma- work previously done by moderately- educated work- nent fi x. Further Keynes’s “paradox of thrift” en- ers to be done by computers (“skill-biased technical couraging people to save, rather than to spend newly change”). While van Zandweghe (2010, p. 19) con- -1— acquired increases in income, may blunt its effect cedes that “it is diffi cult to fi nd direct evidence of 0— (see Jackson 2009, p. 106). the role of structural change” supply shocks do not +1—

561-45401_ch01_8P.indd 176 6/23/11 9:50 AM Economic Development and Prosperity: Current Theory and Debate 177

explain the nature of recovery in the last two reces- consumption—has taken on new importance. Not re- sions. ally “doing more with less” but rather “doing with Changes in the recovery time after recessions may less” and changing the very nature, not just the also refl ect mismatches between job skills demanded amount, of consumption is now on the table.7 As op- and workers available to fi ll them. Goodman (2010) posed to a “revolution from below” to change the na- reports that before 1990, it took an average of twenty- ture of governance that some hope for or predict one months for the economy to regain the jobs shed (Speth 2008), an evolution of necessity may more ac- during a recession. After the recessions in 1990 and curately characterize the cultural transformation that 2001, thirty-one and forty-six months respectively may come upon us. passed before employment returned. The length of Achieving dematerialization and eco- effi ciency of the recovery after the 2008 economic crisis has yet to traditionally-demanded products, production, and be revealed. ser vices can result in the deployment of increased Is the continued increase in structural unemploy- disposable income elsewhere that “boomerangs” into ment necessary and inevitable or does it suggest that more total consumption. Individuals spending more we must fi nd a way to change the nature of work and money on people serving people, unmediated by the consequential skills required and also increase heavy environmental and energy footprints, could the value to work relative to capital in productive not only change the equation by bypassing economic and service activities? Engineering and management activities that convert materials and energy, but also schools have contributed mechanisms and strategies bypasses interests promoted by the entrenched cor- for decreasing the labor content of production. Can porations and established businesses that lock-in they now be redirected to increasing labor content? the present economic system. But will they allow this More than technical changes may be needed. Soci- to happen? Remember the often-omitted question etal evolution as to both what kinds of goods and raised in this work: who is standing in the way of sus- services are demanded in the future could be shifted tainable transformations? toward more labor intensive activities, such as the While some might balk at the concept of provision of extra- mural education in languages, mu- “degrowth”— partly intended to shock— the move- sic, art, money management, etc., that is, in activities ment does have some cache. The second International in which the environmental and energy footprint is Conference on Economic Degrowth for Ecological necessarily negligible and labor, rather than capital Sustainability and Social Equity held in Barcelona on and energy, constitutes the vast content of produc- March 26– 29, 2010, issued the Barcelona Degrowth tion and ser vices. Declaration in which it was stated:8 Jackson (2009, p. 109), while acknowledging that We assert that these proposals are not utopian: new “meaningful employment is itself a key constituent redistributive taxes will address income ine qual ity and in prosperity,” just hints at this by suggesting dispos- fi nance social investments and discourage consumption able income could be spent on “yoga lessons” (ibid., and environmental damage, while reduced working p. 129), but he otherwise does not explore how the hours with a reinforced social security system will demand for labor- focused activities can arise in a manage unemployment. As the economy of wealthy new economy. Instead, he focuses on the need to cre- parts of the world quietly contracts and our damage to ate green jobs in re-designed dematerialized and less the environment through new infrastructures and extraction activities is constrained, well-being will energy- intensive production and ser vices which only increase through public investments in low-cost social change the kinds of products and product-related and relational goods. services that the society provides, but does not address the more diffi cult challenge of shifting demand At that conference, van den Bergh (2011, p. 881) cat- to labor- intensive ser vices. egorized and critiqued fi ve types of degrowth: The 2008 fi nancial crisis has brought forth a stark 1. GDP degrowth; reality that consumption-led growth may never be 2. Consumption degrowth; able to return to what it once was. With the end to borrowing from the future, there is simply not enough 3. Work- time degrowth; purchasing power (i.e., demand)—nor can there be 4. Radical degrowth; and enough—to (re)fuel the decades-old former high rate 5. Physical degrowth. of economic growth. Thus, out of necessity, perhaps Van der Bergh (2011, p. 286) opines that degrowth is more than some moral or practical awakening, rethink- —-1 too imprecise and ambiguous a term, that focusing on ing consumption—especially material and energy —0 —+1

561-45401_ch01_8P.indd 177 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 178

GDP per capita (“the largest information failure in in this sense that some people writing on degrowth the world” [van den Bergh 2009, p. 127]) is too imper- recognize the need for systemic po liti cal, institutional fect an indicator of social welfare to be the target of and cultural change (what van den Bergh frames and policy, and that the likely re sis tance to degrowth from dismisses as “radical degrowth”) in order to create a different system where expansion will no longer be a various quarters will make degrowth—especially 1, 2 , necessity and where economic rationality and goals of 4 and 5— hard to sell. He (ibid., p. 889) instead offers a effi ciency and maximization will not dominate all vision of “agrowth” focusing on getting demo cratic other social rationalities and goals . . . and politi cal support for (1) stringent and serious en- . . . the crucial question here is whether the capitalist, vironmental regulation which may or may not reduce market economies in which the majority of us live today GDP growth, (2) encouraging people to work less can conceivably degrow and stabilise into a steady- hours, earn less income, and consume less, (3) regu- state. . . . More than likely this will only be possible with such a radical change in the basic institutions of late advertising, especially of status goods, (4) work property, work, credit and allocation, that the system on changing environmentally-relevant consumption, will no longer be identifi able as capitalism. . . . There is (5) give less importance to GDP changes, and (6) de- indeed a problematic vagueness in so far as this velop and redirect alternative technological options post-capitalist alternative is not specifi ed. However this and scenarios.* In his view, focusing on consumption is not a reason for discarding the diagnosis: i.e. that degrowth may result in rebound effects that can exac- growth is unsustainable and that the institutions of erbate environmental problems for a variety of rea- what came to be known as “capitalism” that mandate it, sons.† Reducing working time and radical degrowth, have to change. In fact, it might be better to remain agnostic and pluralistic at this stage about what such an while requiring cultural and social change, per se, alternative could look like and let it emerge organically may not result in signifi cant environmental improve- from the ground, rather than dictate it from any ments. Van den Bergh would focus heavily on using intellectual or po liti cal height. regulatory and economic instruments directly to reduce environmental hazards and redirect technology In addition to taxing international capital move- development. His prescriptions do not address directly ment and environmental damage, restricting adver- improving economic welfare or disparities, although tising, and instituting both emission and salary caps, he would probably argue that an improved environ- Kallis (2010) call for a basic income guarantee, re- ment would positively impact economic welfare. Fi- distributive taxation, and more employment of hu- nally, he does not directly advocate for redistribution man capital where human contact adds value (e.g., of income or wealth, or for a replacement of the cur- health care and education). Addressing directly van rent market economy system (the latter being in con- den Bergh’s description of a GDP fetish, Kallis as- trast with the views of Sanders 2006). serts that GNP is a manifestation, rather than the Kallis (2011, p. 874), siding with Herman Daly’s cause, of a growth fetishism. Finally, Kallis (2011, steady-state economics which assumes a robust rela- p. 878) argues that growth is not a “policy” but rather tionship between throughput and GDP and the need a po liti cal alternative seeking a pop u lar mandate for to reduce GDP, offers a rejoinder to van den Bergh’s radical changes. The two articles by Kallis and van critique by asserting that “big social change does not der Bergh discussed above sharpen the emerging take place by appealing to those in power, but by ideological debate about how, or if, market-based bottom-up movements that challenge established economies can become sustainable. paradigms” and that “scientists have a role to play as Finally, Bergmann (2010) has offered a short but partners in these movements . . .” Kallis calls for “a insightful essay on rethinking capitalist economies bit more belief on our collective capacity to plan a by melding the ideas of no growth with the new eco- change.” He argues that sustainable or selective de- nomics. Citing the contributions of Jackson (2009), growth deserves to be considered, not dismissed as a Schor (2010), and Victor (2008), but without any ref- vague concept. Kallis (2011, p. 875) calls for a: erence to the degrowth literature, Bergmann (2010, pp. 51–52) acknowledges that there might be a need recognition that there is a possible incompatibility for a limitation of growth, especially in the already between foundational institutions of market econo- wealthy countries, but adds “we would not want to mies and the goal of degrowth to a steady- state . . . It is label as prosperous an economy without growth unless all residents had their basic needs met in a fairly * Activities 2 and 4 would be accomplished through generous way.” She adds, “designing a no-growth econ- communication and information provision to motivate changes omy that would be labeled “prosperous” would in- -1— in preferences, attitudes, and voluntary actions. volve making societal arrangements that guaranteed 0— † See Owen 2010 for a recent discussion of Jevons paradox. +1—

561-45401_ch01_8P.indd 178 6/23/11 9:50 AM Economic Development and Prosperity: Current Theory and Debate 179

a quite high standard of living as a minimal level” Drucker, P. (1994). “The Age of Social Transformation.” (ibid., p. 52). Four policies would be needed: (1) a re- Atlantic Monthly 274(5): 53– 80. duction in work hours per week with no decrease in Drucker, P. (1999). “Beyond the Information Revolution.” Atlantic Monthly 284(4): 47– 57. pay per week as productivity advances; (2) some reg- Kallis, G., J. (2011). “In Defence of Degrowth.” Ecologi- ulation of new products and ser vices; (3) redistribu- cal Economics 70(5): 873– 880. tion of certain vital services (paralleling what we in Martinez- Alier, J., U. Pascual, et al. (2010). “Sustainable this book have characterized as essential goods and De-growth: Mapping the Context, Criticisms, and Fu- services); and (4) control of immigration. Bergmann ture Prospects of an Emergent Paradigm.” Ecological Economics 69(9): 1741– 1747. acknowledges the need to encourage environmen- Nafziger, E. W. (2006). From Seers to Sen: The Meaning tally sustainable products and services but falls short of Economic Development, Research Paper RP2006/20. of specifying just how, except to propose a “cap-and- World Institute for Development Economic Research trade” system for labor use as a modulating mecha- (UNU- WIDER). Available at www .wider .unu .edu/ pub nism on commercial activity. Unlike many others lications/ working -papers/ research -papers/ 2006/ en _GB/ advocating the “new economics” and “degrowth” rp2006 -20/ (accessed January 17, 2011). Speth, J. G. (2008). The Bridge at the Edge of the World: while dodging the need for a redistribution of wealth, Capitalism, the Environment, and Crossing from Crisis she explicitly acknowledges the need for maintaining to Sustainability. New Haven, CT, Yale University Press. parity in wage income, the need to limit the kinds of Speth, J. G. (2010). A New Environmentalism and the products and services an economy provides, and the New Economy. The 10th Annual John H. Chafee Me- need for minimum welfare. Her ideas of “prosperity morial Lecture, National Council for Science and the Environment, Washington, DC, January 21. without growth” are premised on the requirement Speth, J. G. (2010). “Towards a New Economy and a New that the state fi nds a way for the economy to meet Politics.” Solutions 1(5): 33– 41. people’s basic needs; this is close to the concept of Stiglitz, J. (2010). Freefall: America, Free Markets, and the “competitiveness” introduced in this book that is not Sinking of the World Economy. New York, W. W. Norton. synonymous with “competition,” but rather is defi ned van Ark, Bart, R. Inklaar, et al. (2003). “The Employment as providing an adequate supply of, and access to, es- Effects of the ‘New Economy’: A Comparison of the Eu ro pe an Union and the United States.” National In- sential goods and ser vices. stitute Economic Review 184(2003): 86–98. Available at h t t p : / / n e r . s a g e p u b . c o m / c o n t e n t / 1 8 4 / 1 / 8 6 . f u l l . p d f + h t m l (accessed January 17, 2011). 3.7 NOTES van den Bergh, J. C. J. M. (2011). “Environment vs. 1. G. Modelski, The Evolutionary World of Politics, Kondra- Growth— A criticism of ‘Degrowth’ and a Plea for tieff Waves, http:// faculty .washington .edu/ modelski/ IPEKWAVE ‘Ag row th’.” Ecological Economics 70(5): 881–890. .html (accessed May 17, 2010). 2. See A Guide to John Williamson’s Writing, www .piie .com/ staff/ jwguide .cfm (accessed January 17, 2011). 3.9 REFERENCES 3. See also Mehmet’s (1995) critique of the “Eurocentricity of economic development theories.” Atkinson, R. D. and S. M. Andes (2009). The Atlantic 4. See especially Stiglitz (2010). Century: Benchmarking EU & US Innovation and 5. See Martinez-Alier, Pascual, et al.’s (2010) discussion of Competitiveness. Washington, DC, The Information Georgescu- Roegen. Technology and Innovation Foundation. 6. See The Global Development And Environment Insti- Aghion, P., and P. Howitt (2005). Appropriate Growth tute, Tufts University, www .ase .tufts .edu/ gdae/ publications/ Policy: A Unifying Framework. Mimeo, Harvard Uni- theorybooks .htm (accessed December 17, 2010). versity. 7. See the Sustainable Consumption Research and Action initiative begun by the Boston- based Tellus Institute (Cohen Amin, S. (1991). “Four Comments on Kerala.” Monthly et al. 2010). See www .scorai .org (accessed December 17, 2010). Review 42(8): 28– 32. 8. See the Degrowth Declaration Barcelona 2010, avail- Ashford, N. A., and C. C. Caldart (2008). “Alternative a b l e a t : w w w. d e g r o w t h. e u /v 1 /fi l e a d m i n / c o n t e n t / d o c u m e n s/t Forms of Government Intervention to Promote Pollu- Degrowth _Declaration _Barcelona _2010 .pdf (accessed Decem- tion and Waste Reduction.” Environmental Law, Policy ber 17, 2010). and Economics: Reclaiming the Environmental Agenda. Cambridge, MA, MIT Press. Ashford, N. A., W. Hafkamp, et al. (2002). Pathways to 3.8 ADDITIONAL READINGS Sustainable Industrial Transformations: Cooptimising Competitiveness, Employment, and Environment. Cam- Ayres, Robert (2006). “Turning Point: The End of Expo- bridge, MA, Ashford Associates. nential Growth?” Technological Forecasting and Social Ashford, R. (2009). “Broadening the Right to Acquire Change 73: 1188– 1203. Capital with the Earnings of Capital: The Missing Link Ayres, R., and B. Warr (2009). The Economic Growth to Sustainable Economic Recovery and Growth.” Fo- Engine: How Energy and Work Drive Material Pros- rum for Social Economics 39: 89–100. Available at —-1 perity. Williston, VT, Edward Elgar. www .springerlink .com/ . —0 —+1

561-45401_ch01_8P.indd 179 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 180

Ayres, R., and B. Warr (2009). The Economic Growth En- and Indicator Framework for Evaluation.” Evaluation 12: gine: How Energy and Work Drive Material Prosperity. 474– 495. Williston, VT, Edward Elgar. Euro pe an Commission (EC) (2010). “Sustainable-De- Ayres, R. U. (2006). “Turning Point: The End of Expo- Growth: An Alternative to Sustainable Development?” nential Growth?” Technological Forecasting and Social Science for Environment Policy, DG Environment Change 73: 1188– 1203. News Alert, September 16. Bell, D. (1999). The Coming of Post-industrial Society: A Flink, J. F. (1988) The Automobile Age. Cambridge, MA, Venture in Social Forecasting. New York, Basic Books. MIT Press. Berger, S. (2005). How We Compete: What Companies Franke, R. W., and B. H. Chasin (1990). “The Kerala Ex- around the World Are Doing to Make It in Today’s periment: Development without Growth.” Technology Global Economy. Cambridge, MA, MIT Press. Review 95(3): 42– 51. Bergmann, B. (2010). “Is Prosperity Possible Without Freeman, C. (1990). Schumpeter’s Business Cycles Revis- Growth” Challenge 53(5): 49– 56. ited. Evolving Technology and Market Structure: Stud- Black, S. E., and L. M. Lynch (2004). “What’s Driving the ies in Schumpeterian Economics. A. Heertje and M. New Economy? The Benefi ts of Workplace Innovation.” Perlman. Ann Arbor, University of Michigan Press: Economic Journal 114: 97– 116. 17– 38. Black, S. E., and L. M. Lynch (2005). Measur ing Organ i- Friedman, T. (2009). “(No) Drill, Baby, Drill.” New York zation al Capital in the New Economy. Mea sur ing Capi- Times, April 12, p. WK8. tal in the New Economy. C. Corrado, J. Haltiwanger, Gallagher, K. P. (2008). “The Death of the Washington and D. Sichel. Chicago, University of Chicago Press. Consensus? Paul Krugman’s Nobel Prize for Econom- Castells, M. (1999). The Rise of the Network Society. Ox- ics Signals the Intellectual Tide Is Turning against Un- ford, Blackwell Publishers. restricted Free Trade.” Guardian, October 14. Cho, A. (2010). “Three Laureates Explained Why Unem- Gill, S., and D. Law (1988). The Global Politi cal Econ- ployment Is Inevitable.” Science 330(6002): 303. omy: Perspectives, Problems, and Policies. Baltimore, Christensen, C. M. (1997). The Innovator’s Dilemma: Johns Hopkins University Press. When New Technologies Cause Great Firms to Fail. Goodman, P. S. (2010). “The New Poor: Millions of Un- Cambridge, MA, Harvard Business School Press. employed Face Years Without Jobs.” New York Times, Clark, G. (2007). A Farewell to Alms: A Brief Economic February 21. History of the World. Prince ton, NJ, Prince ton Univer- Goodwin, N. (2010). “A New Economics for the 21st Cen- sity Press. tury.” Forthcoming in World Futures Review. Available Cohen, M. J., H. S. Brown, et al. (2010). “Individual Con- at http:// neweconomicsinstitute .org/ content/ new -eco sumption and Systemic Societal Transformation: Intro- nomics -21st -century (accessed February 11, 2011). duction to the Special Issue.” Sustainability: Science, Griffi th, V. (1997). “IT ‘Has Failed to Fulfi ll Its Prom- Practice, & Policy 6(2): 6– 12. ise.’ ” Financial Times, August 13. Daly, H. E. (1994). “Fostering Environmentally Sustain- Grübler, A., and H. Nowotny (1990). “Towards the Fifth able Development: Four Parting Suggestions for the Kondratiev Upswing: Elements of an Emerging New World Bank.” Ecological Economics 10: 183– 187. Growth Phase and Possible Development Trajectories.” Deparle, J. (2007). “In India, Even Cared-for Populace International Journal of Technology and Management Leaves for Work.” International Herald Tribune, Sep- 5(4): 431– 471. tember 6. Hagemann, H. (2008). “Consequences of the New Infor- De Soto, H. (2000), The Mystery of Capital: Why Capital- mation and Communication Technologies for Growth, ism Triumphs in the West and Fails Everywhere Else. Productivity and Employment.” Competetivenss Re- New York, Basic Books. view: An International Business Journal 18(1 ⁄ 2): 57–69. Deutch, J., E. Moniz, et al. (2003). The Future of Nuclear Harris, J. M. (2010). The Macroeconomics of Development Power: An Interdisciplinary MIT Study. Cambridge, without Throughput Growth. Working Paper 10-05, MA, MIT Press. Medford, MA, Global Development and Environment Diamond, A. (2006). “Schumpeter’s Creative Destruc- Institute, Tufts University, September. tion: A Review of the Evidence.” Journal of Private Hirsch, R. L., R. Bezdek, et al. (2005). Peaking of World Enterprise 22(1): 120– 146. Oil Production: Impacts, Mitigation, and Risk Man- Dorf, R. C. (2001). Technology, Humans, and Society: To- agement. Available at www .netl .doe .gov/ publications/ ward a Sustainable World. New York, Academic Press. others/pdf/ Oil _Peaking _NETL .pdf (accessed Janaury Driesen, D. M. (2004). “The Economic Dynamics of En- 16, 2011). vironmental Law: Cost- Benefi t Analysis, Emissions Hopkins, M. S. (2009). “The Loop You Can’t Get Out Of: Trading, and Priority-Setting.” Boston College Envi- An Interview with Jay Forrester.” Sloan Management ronmental Affairs Law Review 31(3): 501– 528. Review 50(2): 9–12. Available at http:// sloanreview .mit Drucker, P. F. (1994). “The Age of Social Transforma- .edu/ the -magazine/ articles/ 2009/ winter/ 50201/ the -loop tion.” Atlantic Monthly 274(5): 53– 80. -you-cant -get -out -of/ (accessed January 16, 2011). Drucker, P. F. (1999). “Beyond the Information Revolu- Huber, J. (2004). New Technologies and Environmental tion.” Atlantic Monthly 284(4): 47– 57. Innovation. Cheltenham, Edward Elgar. Ekins, P and J. Medhurst (2006). “The Eu ro pe an Structural Jackson, T. (2009). Prosperity without Growth. London Funds and Sustainable Development: A Methodology and Sterling, VA, Earthscan. -1— 0— +1—

561-45401_ch01_8P.indd 180 6/23/11 9:50 AM Economic Development and Prosperity: Current Theory and Debate 181

Jänicke, M., and K. Jacob (2009). “The Third Industrial McCraw, T. (2007). Prophet of Innovation: Joseph Schum- Revolution? Solutions to the Crisis of Resource- peter and Creative Destruction. Cambridge, MA, intensive Growth Free University of Berlin, FFU- Belknap Press of Harvard University Press. report 02-2009. Available at http:// edocs .fu -berlin .de/ McDonough, W., and M. Braungart (1998). “The NEXT docs/ servlets/ MCRFileNodeServlet/ FUDOCS _deri- Industrial Revolution.” Atlantic Monthly 282(4): 82–92. vate _000000001522/ FFU _rep _02 _2009 .pdf ?hosts = Mehmet, O. (1995). Westernizing the Third World: The (accessed January 17, 2011). Eurocentricity of Economic Development Theories. Jowitt, P. W. (2004). “Sustainability and the Formation of New York, Routledge. the Civil Engineer.” Engineering and Sustainability Moors, E. H. M. (2000). Metal Making in Motion: Tech- 157(ES2): 79– 88. nology Choices for Sustainable Metals Production. PhD Kallis, G. (2011 forthcoming). “In Defence of Degrowth.” dissertation, Delft, Delft University of Technology. Ecological Economics70(5): 873– 880. Nafziger, E. W. (2006). From Seers to Sen: The Meaning Kallis, G., J. Martinez-Alier, et al. (2009). “Paper Assets, of Economic Development. Research Paper 2006/20, Real Debts: An Ecological-Economic Exploration of UNU-WIDER. the Global Economic Crisis.” Critical Perspectives on National Research Council (NRC) (2002). Our Common International Business 5(1 ⁄ 2): 14– 25. Journey: A Transition toward Sustainability. Washing- Kaplinsky, R. (2005). Globalization, Poverty, and In e- ton, DC, National Academy Press. quality: Between a Rock and a Hard Place. Cambridge, Niehans, J. (1990). A History of Economic Theory: Clas- United Kingdom, Polity Press. sic Contributions, 1720–1980 . Baltimore, Johns Hop- Kemp, R. (2000). Technology and Environmental Policy: kins University Press. Innovation Effects of Past Policies and Suggestions for Nuttall, W. J. (2004). Nuclear Renais sance: Technologies Improvement. Paper presented at the Workshop on In- and Policies for the Future of Nuclear Power. Bristol, novation and the Environment, Organisation for Eco- IOP/CRC Press, Taylor and Francis. nomic Cooperation and Development (OECD), pp. Organisation for Economic Co- operation and Develop- 35–61. ment (OECD) (2003). The Sources of Economic Growth Kingston, W. (2004). Schumpeter and Institutions: Does in OECD Countries. Paris, OECD. His “Business Cycles” Give Enough Weight to Legisla- OECD (2010a). The OECD Innovation Strategy: Getting tion? Paper presented at the International J. A. Schum- a Head Start on Tomorrow. Paris, OECD. peter Society 10th ISS Conference, Innovation, Industrial OECD (2010b). The OECD Development Agenda. Paris, Dynamics and Structural Transformation: Schumpete- OECD. rian Legacies, Università Bocconi, Milan, June 9– 12. Owen, D. (2010). “The Effi ciency Dilemma” The New Kleiner, A. (2009). “Jay Forrester’s Shock to the System.” Yorker, December 20 and 27, pp. 78– 80, 82, 84– 85. Sloan Management Review, February 4. Available at: Parayil, G. (1996). “The ‘Kerala Model’ of Development: http:// sloanreview .mit .edu/ beyond -green/ jay -forrester Development and Sustainability in the Third World.” -shock -to -the -system/ (accessed on January 16, 2011). Third World Quarterly 17(3): 941– 957. Kondratieff, N. D. (1935 [1925]). “The Long Waves in Partidario, P. J. (2003). “What- If”: From Path De pen- Economic Life.” Review of Economic Statistics 17(6): den cy to Path Creation in a Coatings Chain: A Meth- 105–115. odology for Strategies towards Sustainable Innovation. Krugman, P. (2009). “How Did Economists Get It So PhD dissertation, Delft, Delft University of Technol- Wrong?” New York Times, September 2. ogy. Langford, P. (2004). “Engineering to Shape a Better Perez, C. (2002). Technological Revolutions and Finan- World.” Engineering Sustainability 157(ES2): 69– 78. cial Capital: The Dynamics of Bubbles and Golden Liagouras, G. (2005). “The Politi cal Economy of Post- Ages. Cheltenham, Edward Elgar. industrial Capitalism.” Thesis Eleven 81: 20– 35. Perrow, C. (1984). Normal Accidents: Living with High Luiten, E. E. M. (2001). Beyond Energy Effi ciency: Ac- Risk Technologies. 1st ed. New York, Basic Books. tors, Networks and Government Intervention in the De- Purcell, C. W. Ed. (1996). Technology in America: A His- velopment of Industrial Process Technologies. PhD tory of Individuals and Ideas, Cambridge, MA, MIT dissertation, Utrecht, Utrecht University. Press. Lynch, L. (2008). The Adoption and Diffusion of Organ- Rifkin, J. (2004). The End of Work: The Decline of the i za tion al Innovation: Evidence for the U.S. Economy. Global Labor Force and the Dawn of the Post- market Paper presented at the IWER seminar at MIT, Octo- Era. New York, G. P. Putnam’s Sons. ber 7. Rodrik, D. (2005). “Growth Strategies.” Handbook of Mankiw, G., D. Romer, et al. (1992). A Contribution to Economic Growth, vol. 1, part II, pp. 967– 1014. the Empirics of Economic Growth. NBER Working Rodrik, D. (2007). One Economics, Many Recipes: Glo- Papers 3541. Cambridge, MA, National Bureau of balization, Institutions, and Economic Growth. Prince- Economic Research. Also published in The Quarterly ton, NJ, Prince ton University Press. Journal of Economics 107(2)(May): 407– 437. Romer, P. M. (1986). “Increasing Returns and Long- Run Martinez- Alier, J., U. Pascual, et al. (2010). “Sustainable Growth.” Journal of Po liti cal Economy 94(5): 1002– De-growth: Mapping the Context, Criticisms, and Fu- 1037. ture Prospects of an Emergent Paradigm.” Ecological Romer, P. M. (1990). “Endogenous Technological Change.” Economics 69(9): 1741– 1747. Journal of Po liti cal Economy 98: S71–S101. —-1 —0 —+1

561-45401_ch01_8P.indd 181 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 182

Ruttan, V. (1959). “Usher and Schumpeter on Invention, Speth, J. G. (2008). The Bridge at the Edge of the World: Innovation, and Technological Change.” Quarterly Capitalism, the Environment, and Crossing from Cri- Journal of Economics 73: 596– 606. sis to Sustainability. New Haven, CT, Yale University Sanders, R. (2006). “Sustainability: Implications for Press. Growth, Employment, and Consumption.” Interna- Speth, J. G. (2010a). A New Environmentalism and the tional Journal of Environment, Workplace and Em- New Economy. The 10th Annual John H. Chafee Me- ployment 2(4): 385– 401. morial Lecture, National Council for Science and the Scherer, F. M. (1992). “Schumpeter and Plausible Capital- Environment, Washington, DC, January 21. ism.” Journal of Economic Literature 30: 1416– 1433. Speth, J. G. (2010b). “Towards a New Economy and a New Schor, J. B. (2010). Penitude: The New Economics of True Politics.” Solutions 1(5): 33– 41. Wealth. New York, Penguin. Speth, J. G. (2010c). Letter to Liberals: Liberalism, Envi- Schumpeter, J. A. (1934 [1912]). The Theory of Economic ronmentalism, and Economic Growth. 13th Annual E. Development. Cambridge, MA, Harvard University F. Schumacher Lecures, New York City, November 20. Press. Stiglitz, J. (2009). “GDP Fettishism: The Economists.” Schumpeter, J. A. (1939). Business Cycles: A Theoretical, Voice 6(8): Article 5. Historical, and Statistical Analysis of the Capitalist Stiglitz, J. (2010). Freefall: America, Free Markets, and the Pro cess. New York, McGraw- Hill. Sinking of the World Economy. New York, W. W. Nor- Schumpeter, J. A. (1962 [1942]). Capitalism, Socialism, ton. and Democracy. New York, Harper Torchbooks. Todaro, M. P., and S. C. Smith (2009). Economic Develop- Seers, D. (1997). “The Meaning of Development.” Devel- ment. 10th ed. Boston, Addison- Wesley. opment 40(1): 39–45. [Originally published as Seers, D. van Ark, B., R. Inklaar, et al. (2003). “The Employment (1979). “The Meaning of Development, with a Post- Effects of the ‘New Economy’: A Comparison of the Eu- script.” Development Theory: Four Critical Studies. D. rope an Union and the United States.” National Institute Seers, E. W. Nafziger, D. C. O’Brien, and H. Bernstein. Economic Review 184: 86– 98. Available at http:// ner London, Frank Cass.] . s a g e p u b . c o m / c o n t e n t / 1 8 4 / 1 / 8 6 . f u l l . p d f + h t m l ( a c c e s s e d Sen, A. K. (1999). Development as Freedom. New York, January 17, 2011). Alfred A. Knopf. van den Bergh, J. C. J. M. (2009). “The GDP Paradox” Shiller, R. J. (2000), Irrational Exuberance. Princeton, Economic Psychology 30(2): 117– 135. NJ, Prince ton University Press. van den Bergh, J. C. J. M. (2011). “Environment vs. Smil, V. (2008). Oil: A Beginner’s Guide. Oxford, One Growth— A Criticism of “Degrowth” and a Plea for World Publications. ‘Ag row th’.” Ecological Economics 70(5): 881– 890. Smith, M. R. (1994). “Technological Determinism in van Zandweghe, W. (2010). “Why Have the Dynamics of American Culture.” Does Technology Drive History? Labor Productivity Changed?” Economic Review 95(3): The Dilemma of Technological Determinism. Cam- 5–30. bridge, MA, MIT Press: 1– 35. Victor, P. (2010a). Macroeconomics for Sustainability. Smith, M. R. and L. Marx, Eds. (1994). Does Technology Pre sen ta tion at Tufts University, February 16 (contact Drive History? The Dilemma of Technological Deter- author at York University, Toronto, Canada). minism. Cambridge, MA, MIT Press. Victor, P. (2010b). “Questioning Economic Growth.” Na- Söderbaum, P. (2008). Understanding Sustainability Eco- ture 468: 370– 371. nomics: Towards Pluralism in Economics. London, Victor, P. A. (2008). Managing without Growth: Slow by Earthscan. Design, Not Disaster. Cheltenham, Edward Elgar. Solow, R. (1987). “We’d Better Watch Out.” New York Warsh, D. (2006). Knowledge and the Wealth of Nations: A Times Book Review, July 12, p. 36. Story of Economic Discovery. New York, W. W. Norton. Solow, R. M. (1993). Sustainability: An Economist’s Per- Westrum, R. (1991). Technologies and Society: The Shap- spective. Economics of the Environment: Selected Read- ing of People and Things. Belmont, CA, Wadsworth ings. R. Dorfman and N. S. Dorfman. New York, W. W. Publishing Company. Norton: 179– 187. Wetlesen, J. (1999). A Global Ethic of Sustainability? To- Spangenberg, J. H. (2007). Defi ning Sustainable Growth: wards Sustainable Development: On the Goals of The In e qual ity of Sustainability and Its Applications. Development—And the Conditions of Sustainability. Frontiers in Ecology Research. S. D. Antonello. New W. M. Lafferty and O. Langhelle. New York, St. Mar- York, Nova Science Publishers. tin’s Press: 30– 47.

-1— 0— +1—

561-45401_ch01_8P.indd 182 6/23/11 9:50 AM 4 Globalization: Technology, Trade Regimes, Capital Flows, and the International Economy Coauthored with KYRIAKOS PIERRAKAKIS

4.1 Introduction 183 4.5 The Role of Multinational Enterprises in the International 4.2 Globalization 184 Economy 198 4.2.1 Industrial Globalization 187 4.5.1 MNEs and Neoclassical Economics 198 4.5.2 The Centrality of Foreign Direct Investment for 4.3 Trade Regimes 189 Development 200 4.3.1 The World Trade Or ga ni za tion 189 4.5.3 MNEs: Blessing or Peril? 201 4.3.2 The North American Free Trade Agreement 189 4.6 Evolution of Financial Institutions 203 4.4 Trade and Economic Development 190 4.6.1 Bretton Woods and Its Aftermath 203 4.4.1 Free Trade: Winners and Losers 190 4.6.2 The Beneﬁ ts and Perils of Increased Capital Mobility 204 4.4.2 The Effects of Trade in the Developed World 194 4.6.3 Toward a New Bretton Woods? 206 4.4.3 The Effects of Trade in the Developing World 195 4.6.4 Steps toward a New Financial Architecture 207 4.4.4 Current Structural Changes Stemming from Manufacturing and Ser vices Dominated by China and India, 4.7 Notes 209 and from the Consolidation of Retailing Power in the 4.8 Additional Readings 209 Developed Countries 196 4.9 References 210

4.1 INTRODUCTION tems may be uncertain, and foreign governments may be subject to unanticipated corruption. lobalization and trade create new opportunities, alliances, and relationships Operating in the international marketplace may among technology- based fi rms and na- change the access of potential consumers to credit tions. They also create new problems and for purchasing products and services, and of entre- challenges: preneurs to investment capital, with mixed results. G In addition, different tax treatment of investment • There are opportunities to expand existing domes- and profi ts and different rules for the expatriation of tic production/ser vices to international markets, capital and requirements for domestic content can but the international marketplace may present additional competitive challenges as well. undermine the profi tability of operating internationally. Nonetheless, globalization of markets is pro- • There are opportunities to benefi t from lower fac- ceeding at an unpre ce dented pace.* tors of production by locating facilities abroad, but the advantages of doing so may be undercut by currency fl uctuations, po liti cal instability, inadequate * See Kleinknecht and ter Wengel (1998) for the obser- infrastructure, and lower worker productiveness vation that Eu rope (even before the recent addition of new acces- sion countries) was actually deglobalizing as an economic unit/ • There are opportunities to avoid costly domestic region, i.e., the percentage and level of trade outside the Euro- fi nancial, environmental, or tax regulation by op- pe an Union was decreasing relative to the trade associated with —-1 erating abroad, but future foreign regulatory sys- the integration of its internal market. —0 —+1

561-45401_ch01_8P.indd 183 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 184

In this chapter, we explore the several dimensions In the age of the so-called knowledge-based econ- of globalization (Section 4.2), introduce the major omy and information systems using sophisticated in- emerging international trade regimes (Section 4.3), formation and communication technology (ICT), explore the relationship between trade and eco- information/knowledge transfer is crucial not only nomic development (Section 4.4), examine the role for optimizing industrial activity but also for the of MNEs in the international economy (Section 4.5), transfer of fi nancial information and assets. and discuss the evolving world fi nancial system (Sec- Labor mobility has two important but different tion 4.6). Both Todaro and Smith’s (2009) work on dimensions: (1) the fl ow of intellectual capital (the trade and the Bhagwati (1993)/Daly (1993) debate “brain drain”) to places where it is most highly val- on the merits of free trade are addressed. Finally, a ued; and (2) labor migration to areas with shortages cautious prognosis for future stabilization and the of people to perform physical or so-called low-skilled restoration of consumer and producer confi dence is work (see Chapter 5, Sections 5.2 and 5.3.3, for fur- offered (Section 4.7). ther discussion). Chapter 5, which follows, discusses the adverse Not all aspects of globalization are seen to be affects of globalization on the environment and em- positive. Nobel Prize economist J. Stiglitz (2002, p. ployment (including purchasing power) as a result of 248) notes: “Globalization has helped hundreds of (1) shifting the locus and nature of production (the millions of people attain higher standards of living, international division of labor) and (2) the opportu- beyond what they, or most economists, thought nity to externalize the social consequences of pro- imaginable but a short while ago. . . . But for millions duction resulting from differences in the willingness of people globalization has not worked. Many have of trading nations to address issues such as environ- actually been made worse off, as they have seen their mental degradation, worker safety, and the need to jobs destroyed and their lives become more insecure. provide a living wage. They have felt increasingly powerless against forces beyond their control. They have seen their democracies undermined, their cultures eroded.” The leg- 4.2 GLOBALIZATION endary investor George Soros (1997, p. 45) cautioned We take the international economy to be composed as early as 1997: “Although I have made a fortune in of the following fi ve highly interrelated aspects: the fi nancial markets, I now fear that the untram- meled intensifi cation of laissez-faire capitalism and 1. Trade in goods and ser vices* the spread of market values into all areas of life is † 2. International distribution of production (more endangering our open and demo cratic society. The commonly called the international division of la- main enemy of the open society, I believe, is no lon- bor) ger the communist but the capitalist threat.” When 3. Flows of capital across national borders Stiglitz (2002) and Soros (1997, 2002) expressed such 4. Flows of information and knowledge concerns about economic globalization, it sent a strong 5. Flows of labor across national borders message that the current trajectory of economic development is fl awed. Six years later, in 2008, we saw The interrelatedness of the fi rst three features of the the beginning of the worst world economic crisis international economy is quickly apparent. Trade in since the 1930s. goods and services refl ects the geographic distri- In contrast to the early international debates bution of production/generation of services— that is, about the environment and development, which fo- inputs must go to production/ser vice centers. The cused mainly on national issues, today’s discourse fi nished products/services (which may also be used places sustainable development within the much as inputs) subsequently go to consumption centers/ broader concept of globalization. Indeed, globaliza- consumers. Capital fl ows across national borders as tion was described as adding a “new dimension” to a consequence of production/service-system invest- sustainable development in the Johannesburg Decla- ments and because of speculation on the future value ration (2002). of produced goods and ser vices and currencies. Globalization can be conceived as a process by which the world is becoming more interconnected, * As explored later in this section, this kind of industrial both in economic relations— encompassing trade, in- globalization is known as “internationalization.” vestment, fi nance, and the orga ni za tion of global † As explored later in this section, the location of produc- -1— tion/assembly/service operations outside the parent country is a production systems—and in social and politi cal in- 0— form of industrial globalization known as “multinationalization.” teractions among organizations, communities, and +1—

561-45401_ch01_8P.indd 184 6/23/11 9:50 AM Globalization: Technology, Trade Regimes, Capital Flows, and the International Economy 185

individuals across the world (WCSDG 2004). There ones.”‡ More useful defi nitions -characterize global- is no universally agreed- on defi nition of globaliza- ization as a linked set of trends in the international tion, and the concept is still being formulated (Held economy and elaborate on these trends by identify- and McGrew 2002; Saha 2002).* Thus the discourse ing their likely cause. Lee (1996, p. 485) comments: on globalization can be described as representing an “The rapid growth in world trade, foreign direct in- area for discussion rather than an established mode vestment, and cross-border fi nancial fl ows over the of thought. Three main theories are often used to past decade has been the main manifestation of the frame the pro cess of globalization: (1) the world- increasing ‘globalization’ of the world economy. This system theory (the spread of the capitalist system phenomenon has been driven primarily by a world- across the globe); (2) the world polity theory (the the- wide wave of economic liberalization—the lowering ory that “a rationalized world institutional and cul- of tariff and non- tariff barriers to international trade, tural order has crystallized that consists of universally the encouragement of foreign investment, and the applicable models that shape states, organizations, deregulation of fi nancial markets. At the same time and individual identities”); and (3) the world culture technological developments have magnifi ed the ef- theory (the formation of a “world consciousness” fects of this liberalization by reducing the costs of that gives meaning to living in the world as a single transportation and communications, hence expand- place).1 ing the scope and volume of goods and services that An important element of the globalization dis- are internationally tradable.” course is its links to discussions on the “nature and In contrast to Lee’s remarks, Judt (2005) argues existence of the nation state, econom ical ly, politi- that globalization is not about trade liberalization cally and culturally” (Voisey and O’Riordan 2001, or expanding communication networks, but rather p. 34). Because the nation- state has a responsibility to move toward the objectives of sustainable devel- ‡ The OECD’s (1997) four “effects” of globalization are opment (see the Stockholm, Rio, and Johannesburg† the following: • Scale effects: increased world output, thought to arise declarations and Agenda 21), any forces that might from the increase in economic effi ciency that results as infl uence the effectiveness of government in this task resources are freed to fl ow to uses that refl ect their great- will have important implications for the design of est marginal contribution (a very neoclassical argument). national and/or international strategies to address • Structural effects: shifts in the composition and location of production and consumption activities. Note that sustainable development. Hence it is important to these shifts in production are required to realize scale understand how globalization could enhance, under- effects. In general, “Market structures [become] deeper mine, or provide new opportunities for government (more geographic specialization in production; more contracting-out to inde pen dent, but related fi rms) and action (see Section 5.4 in Chapter 5). wider” (more countries participating actively in the The OECD (1997, p. 19) viewed globalization “as global economy). Further, as foreign investment fl ows be- a pro cess in which economic markets, technologies, come larger, there is “an increase in overseas commercial transactions (especially for primary and intermediate and communication patterns gradually exhibit more products), and a greater tendency to export fi nal goods. ‘global’ characteristics and less ‘national’ or ‘local’ Expansion may also be expected in the number and ex- tend to international co- operative agreements between fi rms, notably in the fi elds of R&D, product supply, dis- * For a useful list of defi nitions of globalization, see tribution, and marketing.” Streeten (2001, pp. 167–173). For a review and critique of the • Technology effects: promotion of different technology earlier globalization scholarship, see Marshall (1996). Marshall paths and increases in the rate of technological change. analyzes the ideological content of globalization commentary (This is diffi cult because technological change is seen and rhetoric and provides a useful counterpoint to the propo- both as an enabler of globalization— for example, mod- nents of globalization. ern capital markets would be impossible without sophis- † The 2002 Johannesburg Declaration called on the pri- ticated information and communication technology—and vate sector to recognize its role in achieving sustainable develop- as a consequence of globalization. For example, free ment. This evolution in strategy broadened the responsibility for trade increases direct competition between manufactur- action to effectively incorporate all stakeholders working to ing industries in Northern and Southern economies. Pres- achieve sustainable development. However, governments—which sures toward continuous innovation as a means of have retained the sovereign right to use national resources as maintaining comparative advantage thus become more they see fi t within certain international constraints— remain cen- intense in the North.) tral to any transition toward sustainable development because • Product effects: production and consumption of different they defi ne the economic and regulatory environment within product mixes; “globalization might lead to more uni- which the private sector operates. The major debate with the cur- form consumer tastes, infl uenced by transnational mass rent process of globalization is that it holds the potential to un- media and advertising.” dermine the ability of governments to establish this environment Interestingly, one effect that is not articulated is the effect on fi - by transferring po liti cal and economic power to corporate inter- nancial systems that are affected by, as well as affect, economic —-1 ests. This concern is discussed throughout this section. welfare. —0 —+1

561-45401_ch01_8P.indd 185 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 186

“about the disappearance of boundaries—cultural other concepts, global integration, the reordering of and economic boundaries, physical boundaries, lin- interregional power relations, consciousness of the guistic boundaries—and the challenge of orga niz ing global condition and the intensifi cation of inter- our world in their absence.” In addition, the disap- regional interconnectedness. pearance of boundaries has placed limitations on Like the sustainable development discourse, the the ability of national governments to address prob- globalization debate is somewhat polarized by those lems adequately and has enhanced the importance who are skeptical that such a phenomenon exists and of international law and institutions. those who believe that it is an integral and unavoid- Although consensus on a defi nition of globaliza- able aspect of our lives. Held and McGrew (2002) tion has not yet been reached, there appears to be provide a useful summary of the perceptions of some agreement on its core drivers (Held and Mc- those who believe in the existence of the globaliza- Grew 2002; Lall 2002; Saha 2002; Stiglitz 2002). tion pro cess and those who are skeptical (Table 4.1). These drivers are (1) the gradual removal of barriers It is important to recognize that the perceptions pre- to trade and to the movement of capital, services, sented do not necessarily represent the views of all knowledge, and (to a lesser extent) people between skeptics and all globalists. By the very nature of the nations; (2) the rapid reduction in the costs of trans- subject, it is highly likely that views on certain issues portation (due to energy effi ciency gains and logisti- may begin to diverge within the skeptic and globalist cal improvements)* and communication; and (3) the camps. creation of new institutions to supplement existing A relatively skeptical view of economic globaliza- ones to formulate and oversee normative rules of tion is presented by Hirst and Thompson (2002, pp. engagement (especially for trade, but also increas- 2– 3), who provide a convincing set of evidence to ingly for the environment) at the international level. show the following: The fi rst driver highlights an interesting observa- 1. “The present highly internationalized economy tion. Although the mobility of goods, fi rms, and cap- is not unpre ce dented. . . . In some respects, the ital has grown signifi cantly over the past two decades, current international economy is less open and the ability of people to crisscross national borders integrated than the regime that prevailed from has not, which is an important difference from previ- 1870 to 1914. ous episodes of globalization (Bordo, Eichengreen, 2. Genuinely transnational companies appear to et al. 1999; ECLAC 2002; WCSDG 2004). be relatively rare. . . . [†] These drivers have the effect of bringing nations, 3. Capital mobility is not producing a massive people, societies, cultures, economies, and markets shift of investment and employment from the closer together, affecting them “in different ways advanced to the developing countries. . . . through space and time” (Voisey and O’Riordan 4. As some of the extreme advocates of globaliza- 2001, p. 34). A concise description of the wide range tion recognize, the world economy is far from of elements that form the pro cess of globalization is being genuinely “global.” Rather trade, invest- put forward by Held and McGrew (2002, p. 3, em- ment and fi nancial fl ows are concentrated in phases added): the Triad of Europe, Japan and North America Globalization has been variously conceived as action and this dominance seems set to continue. at a distance (whereby the actions of social agents in 5. These major economic powers, the G3, thus one locale can come to have signifi cant consequences have the capacity, especially if they coordinate for “distant others”); time-space compression policy, to exert powerful governance pressures (referring to the way in which instantaneous elec- over fi nancial markets and other economic ten- tronic communication erodes the constraints of distance and time on social orga ni za tion and dencies. Global markets are thus by no means interaction); accelerating interdependence (under- beyond regulation and control, even though stood as the intensifi cation of enmeshment among the current scope and objectives of economic national economies and societies such that events in one country impact directly on others); a shrinking world (the erosion of borders and geo graph i cal † A transnational company or corporation is “an eco- barriers to socio-economic activity); and, among nomic entity operating in more than one country or a cluster of economic entities operating in two or more countries— whatever their legal form, whether in their home country or country of ac- * Internalizing the environmental costs (pollution and tivity, and whether taken individually or collectively” (United -1— global climate change) may very well offset or even reverse the Nations Economic and Social Council [ECOSOC] 2003, p. 7). 0— trends toward the reduction of transportation costs. See Section 4.5. +1—

561-45401_ch01_8P.indd 186 6/23/11 9:50 AM Globalization: Technology, Trade Regimes, Capital Flows, and the International Economy 187

TABLE 4.1: THE GREAT GLOBALIZATION DEBATE

SKEPTICS GLOBALISTS

Concepts Internationalization, not globalization One world, shaped by highly extensive, Regionalization intensive, and rapid fl ows, movements, and networks across regions and continents Power Rule by the nation- state Erosion of state sovereignty, autonomy, Intergovernmentalism and legitimacy Decline of the nation- state Rise of multilateralism Culture Resurgence of nationalism and national Emergence of global pop u lar culture identity Erosion of fi xed po liti cal identities Hybridization Economy Development of regional blocs Global informational capitalism Triadization The transnational economy New imperialism A new global division of labor In e qual ity Growing North- South divide Growing in e qual ity within and across Irreconcilable confl icts of interest societies Erosion of old hierarchies Order International society of states Multilayered global governance Inevitable persis tence of politi cal Global civil society confl ict between states Global polity International governance and geopolitics Cosmopolitanism Communitarianism

Source: Adapted from Held and McGrew (2002, p. 37).

governance are limited by the divergent inter- often neglected in discussions focusing on technol- ests of the great powers and the economic doc- ogy and industrialization, is the movement of labor/ trines prevalent among their elites. human resources in response to pressures for migration. This is discussed more fully in Section 5.3.3 of Held and McGrew (2002, p. 20) support the no- Chapter 5. tion of the “triadization of the world economy” but argue that economic integration has occurred between the broader group of Europe, Asia-Pacifi c, and 4.2.1 Industrial Globalization the Americas. This broader grouping incorporates Globalization connects the world through the trans- the formation of the NAFTA, MERCOSUR (in- fer and sharing of knowledge/information, fi nancial volving Argentina, Brazil, Paraguay, and Uruguay), systems, labor, and the production and consumption APEC (Asia-Pacifi c Economic Cooperation), and of goods and ser vices. The last is termed “industrial- ASEAN (the Association of Southeast Asian Na- ization.” It is possible to identify three main types of tions) multilateral agreements and the recent eco- industrial globalization—internationalization, mul- nomic integration of the EU. It also suggests that tinationalization, and transnationalization (Gordon reducing globalization to a purely economic or tech- 1995)*— the fi rst two of which can have a direct im- nological discourse is misleading because it does not pact on environmental degradation. take into account other important forces shaping Internationalization is the expansion of product/ modern societies. service markets abroad while the locus of produc- The notion of the triad may need to be reconsid- tion remains within the parent country. The pro cess ered, however, if countries such as China and India, of internationalization is primarily facilitated by previously considered “peripheral” economies, con- cheap transportation services, with information and tinue to emerge as the “new core” of the world econ- communication technology (ICT) and e-commerce omy (Muradain 2004). See Section 4.4.4 for a taking a secondary—but, nevertheless, increasingly discussion of how the dominance of manufacturing important—role. Technology or products that are and ser vices by China and India and the consolidation of retailing power in developed countries are reshaping the structure of markets. * For an insightful (early) discussion of how competition One additional aspect of globalization that has in global industries drives the geographic confi guration and co- —-1 important challenges for sustainability, and an issue ordination activities of fi rms/industries, see M. E. Porter (1986). —0 —+1

561-45401_ch01_8P.indd 187 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 188

produced in industrial nations and exported over- for the regional economies in which they are embed- seas can provide signifi cant benefi ts to governments, ded, because fi rms selling in the more profi table fi rms, communities, and individuals in the importing markets where competition depends as much on in- nations.* However, these technologies and products novation and quality as it does on price are more can also introduce new problems or worsen existing likely to use skilled and better- paid workers” (ibid., problems in these nations. For example, the sale of p. 3). Whitford (2006) also argues that the structure pesticides to a nation that previously had never used of manufacturing networks has more to do with how such chemicals can result in negative environmental a fi rm is embedded in a partic u lar historical and in- and human health impacts. These problems are exac- stitutional context than with factors such as trade erbated by improper or uncontrolled use that can oc- policy or international regulatory arbitrage. cur as a result of inadequate warnings, training, or As with internationalization, the pro cess of multi- monitoring. Of course, the impacts of such products nationalization has provided signifi cant benefi ts to need to be considered against the conditions that societies outside a multinational enterprise’s (MNE’s) likely would exist had they not been introduced. home nation. However, MNEs are also responsible Multinationalization is where a (multinational) for some of the world’s worst industrial accidents.† company establishes production/service facilities The more industrial globalization occurs in this sec- abroad to be nearer to foreign markets and/or to take ond category, the more concerned we should become advantage of more industry- friendly labor and envi- because the impacts on other nations can be exten- ronment and tax policies while maintaining research- sive.‡ and- development (R&D) and innovation- centered Benton and Redclift (1994) present another way to activities in the parent country. In this situation, the consider multinationalization by discussing how the parent company is no longer sending products over- spatial relocation of the Japa nese car- manufacturing seas but is manufacturing or assembling its products industry has led to both positive and negative envi- overseas. However, it is important to recognize that ronmental impacts. On the one hand, the relocation very few companies actually operate branches abroad of car-manufacturing plants in other nations is seen that are a direct extension of the parent company to have reduced the environmental pollution prob- itself. As Clegg (1996, p. 104) comments, “The pre- lem in Tokyo. On the other hand, the creation of new ponderance of fi rms work through foreign affi liates consumer markets for Japanese cars is seen to have incorporated according to local law. The parent fi rm increased the per capita consumption of energy and in the home country will normally own signifi cant eq- material at the global level, with a corresponding in- uity in the foreign affi liate.” Clegg (1996) argues that crease in the amounts of total pollution and waste. the increased turbulence of the international business Hence the authors argue that this second type of in- environment, combined with cheap and effective com- dustrial globalization has the effect of redistributing munication and transportation services, provides the environmental costs and benefi ts. incentive for parent fi rms to coordinate with foreign What is evident from these fi rst two types of affi liates. industrial globalization is that when technology is In a study of the U.S. manufacturing industry, Whitford (2006) provides a more nuanced descrip- † An example of an MNE’s operation that had devastat- tion of how fi rms have outsourced much of their pro- ing consequences for society in the recipient nation was the Bho- ductive capacity to other fi rms in the United States pal incident in India. In 1984, a leak of deadly intermediate and abroad. He observes that “most of what matters methyl isocyanate at a Union Carbide pesticide plant killed some four thousand people and affected the health of tens of thou- to manufacturing fi rms no longer happens under sands more in the city of Bhopal. Although Union Carbide batch roofs they own or control. This has made the quality processing plants in the United States are subject to strict health of relationships between fi rms much more important and safety and environmental controls, the state of Madhya Pradesh in India did not have the motivation to deploy a similar and their structure much more complex. . . . How monitoring/control regime. Indeed, it has been argued that health (and where) these large fi rms choose and direct their and safety violations at the Bhopal plant were overlooked in the armies of suppliers has tremendous consequences name of industrialization and agricultural self- suffi ciency. In this case, the problem was not due to the sale of products or equipment but to the transfer of manufacturing capacity—see Lopatin (2004). * The idea of the developed countries selling inexpen- ‡ Note, however, that MNEs have come under greater sive products to millions of people in the developing world is scrutiny by NGOs and stockholders and have increasingly re- known as “trading from the bottom of the pyramid”—see Hart sponded to these concerns by adopting “at-home practices” -1— and Milstein (1999), London and Hart (2004), and Prahalad and abroad. See the codes of conduct and principles developed in the 0— Hart (2002). context of foreign investment discussed in Chapter 12. +1—

561-45401_ch01_8P.indd 188 6/23/11 9:50 AM Globalization: Technology, Trade Regimes, Capital Flows, and the International Economy 189

transferred between nations—primarily by MNEs tariffs and other trade barriers, to minimize or elim- (see Section 5.1.2 in Chapter 5)*—both the positive inate subsidies, to open and keep open services mar- and negative aspects of the technology are trans- kets, and to respect intellectual property. They set ferred with the equipment and products. If the re- procedures for settling disputes. They prescribe spe- ceiving nation’s ability to control the new technology cial treatment for developing countries. They require or industrial processes is limited, then what might governments to make their trade policies transpar- well be an environmentally sound technology in an ent by notifying the WTO about laws in force and industrialized nation can become environmentally mea sures adopted, and through regular reports by destructive if it is used in an uncontrolled manner. the secretariat on countries’ trade policies.” The third type of industrial globalization, which The agreements are often called the WTO’s trade we will call transnationalization, is the creation of rules, and the WTO is often described as “rules strategic alliances in which two different foreign en- based.” The “rules” are agreements that govern- terprises merge/share their R&D and other capabili- ments negotiated, which can be renegotiated or fur- ties to create a new entity or product line, reduce ther clarifi ed though the resolution of trade disputes. expenditures, and open up new markets (Gordon The legal texts consist of about sixty agreements, 1995; Mowery and Rosenberg 1989). An example of annexes, decisions, and understandings. The main a strategic alliance was the ultimately unsuccessful agreements fall into a simple structure with six main Daimler-Chrysler merger, where different techno- parts: an umbrella agreement (the Agreement Estab- logical and managerial capacities were combined, lishing the WTO); agreements for each of the three ostensibly to create a whole that was expected to be broad areas of trade that the WTO covers (goods, greater and more effi cient than the sum of its parts. services, and intellectual property); dispute settle- This form of industrial globalization is not as com- ment; and reviews of governments’ trade policies. mon as the fi rst two and is most likely to occur between developed nations, as opposed to between developed 4.3.2 The North American Free Trade Agreement and developing nations. NAFTA differs from the WTO in that, like the ASEAN, it is a regional trade agreement involving 4.3 TRADE REGIMES the United States, Canada, and Mexico. It is also The most signifi cant trade regimes are the World unique in that in order to get the support—or at least Trade Orga ni za tion (WTO), the North American lessen the resis tance to its adoption—of environ- Free Trade Agreement (NAFTA), the Association mental groups and orga nized labor, it contains two of Southeast Asian Nations (ASEAN), and various side agreements on the environment and labor. Un- agreements involving countries in Central and South like the WTO, which speaks directly to environmen- America. A detailed examination of the WTO is tal agreements but obliquely to labor issues, NAFTA provided in Chapter 11. The exploration of ASEAN does not address either, which necessitated the side and trade agreements involving South America is agreements. In contrast to multilateral environmen- beyond the scope of this text. The WTO and NAFTA tal agreements (MEAs) and conventions of the In- are briefl y discussed in the following sections. ternational Labour Orga ni za tion (ILO)† and to the preference for uniformity among trading partners of environmental safeguards expressed by the WTO, 4.3.1 The World Trade Or ga ni za tion the NAFTA side agreements do not encourage uni- The WTO describes its agreements as follows:2 “The formity but rather adherence of each separate coun- WTO agreements cover goods, ser vices and intellec- try’s requirements to its own laws and standards. tual property. They spell out the principles of liber- Two separate institutional dispute-resolution mecha- alization, and the permitted exceptions. They include nisms that operate outside other traditional (eco- individual countries’ commitments to lower customs nomic) trade- dispute mechanisms are established for environmental and labor issue disputes.3 Interestingly, although NAFTA was originally in- * The recent growth infl ows of foreign direct investment (FDI) have been primarily driven by global production systems tended to expand its membership to Central and that are made up of some 65,000 MNEs with around 850,000 South America, the Bush administration’s resis tance foreign affi liates (WCSDG 2004). Within these production systems, high-tech industries (e.g., electronics, semiconductors) and labor- intensive industries (e.g., textiles, garments, footwear) have † See Chapter 10 for a discussion of regional and inter- —-1 experienced the most pronounced growth (ibid.). national regimes to protect health, safety, and the environment. —0 —+1

561-45401_ch01_8P.indd 189 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 190

to including side agreements caused the United The purpose of this section is to articulate why trade States to attempt to negotiate an entirely separate is seen as an important driver of development. agreement under a Free Trade Agreement of the Since the time of Adam Smith, most economists Americas (FTAA) banner, but this ultimately failed. have considered free trade to be a benefi cial activity The United States then resorted to negotiating sepa- toward which societies should strive. The most fun- rate bilateral agreements with selected South Amer- damental argument for free trade lies in the existence ican countries, undermining the likelihood of a of effi ciency losses associated with the enforcement regional approach to trade. of protectionist policies, such as tariffs, quotas, and subsidies, which do not take advantage of lower factor costs elsewhere and which could be avoided 4.4 TRADE AND ECONOMIC through the imposition of a free-trade policy regime. DEVELOPMENT It is becoming increasingly apparent that devel- Trade consists of the fl ow of goods and ser vices be- oped nations (the United States in partic u lar) between nations. These fl ows are heavily mediated by lieve that trade is critical to achieving sustainable the international division of labor (that is, the location development. It is seen as the mechanism through of production versus consumption) and by the institu- which poverty will be reduced, human well-being tional orga ni za tion of that labor (for example, MNEs, will increase, and environmental problems will be which conduct signifi cant interfi rm transfers of goods addressed. However, focusing on trade as a driver and services). But the international trading system is of sustainable development has its supporters and also founded on theoretical beliefs about the gains critics. from trade, and the international agreements that Economists have identifi ed a series of additional codify and regulate the conduct of trade refl ect both gains associated with free trade. One such gain in- these beliefs or ideology and a process of historical volves the emergence of so- called spillover effects. evolution. This section is therefore designed to pro- By providing entrepreneurs with an incentive to de- vide an introduction to trade theory and its relation- vise new ways to export or to compete with imports, ship to development/economic prosperity and to the free trade results in innovation and increased learn- practice of trade as embodied in trade agreements. ing opportunities. An additional gain involves the We provide an evaluation of the implications of trade surfacing of economies of scale in production (Krug- for work and the environment in the next chapter. man and Obstfeld 2003). An expected consequence of protected markets is that they decrease production internationally; however, they also lead to a re- 4.4.1 Free Trade: Winners and Losers duction in competition and an increase in profi ts for Although modern development theory emphasizes industry in the protected economy. On the other technological innovation as the “engine of economic hand, low barriers to entry can lead too many fi rms growth,” trade also contributed to advancing indus- to enter the protected industry, making the scale of trializing nations during the nineteenth and twenti- production of each fi rm ineffi cient. A good example eth centuries. Now trade is increasingly described as is the Argentine automobile industry, which owes its a major engine of economic growth, both for ad- emergence to import restrictions. Although an effi - vanced economies with “excess productive capacity” cient assembly plant should be making 80,000 to and saturated domestic markets and for less industri- 200,000 automobiles per year, in 1964 the Argentine alized countries with unutilized natural resources industry was producing only 166,000 cars per year in increasingly needed by the industrialized econo- a market of thirteen fi rms (ibid., p. 219). mies. For both, outward- looking strategies are being The proponents of trade generally ground their fashioned for more participation in world markets.* arguments in the notion that free trade will enhance the welfare of humans by increasing prosperity. The basic economic theory is that international trade * See Schmidheiny (1992, pp. 69–81) for an insightful that is free from protectionist barriers will reduce discussion of “trade and sustainable development.” Schmidheiny (1992, p. 79) makes the observation that “traditionally, the industrial nations of North America and Eu rope have championed free trade, against the resis tance of most developing nations and it as their main hope for economic development.” To address the centrally planned economies. Today, it is the former that tend to inherent confl icts associated with the expansion of trade and en- question the benefi ts of liberalized trade, while developing na- vironmental protection, Schmidheiny (1992) calls for the harmo- -1— tions and the newly emerged democracies of Eastern Eu rope see nization of environmental regulations throughout the world. 0— +1—

561-45401_ch01_8P.indd 190 6/23/11 9:50 AM Globalization: Technology, Trade Regimes, Capital Flows, and the International Economy 191

prices and increase the amount of goods and ser- could be copied, as in manufacturing, countries’ dif- vices available (Driesen 2001). Because free trade fering endowments of factors of production could enables corporations (predominantly based in devel- explain different countries’ gains from trade. Capital- oped nations) to become global in their operations, rich countries would specialize in goods whose pro- proponents argue that less developed nations will duction required an abundance of capital, while benefi t from job creation and the spread of advanced labor-rich countries would specialize in labor-intensive technology; health, safety, and environmental stan- goods and land-rich countries in land-intensive (that dards; and environmental management techniques is, agricultural) goods. Instead of making goods that (OECD 1997). In addition, as individual prosperity would primarily require the factors they possessed the increases, so does the tax base for environmental least, countries could trade for them and acquire more and social programs that governments can imple- goods overall.‡ The Hecksher- Ohlin theory recog- ment in response to increasing demands for a health- nizes that trade will not benefi t everyone uniformly. ier environment (Bhagwati 1993; Speth 2003).* In For instance, capital in labor-rich countries will lose effect, proponents argue that international trade is from imports of capital- intensive goods. This helps opening up new opportunities to protect and en- explain why capitalists in low- wage countries, such as hance the environment through the re orientation of Brazil, opposed trade with capital-rich countries economic policies (OECD 1997). Further, as govern- for capital- intensive goods, because this threatened ments’ ability to manage their economic affairs is their scarce premium. On the other hand, capitalists enhanced, there are likely to be spillover effects that in capital- intensive Britain were among the primary will enable them to address environmental concerns proponents of free trade. Symmetrically, labor in (Speth 2003). capital-rich countries will lose from imports of labor- Although free trade is a preferred policy measure intensive goods, which explains why labor unions in in theory, it does not uniformly advance all social rich countries are usually antitrade, and also why the interests. It is important to ask who wins from free United States and Eu rope have been reluctant to re- trade and who loses. duce subsidies of agricultural production. David Ricardo’s theory of comparative advantage Furthermore, by understanding which productive remains the most central formulation of the theory of factors are required to manufacture commodities the benefi ts of international trade. The idea of com- and relating this information to the relative endow- parative advantage states that countries can better ments and factors of production of each country, their fi nancial position by specializing in what they do factor- endowment trade theory encourages coun- best.† In the 1920s, the Swedes Eli Heckscher and tries to specialize in commodities in which they have Bertil Ohlin showed that even when technologies a comparative advantage. Hence the most effi cient (worldwide) allocation of resources will be achieved

* This type of argument is often put forward by those if all countries specialize in their relative strengths who believe in inverted- U-shaped or environmental Kuznets and trade their surplus for needed commodities that curve relationships—i.e., environmental quality falls during the are more easily produced by others. This view of initial stages of economic growth and industrial expansion but trade ultimately leads to the integration of regional later improves with increasing GDP. See the discussion in Sec- tions 1.3.2 and 5.1.1.3 of Chapters 1 and 5, respectively. and national markets, increasing the importance of † In a self-contained economy, an example of this theory transnational corporations (TNCs) and the need to is bartering between a dentist and a carpenter. The carpenter transport resources and commodities between na- needs his teeth fi xed, and the dentist needs shelves in his study. They agree freely on an exchange of ser vices, and it sounds like a tions (Korten 2001). marriage made in heaven. Both are made better off by the ex- In an article published in 1941, twenty years change. The dentist fi xes two teeth, and the carpenter builds after the Heckscher-Ohlin contribution, Harvard three shelves. Five years later the carpenter needs four teeth fi xed, but the dentist has enough shelves and wants a tool shed built in his garden. At that partic u lar time, the exchange still goods) trading with third-world countries (providing basic com- looks like a marriage made in heaven. Both are benefi ting from modities) is obvious. the exchange. Ten years later the bargain is six teeth fi xed in ex- ‡ The early theories of comparative advantage were change for a garage. It is still a mutually advantageous exchange, based on a set of static (endowment/core) factors, namely, labor, but note that one party to the bargain (the carpenter) is increas- natural resources, land, and population size. However, compara- ingly impoverished relative to the other (the dentist). The dentist tive advantage is now understood to be more of a dynamic pro- is further advantaged by the greater technological advances in cess (Dicken 1994). Possibly the best- known description of the dentistry compared with carpentry. Although at any one time factors that determine a nation’s competitiveness is M. E. Por- welfare is maximized, examination over time reveals a problem. ter’s (1990) “diamond of competitive advantage,” discussed later The analogy to fi rst- world economies (providing advanced in this section. —-1 —0 —+1

561-45401_ch01_8P.indd 191 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 192

classmates Wolfgang Stopler and Paul Samuelson • Factor conditions (such as resources, labor, and explored who benefi ts and who loses from trade. The infrastructure)* authors began with the assumption that trade is ben- • Demand conditions (characteristics of consumers efi cial for producers of exports and harmful for pro- in domestic markets) ducers who compete with imports, with Heckscher • Related and supporting industries (suppliers, col- and Ohlin predicting that export producers have the laborators, competitors) factor that is abundant in their country (Frieden • Firm strategy, structure, and rivalry (market con- 2006). In accordance with this analysis, an increase ditions, competitive structure, and company orga- in exports will lead to an increase in demand for the niza tion, that is, the factors that infl uence an factors employed in their production. For instance, industry’s/fi rm’s attitude toward competition and as a labor- rich country exports labor- intensive prod- innovation) ucts, the demand for labor increases, which leads to These factors can combine to generate new ad- a corresponding increase in wages—at least in the- vanced factor endowments (such as a high- technology ory. At the same time, the demand for the products sector or a large pool of skilled labor) that determine of import- competing producers will decrease, thus a nation’s comparative advantage. A clear omission pushing them out of the market. In summary, the from Porter’s (1990) theory, however, is the failure to Stopler-Samuelson scheme constitutes a central the- include government as a factor (Dicken 1994). In- ory of the politics of trade, making the case that stead, government is described as having a proactive trade makes the national own ers of an abundant fac- “infl uence” on the four core endowment factors.† tor of production better off and the owners of a Daly (1993), in a comprehensive critique of free scarce factor of production worse off. trade, underlines that even the term “free trade” is Indeed, in the late nineteenth and early twentieth fallacious because it creates the erroneous impres- centuries, farmers in land-rich countries were free sion that people who support some set of trade re- traders in almost all cases, whether they were cattle strictions are against “freedom.” In that context, the ranchers in Australia or wheat farmers in Canada real debate is not over being for or against “free (Frieden 2006). The same held true for own ers of trade” (because there is no such thing as purely free capital in capital-rich countries, such as Britain and trade), but over what sets of regulations and restric- other countries of northwestern Europe. Stopler tions should be put in place and what goals are legiti- and Samuelson’s analysis also appeared to hold for mate. Hence, according to Daly (1993), a more the enemies of free trade as well. In labor-poor Aus- accurate name than “free trade” would be “deregu- tralia, Canada and the United States, labor was pro- lated international trade.” tectionist, while in capital- poor Rus sia and Brazil, it Greider (1997) agrees with this analysis. A pas- was the own ers of capital who primarily opposed sage from his 1997 book One World, Ready or Not is free trade (ibid.). Finally, farmers in land-poor Eu- particularly elucidating: “Lawrence B. Krause, in- rope are still protectionist today, with countries ternational relations professor at the University of such as France and Greece known for the subsidiza- California at San Diego, aggregated all of the differ- tion of their respective national agricultural activi- ent ways in which trade was managed— openly and ties. covertly— and concluded that only about 15 per cent Nevertheless, although international differences of global trade was genuinely conducted in free- in factor costs and endowments have been important market circumstances. Other scholars have calcu- in the determination of the international division of lated that governments directly managed 25 to 30 labor and the patterns of international trade, Ricar- per cent of trade through their various non-tariff do’s comparative advantage does not have suffi cient [trade] barriers. Multinational corporations them- explanatory power (Coffey 1996). In fact, most world selves managed about 40 percent of global trade trade seems to be taking place between countries through the intrafi rm trade among their own subsid- with similar factor endowments and costs. Accord- iaries. Further, Krause noted that the top ten trade ing to Porter (1990), the notion of competitive advantage constitutes a much more elaborate scheme for * Even though this may sound similar to Ricardo’s no- understanding international trade. Competitive ad- tion of comparative advantage, Porter does not limit his analysis vantage is a much broader concept than comparative to factor endowments. Porter believes that the key factors of advantage. Four attributes or interacting factors con- production are actually created (i.e., skilled labor, capital, and infrastructure). -1— stitute Porter’s diamond of competitive advantage † See also Section 3.1.2 in Chapter 3 on factor endow- 0— (ibid.): ments necessary for economic development. +1—

561-45401_ch01_8P.indd 192 6/23/11 9:50 AM Globalization: Technology, Trade Regimes, Capital Flows, and the International Economy 193

sectors, from aircraft to petroleum, were managed ployed or underemployed. Also, the assertion that by governments or concentrated fi rms, with the sin- labor and capital markets clear perfectly is not cor- gle exception of paper. These accounted for 22 per- roborated by the evidence in all cases.† In fact, de- cent of world trade” (ibid., pp. 137– 138). More than fects often exist in the capital and labor markets that ten years have passed since the publication of Gre- prevent resources from being transferred as rapidly ider’s book, but these observations remain relevant as they should be to sectors that yield high returns. today. There is also a signifi cant argument to be made Informed by Daly’s and Greider’s analyses, an ex- about the protection of nascent domestic industries tension of Porter’s model of competitive advantage that can be particularly innovative and produce would contribute the insight that government has an technological spillover effects.‡ important regulatory role to play. Governments can In general, the proponents of free trade claim that affect all four elements of Porter’s diamond through it lowers import prices, a case that becomes all the subsidies, the creation of infrastructure, tax policy, more clear when one thinks of cheap Wal-Mart prod- education policy, standardization, regulations, and ucts. However, this is not what theory claims to be other mea sures the case. In fact, comparative advantage theory states Daly (1993, 1999) however, makes an additional that free trade affects relative rather than absolute observation, often disregarded by some economic prices. Absolute prices are actually determined by theorists. According to Ricardo’s specifi cation, fol- monetary and macroeconomic policies. The effect of lowing trade liberalization, countries can specialize a country’s liberalization of its trade regime is that on the basis of comparative advantage, with the pos- the relative price of imports decreases relative to ex- sibility of investing all of a country’s capital in a sin- ports, or, inversely, that the relative price of exports gle product. However, the hidden assumption of the increases relative to imports. The determinant of theory of comparative advantage, according to Daly whether consumers will be better or worse off will be (1993, 1999), is that capital earned from trade cannot the extent to which their consumption basket is dom- cross borders, as was the case in the pre- 1970 Bret- inated by imports, after accounting for the net change ton Woods world, and will be invested in the country in the amount of jobs. However, one cannot argue in which the product was produced. If capital is mo- from fi rst principles that this relationship will always bile as well, then it can follow absolute advantage be positive, especially in countries that seem to be rather than comparative advantage, and one country running signifi cant trade surpluses. could conceptually end up producing everything be- Nevertheless, on many occasions, trade restric- cause it could have lower costs, better infrastructure, tions, such as tariffs and import quotas, are under- larger or better markets, and other advantages and taken not in the context of an elaborate and attract foreign capital.* well-planned industrial policy but in order to protect Morris (2001) extends Daly’s critique by offering a the income of par tic u lar interest groups. Given the reassessment of some of free trade’s assumptions. In fact that trade restrictions are associated with effi - his view, prices do not provide accurate mea sures of ciency losses, one would automatically make the case real effi ciency, because they are the outcome of a se- that such trade restrictions would reduce national ries of variables, such as market structure and subsi- welfare. However, there are theoretical grounds to dization. Furthermore, Morris (2001, p. 121) cites believe that activist trade policies can in some in- Howard Wachtel, who notes that “differences in prod- stances, apart from protecting the income of certain uct cost that are due to totalitarian politi cal institu- segments of society, increase the welfare of a nation tions or restrictions on economic rights refl ect no as a whole. natural or entrepreneurial advantage. Free trade has Contributing to this view involves the “Olsonian” nothing to do with incomparable po liti cal economic nature of the debate of free trade. The term “Olso- institutions that protect individual rights in one coun- nian” connotes the presence of concentrated losses try and deny them in another.” from trade in specifi c segments of the society and Furthermore, a signifi cant set of additional argu- diffused benefi ts from lower consumer prices from ments against free trade needs to be examined. For instance, labor used in a sector that would be harmed by import competition might otherwise be unem- † See Section 4.4.4 on the creation of a “reserve army of labor.” ‡ See Amsden (1994) for an explanation of the success * See Section 4.4.4 on the emergence of China and India of the so-called Asian tigers as being the result of promoting na- —-1 as major economic power houses. tional champions under a cloak of protectionism. —0 —+1

561-45401_ch01_8P.indd 193 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 194

import competition. Olson’s (1982) “logic of collec- 1994–2002. Furthermore, according to Berger tive action” has long been invoked by economists in (2006, pp. 20– 21), “More than two million jobs dis- order to explain seemingly irrational trade policies appeared from the U.S. workforce between 2001 as a result of small concentrated groups capturing and 2004. By one calculation, a half-million of them the po liti cal pro cess. This is highly relevant for coun- were in high- tech industries like electronics, compo- tries where the harmed interest groups can closely nents, and telecoms. The layoff rate has risen, and infl uence the policy-making process through their while many of those who lose jobs get hired again linkages to specifi c party interests. Orga nized labor fairly soon, two-thirds of the jobs they get pay less was the natural base of the British Labour Party in than the jobs lost.” the 1970s and 1980s, while the policies of the Tories Hence apart from the impact of trade on employ- in the late 1970s and early 1980s refl ected their prox- ment statistics, trade has also signifi cantly affected imity to capital own ers and City fi nanciers. wages. According to Scott (2002), trade’s indirect effects on wages through the elimination of good job opportunities and the possibility of relocation as a 4.4.2 The Effects of Trade in the Developed World threat in wage negotiations have led to a series of ef- In general, the established consensus among most fects on wages: members of the economic profession appears to be • A 5.4 percent decrease in real production worker that trade constitutes “an important stimulus to eco- wages between 1978 and 2000 nomic growth” (Todaro and Smith 2009, p. 603). Trade • Growing wage in e qual ity since the late 1970s increases a country’s consumption capacities, ex- pands world output, and provides access to scarce • Increasing income in e qual ity since 1979 resources and global markets for products, without • Flat incomes for the bottom 60 percent despite a which poor countries would not have been able to 7.6 percent increase in working hours develop (ibid.). Scott (2002) notes that trade explains at least 15 to 25 However, although agreements such as NAFTA percent of the increase in income ine qual ity, along are generally considered by economists to have been with other factors, including deregulation, liberaliza- benefi cial for the United States, the population of tion, and weak macroeconomic policies. Further- the United States appears to be particularly divided more, Charles and Lehner (1998) argue that trade on the issue (Warf and Kull 2002). How can Ameri- might actually facilitate rigidity and lack of innova- cans be that divided when NAFTA has purportedly tion and actually contribute to a long- term decline in been benefi cial for the majority of the population competitiveness. through lower consumer prices? One answer attrac- Faux’s (2007) analysis moves along similar lines, tive to the proponents of the mainstream view has to but the picture that he paints is even more bleak. Al- do with the relative visibility of NAFTA’s effects. In though he deems globalization to be a force that can general, job losses are more obvious and concen- potentially be benefi cial and enhance living stan- trated than lower prices* and are more easily attrib- dards for workers around the world, he argues that it utable. Therefore, even though one might have gained has been “tragically mismanaged,” entailing an ac- personally from free trade, the adverse effects of cumulation of international trade and investment trade liberalization through the associated job losses agreements that are “increasingly unaccountable to in sectors like manufacturing can increase insecurity any country’s citizens” (ibid., p. 1). Faux’s (2007) cal- in the working population and create hostility to- culations are dire. According to his analysis, between ward free trade (see Section 4.4.4). 1979 and 2007, 7 million jobs were displaced in the Nevertheless, other commentators seem to dis- United States because of the expansion of trade. Fur- agree with this “established” view. Scott (2002) states ther, real wages have not declined. In fact, the wages that NAFTA was eventually harmful for the U.S. of nonsupervisory employees (accounting for 80 per- economy, costing 766,030 jobs and job opportunities cent of U.S. workers) increased by a marginal 4 per- in the period 1993– 2002, while the total U.S. trade cent; however, this increase did not remotely match defi cit cost approximately 3 million jobs in the period the corresponding 71 percent increase in the productivity of the U.S. economy, as traditional economic theory would have us believe. Furthermore, the 4 * It is also not clear that the location of production abroad inures to the benefi t of domestic consumers. Monopoly percent increase includes the increasing participation -1— wholesalers or retailers could very well retain saved costs and of female workers in the workplace. In fact, among 0— increase profi ts. +1—

561-45401_ch01_8P.indd 194 6/23/11 9:50 AM Globalization: Technology, Trade Regimes, Capital Flows, and the International Economy 195

working males, real hourly wages have remained at reality of the benefi ts of free trade for the United the 1973 level (ibid., p. 3; see the related discussion in States thus seems unclear. Section 1.1.3.1 in Chapter 1). The proponents of free trade underline that these 4.4.3 The Effects of Trade in the Developing costs are infl ated. However, they also note that even World if such costs are infl ated, they should be expected to some degree, given the lack of skills of the unskilled Although there appears to be a consensus among workers of the manufacturing sector. According to many economists that free trade produces net gains mainstream economic thinking, these workers, as for developing societies, and that countries should they obtain portable skills and become better trained, unambiguously adopt trade-liberalization policies, will be channeled to other productive activities. Scott reality paints a more complex picture. Rodrik (2007) (2002) seems to agree that college- educated workers, cites the particularly elucidating case of two differ- who account for 20 to 40 percent of U.S. house holds, ent countries, Vietnam and Haiti. Vietnam still en- constitute the second category of winners from glo- gages in state trading, maintains import monopolies, balization in the United States, apart from MNEs. retains quotas and tariffs (in the range of 30 to 50 Nevertheless, Faux (2007) does not come to the same percent) on imports of agricultural and industrial conclusion. Americans are working longer hours and products, and is not a member of the WTO. On the are increasingly educated. The percentage of workers other hand, Haiti undertook signifi cant trade liber- with college degrees has doubled from 15 percent in alization in 1994–1995, joined the WTO, diminished 1973 to 30 percent today, while the share of high- import tariffs to a maximum of 15 percent, and re- school dropouts has fallen from 29 percent to 10 per- moved all quotas. The result? Vietnam experienced cent. Nevertheless, the U.S. economy, in this pro cess annual GDP growth rates in the area of 8 percent, of Schumpeterian creative destruction, does not seem reduced poverty, expanded trade signifi cantly, and at- to be fulfi lling the “creative” part. Faux (2007) cites tracted signifi cant foreign direct investment. On the projections from the Bureau of Labor Statistics that other hand, even before the recent earthquake, Haiti conclude that by 2014, the number of occupations stagnated and suffered from signifi cant poverty and fi lled by people with college degrees will rise by only unemployment rates, having made little progress in 1 percent— from 28 percent to 29 percent— while the integrating into the world economy. share of jobs for which a college degree is required is Rodrik (2007) is right that trade should not be projected to be only 21 percent. viewed as a goal in itself but rather as a means to- However, some level of costs that emanate from ward the goal of increasing economic development. increasing trade openness is to be expected even As he notes, “A leadership committed to develop- from the most fervent advocate of trade. The point ment and standing behind a coherent growth strat- is whether these costs, as accounted from the pre- egy counts for a lot more than trade liberalization, ceding analysis, are less than the projected benefi ts. even when the strategy departs sharply from the In theory, free trade creates losers in the domestic enlightened view of reform” (ibid., p. 217). His economy in those industries that are not able to view is corroborated by the facts. The cross-national compete in the international spectrum; however, it evidence on the relationship between open trade also entails cheaper imports and products, which policies and higher economic growth and poverty re- can increase the standard of living of the domestic duction has shown no systematic relationship be- population, providing lower costs are passed on to tween a country’s average level of tariff and nontar- consumers. iff restrictions and its subsequent economic growth But is this the case? Are lower prices that preva- rate. In fact, if anything, the evidence from the 1990s lent? Faux (2007, p. 6) again offers compelling evi- suggests a positive (but statistically insignifi cant) re- dence to the contrary. He notes: “Comparing the lationship between tariffs and economic growth, price change of domestic and imported goods . . . with the only systematic relationship being that as yields a savings from imports to the average Ameri- countries get richer, they tend to liberalize trade. can of about $36 a year. A gain, but hardly substan- Hence integration into the world economy tial enough to justify any costs.” Faux (2007) does through trade liberalization should be viewed as an note that other authors are led to conclude that there outcome rather than a prerequisite of a successful are higher benefi ts; however, most of these studies growth strategy. As Stiglitz (2002) and Rodrik seem to be based on unrealistic assumptions and (2007) note, the fact that all of today’s advanced —-1 simulation rather than being grounded in facts. The countries embarked on their growth under trade —0 —+1

561-45401_ch01_8P.indd 195 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 196

restrictions and some protection should be viewed means that it is more profi table to invest in the in- as a lesson. Finally, almost all the outstanding suc- effi cient and polluting industries of Eastern Eu- cess stories, such as China, India, and the East rope, for example, than in the less attractive markets Asian countries, involved partial and gradual trade of developing nations (Reid 1995). Hence economic “logic” is reducing the already- limited fi - and capital liberalization. A country’s trade policy nancial fl ows reaching developing nations. should be eclectic and should take into account a • Free trade leads to the “spatial and temporal sepa- series of national and external variables, such as ration of action and impact from responsibility” the industries that will be harmed from trade open- (Speth 2003, p. 13). The spatial and social distance ness and the capacity of the domestic market to re- between production and consumption is widened allocate workers. as commodity chains grow in length and become Although international trade has some positive more complex and more international, (Conca effects on developing regions and can potentially 2002; Princen 2002). Consumers lack the informa- help protect/enhance the environment, it is also seen tion and incentives to behave in a more sustain- to have negative environmental (OECD 1994) and able manner even if they wished to do so as a result of this distancing effect. To put it another way, as social (welfare) impacts (Rees and Westra 2003). trade increases and countries continue to special- Among the main arguments against the interna- ize, the transaction costs (linked to externalities) tional integration of economies are the following: become hidden by the distancing effect. There- fore, it becomes increasingly diffi cult for commu- • Free trade is accompanied by environmental deg- nities in different nations to communicate and radation and growing economic in e qual ity (Bor- agree on collective solutions to externality prob- ghesi and Vercelli 2003; Held and McGrew 2002). lems (Costanza, Cumberland, et al. 1997). Further, • Free trade weakens the democratic accountability the growing movement of resources between na- of governments through the transfer of power from tions in response to market demands is reducing people (and society in general) to global fi nancial the effectiveness of traditional local controls over institutions and corporations (Korten 2001). This resource use (Speth 2003). This loss of indigenous transfer of power is mirrored by “a corresponding control can lead to the exploitation of resources as shift in economic priorities from the production of a result of unsustainable rates of extraction. goods and services to meet human needs to a wholly different agenda centered on extracting wealth The preceding concerns have led a series of schol- from the larger society to increase the fi nancial as- ars to move their point of reference, asking for trade sets and power of the wealthiest among us.”4 to become part of a larger development scheme. Na- • Free trade is not proceeding in a fair and equitable jam and Robins (2001) note that it is in the interest manner. A main contention is that industrialized of the developing world (“the South”) to shift the nations have pressured developing nations to elim- terms of the debate from “trade and environment” inate their trade barriers while keeping their own to “trade and sustainable development.” Further- intact. This has the effect of opening up the mar- more, in their view (ibid., p. 68), “If sustainable de- kets of developing nations to capital- intensive velopment is to become the or ga niz ing focus of the products from developed nations, but has pre- vented them from exporting their labor- intensive international trade regime, then at some point, ‘sus- products, depriving them of vital export income tainable trade’ will have to replace ‘free trade’ as the (Stiglitz 2002). grand rationale for our efforts. For the early advo- • Free trade encourages econom ical ly rational cor- cates of GATT, the ultimate and non- negotiable porations to invest capital in countries with the low- goal— to be reached through small steps— was to cre- est environmental and health and safety standards. ate a world in which all trade was ‘free.’ The new Such action reduces the cost of producing commod- goal, equally non-negotiable at its core, must be the ities and might also lead countries to specialize in creation of a world where all trade is seen as a part of those sectors where regulations are weakest (Cole the larger sustainable development enterprise.” 2000). Alternatively, the pressure to produce commodities at or below the price dictated by the international market creates a perverse incentive to lower 4.4.4 Current Structural Changes Stemming from health and safety and environmental standards to Manufacturing and Ser vices Dominated by improve the competitiveness of national sectors China and India, and from the Consolidation (Daly 1993). of Retailing Power in the Developed Countries • Free trade creates a situation in which capital from developed nations is invested only in nations that Aside from economic effects accruing to an individ- -1— offer the potential for a high rate of return. This ual nation from trade— which provides new markets 0— +1—

561-45401_ch01_8P.indd 196 6/23/11 9:50 AM Globalization: Technology, Trade Regimes, Capital Flows, and the International Economy 197

for exports and new opportunities to acquire cheaper stability. These involve not the theoretical benefi ts of and/or better imports used to promote export-bound competition brought on by international trade, but production or domestic consumption— the structure rather monopoly/oligopoly in manufacturing and ser- of markets may change appreciably for the better or vices (predominantly in China and India, respec- for the worse. Ricardo’s theory of comparative ad- tively), which, combined with monopsony in retailing vantage (see Section 3.2.6 in Chapter 3) argues that (for example, Wal- Mart and Tesco), have squeezed trade promotes win-win scenarios among the trad- out competition through concentration of both pro- ing partners, while others have argued that there are ducers and (mostly) corporate buyers and price re- also win-lose scenarios (Kaplinsky 2005; Kaplinsky ductions. The result is that there are a few national and Messner 2007; Kaplinsky and Morris 2007). winners and many national losers. On the supply side, In the context of win-win opportunities in inter- the tendency toward a concentration of large produc- national trade, Ricardo’s theory of the benefi ts of ers is enhanced by the fact that the costs of advancing specialization and exchange between countries (the technological progress may require large markets to theory of comparative advantage) depends on three sustain profi tability and an attractive return on in- crucial assumptions (Kaplinsky 2005, p. 209): vestment (Kaplinsky 2005, p. 11). The easing of fi - nancial fl ows following the globalization of fi nance 1. The existence of full employment in both export- has largely facilitated the creation of most of the prof- ing and importing economies itable large centers of production, moving world pro- 2. The mobility of capital and skilled entrepreneur- duction from undercapacity to overcapacity in what ship* Kaplinsky terms “the ‘outward-inward’ breath of the 3. Implicitly, that income transfers must be easily global economy” (ibid., p. 23). The ideology that made to facilitate producers moving from one eco- fanned an uncritical endorsement of free trade also nomic activity to another concentrated developed-nation currency holdings in These assumptions may not hold in the real world. the hands of those few nations to the extent that Perhaps the most succinct observations are offered geopo liti cal stability may be threatened. by Raphael Kaplinsky and colleagues (Kaplinsky Kaplinsky (2005, p. 196) argues that the worst 2005; Kaplinsky and Messner 2007; Kaplinsky and price squeezing (that is, the price falls) occurs in Morris 2007). Found in the writings of Malthus and products embodying low technological content and Marx, an alternative perspective to the clearing of in low- income economies and that “a signifi cant de- labor markets is that there is a systematic tendency gree of poverty and in e qual ity are relational out- toward structural unemployment consisting of a “re- comes of globalization [arising from] excess global serve army of labour” that can depress the wage rate capacity and constrained global consumption, . . . (Kaplinsky 2005, p. 210). Thus Kaplinsky (p. 230) [leading] to a race to the bottom in real incomes” argues that “there is a structural excess in the global (ibid., p. 197). The key relationships of falling prices economy, not just in productive capacity, but also in involve (1) the extent to which prices of the nation’s the labour market.” W. A. Lewis (1954) observed that exports fall relative to the prices of the products it “in most developing countries there was a dual imports, (2) the extent of price falls received by pro- economy— one segment composed of a modern sec- ducers relative to the prices of the inputs into their tor with near-full employment, and the second com- production pro cesses, and (3) the extent of price falls prised of a sector characterized by heavily disguised received by producers relative to the cost reductions unemployment, where people undertook all kinds of enabled by productivity improvements (ibid., p. 199). work at very low (and often zero) productivity” Productivity improvements derived from replacing (quoted in ibid., p. 211). labor with capital adversely affect workers, depress- Tectonic changes in both developed and developing wages, unless they are accompanied by suffi - ing nations have occurred in the past ten to fi fteen ciently larger revenues from greater sales derived years that threaten global economic and fi nancial from lower prices, whatever the source. Whether serious structural unemployment in manufacturing is caused by technological displacement or by the * It has been argued that a critical (but little- noticed) assumption of Ricardo’s theory of comparative advantage is that import of labor-intensive goods, it is now acknowl- capital is immobile between nations (Daly 1999). If capital can edged in both developed and developing countries, move freely between nations, the idea of comparative capital ad- including China and Brazil (ibid.). Structural unem- vantage becomes less important because capital can move in search of absolute advantage. See the discussions in Section 4.4.1 ployment is also evident in ser vices, especially those —-1 and in Section 5.1.2.4 in Chapter 5. that can be outsourced, such as ICT and banking. To —0 —+1

561-45401_ch01_8P.indd 197 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 198

the extent that a country builds up a large trade defi - than the present, and we have a global economic di- cit, fueling a buying spree supported by credit- driven saster. purchases, structural unemployment may be delayed Finally, to return to the geopoliti cal arena, when- and may not be currently visible. The 2008 fi nancial ever a country holds a very large reserve of another crisis can be seen as a rude awakening in this regard. country’s currency, mischievous po liti cal actions China not only has greatly increased its share of may ensue, leading to interference in the other coun- manufacturing markets but also has become a very try’s internal affairs, straining international relations large market for the exports of other (especially and agreements, or even to economic subjugation Asian developing) countries (Kaplinsky 2005, p. 206). and war. Globalized trade needs to be evaluated along Paradoxically, the massive expansion of industrial many dimensions. capacity in China is destroying jobs (ibid., p. 208). It has also squeezed out many developing-country pro- 4.5 THE ROLE OF MULTINATIONAL ducers, especially in Latin America, the Carib be an, ENTERPRISES IN THE and sub-Saharan Africa (ibid., p. 167). Global capi- INTERNATIONAL ECONOMY tal has also shifted to Asia and, in partic u lar, to China (ibid., p. 209). Kaplinsky and Messner (2007, A discussion of globalized commerce would be in- p. 197) opine that “China is likely to become the sec- complete without a discussion of the role of multi- ond biggest economy in the world by 2016, and India national enterprises (MNEs), also referred to as the third largest by 2035. . . . The economic pro- multinational corporations (MNCs). The most cesses they engender are likely to radically trans- straightforward and least technical defi nition is perform regional and global economic, po liti cal, and haps that of Gilpin (2001, p. 278), who defi nes the social interactions and to have a major impact on the MNE as “simply, a fi rm of a partic u lar nationality environment.”* with partially or wholly owned subsidiaries within at Kaplinsky (2005, p. 240) concludes that “market least one other national economy.” forces alone, as the Washington Consensus proposes, will neither solve the problem of absolute poverty nor 4.5.1 MNEs and Neoclassical Economics result in a more equal world. On the contrary, they are likely to exacerbate both. . . . Thus to achieve a Gilpin (2001) offers an extensive overview of the dif- different outcome requires policies to promote and ferent schools of thought with respect to the role of sustain innovation.” For further policy discussions MNEs in the international economy. One key point related to technological, organ i za tion al, institutional, he makes is that despite the central role of MNEs in and social innovation, see Chapters 8 and 13 of this the international economy, mainstream economists work. have chosen to focus elsewhere. Gilpin (2001) pro- In summary, there are two perspectives on global- vides the reasons behind this observation. In his ization, poverty, and in e qual ity: (1) global poverty is view, economists the result of the failure of producers and nations to • have a strong belief in the primacy of markets and engage in globalized commerce, and (2) the global not in the importance of institutions; economy deepens global poverty for many produc- • believe that a fi rm’s behavior is determined pri- ers who are unable to compete effectively in a world marily by market variables, thus making its loca- of growing surplus capacity (Kaplinsky 2005, p. 208). tion selection of secondary importance; Add to the latter the artifi cial expansion of demand • assert (through the Mundell equivalency)† that by credit promotion and debt that encourages bor- trade and investment constitute perfect substitutes rowing from the future that is not likely to be better for one another, with trade preceding investment; • expect that production will be located where it is * Lee (2008) reinforces the views of Kaplinsky (2005) by most effi cient, in line with the theory of location and arguing that the successful integration of China and India into Ricardo’s theory of comparative advantage; and the global economy leaves little space for other developing nations to enter and succeed. While several developing nations could successfully pursue an export-led development strategy, if many developing nations followed suit, the same success is unlik- † The Mundell equivalency argues that trade in factors ley to be realized. Foreign direct investment (FDI) fl ows are un- of production, such as labor and capital, has essentially the same likely to be diverted from the two Asian giants now playing such effect as trade in goods. Hence exporting labor-intensive goods a large role in the global economy. The problem is compounded and importing capital-intensive goods is exactly the same as the -1— by the fact that there are potential limits to the growth of con- labor- abundant country exporting labor directly for capital (Gil- 0— sumer demand in developed countries (Lee 2008). pin 2001). +1—

561-45401_ch01_8P.indd 198 6/23/11 9:50 AM Globalization: Technology, Trade Regimes, Capital Flows, and the International Economy 199

• have chosen not to focus on MNEs because of cle theory, “Foreign direct investment is principally a methodological obstacles in the analysis of oligop- device used by fi rms to preempt foreign competition olistic fi rms in imperfect markets. and to maintain their monopoly rents.” However, this The last point is a crucial one. MNEs arise in the theory was largely a product of the 1960s, which saw context of market distortions. International manu- the primacy and overseas expansion of the American facturers, such as IBM, for instance, elect to invest in corporation. It did not account for a series of other many countries for reasons other than economics, variables, such as the erection of trade barriers, mar- such as good public relations. An interesting point ket proximity, falling transportation costs, and cur- that Gilpin (2001, p. 280) raises is that “some market rency risks (Gilpin 2001). [distortions] are created by national governments The eclectic school was developed by John Dun- through such policies as trade protection and indus- ning and carries the name of the University of Read- trial policy; in fact, a government sometimes creates ing in the United Kingdom. The central tenet of this market imperfections to encourage foreign [MNEs] theory is to emphasize the role of technology as a to invest in their economies. A notable example is the factor in MNE development (Gilpin 2001). Gilpin erection of trade barriers and the provisions of tax (p. 284) notes that “according to [the Reading school’s] breaks to encourage FDI. Without such [distortions], eclectic theory, the unique nature and extraordi- a fi rm might fi nd it more effi cient to export its prod- nary economic success of the [MNE] are due to par- ucts from its home economy[*], or to license its tech- tic u lar characteristics that give the [MNE] . . . nology to a foreign fi rm.” important advantages over purely domestic corpo- However, unlike most neoclassical economists, rations. These advantages are ownership, location, business economists, beginning from the 1960s, have and, most importantly, internalization. . . . These oli- attempted to put forward alternative theories of the gopolistic fi rms usually possess some proprietary or MNE. Gilpin (2001) focuses on three theoretical fi rm- specifi c advantage that they want to exploit contributions: rather than lose to a rival fi rm; such an internal advantage may be a trademark or possession of a partic- • Vernon’s product cycle theory u lar technology. Although some of the most important • The Reading school’s eclectic theory [MNEs] are not high- tech, it is not coincidental that • Porter’s strategic theory. many [MNEs] predominate in industries characterized by extensive and expensive research and develop- The main idea of Vernon’s product cycle theory is ment activities.” that every product follows a certain life cycle from in- Porter’s (1990) analysis largely departed from the novation through maturity to decline and to fi nal ob- analyses conducted by Vernon and by the Reading solescence (Gilpin 2001). According to Vernon (1971), school. According to Porter, it is the fi rm’s strategy American fi rms had a comparative advantage in that actually determines its structure and its location product innovation because of the signifi cant size of of economic activities. According to Gilpin (2001, the American market on the demand side and the p. 285): American superiority in R&D on the supply side. As Gilpin (2001, p. 282) notes, “During the initial phase Porter assumes that international business is charac- of the product cycle, fi rms export new products from terized by a value chain of activities ranging from their home industrial base, but in time, a number of extraction to production to marketing. The individual fi rm must decide which and how many of these changes associated with the maturing of the product— activities it wishes to pursue and in what locations such as standardization of production techniques— around the globe. These decisions in turn depend on diffusion abroad of industrial know-how, and creation the overall competitive strategy of the fi rm. . . . The of signifi cant foreign demand for the product ulti- essence of strategic management is that the transna- mately stimulate the entry of foreign imitators into tional fi rm has available to it more extensive options the market. To deter foreign fi rms from entering the and techniques than do even the largest domestic market and undercutting their monopoly position, the fi rms. These mechanisms include not only FDI, but original fi rms establish production facilities in other also strategic alliances, outsourcing component production, and licensing technologies. These economies.” Thus, according to Vernon’s product cy- corporate activities create international complexes or networks of corporate relations with the parent MNC in its home economy. Through modern information * Note, however, that this holds true only up to some technologies and monopoly of information resources, —-1 level of transportation costs, because proximity to suppliers can the multinational corporation can become dominant be an important consideration. —0 —+1

561-45401_ch01_8P.indd 199 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 200

over both its domestic and international competitors. • Strategic- asset- seeking (SAS) investment, which Needless to say, such a depiction of a fi rm’s strategy, aims to augment the existing set of assets through structure, and activities has evolved far beyond that merger and acquisition activities portrayed in Vernon’s product cycle model or even in [the Reading school’s] eclectic theory. [MNEs] have The effects of FDI, as studied in the literature, become worldwide institutions coordinating economic vary and include productivity spillover effects, clus- activities that are located in many countries. ter formation, and innovation, as well as a positive degree of correlation between FDI and real GDP growth rates. However, it proves to be signifi cantly 4.5.2 The Centrality of Foreign Direct Investment diffi cult to mea sure and quantify these effects. for Development As mentioned, one of the most studied and fre- quently cited effects of FDI is the effi ciency spill- MNEs expand outside the reality of the nation-state overs from MNEs to domestic fi rms in the host mainly through foreign direct investment (FDI). In country (Barrios, Dimelis, et al. 2002). MNEs are general, FDI occurs when the residents of one country usually characterized by the employment of a level acquire control over, or create, a business enterprise in of technology higher than that of domestic fi rms. another country. This acquisition may involve buying Furthermore, knowledge displays some characteris- enough stock in an existing enterprise to become a tics representative of those of public goods (Marku- controlling shareholder (10 percent of own ership), tak- sen 1995). This signifi es that there is a broad scope ing over the enterprise outright, or building a new fac- of potential positive externalities that fl ow from mul- tory or enterprise from scratch, including the purchase tinationals to domestic fi rms. Blomstrom and Kokko of real estate (Caves, Frankel, et al. 2006). (1998) identify three main channels of spillovers: There are two major types of FDI: (1) greenfi eld FDI and (2) mergers and acquisitions (M&A) FDI. 1. Movements of highly skilled staff from multina- Greenfi eld FDI refers to direct investment in new tional to domestic fi rms facilities or in the expansion of existing facilities, 2. “Demonstration effects” through complementary whereas M&A FDI is investment that takes the form production relationships between domestic and of acquisition of existing assets. Cross- border merg- foreign fi rms ers take place when resources and management of 3. Competition between multinationals and domes- fi rms from different countries are assembled in or- tic fi rms, which provides the fi rms with effi ciency der to create a new legal entity.* Cross- border acqui- and productivity incentives sitions refer to the transfer of control from a local However, these spillover effects are not omnipres- company to an MNE, with the local company be- ent in each economy in question and mainly depend coming an affi liate or branch of the MNE. on the sector and country under consideration. In Dunning (1993) distinguishes four distinct types their analysis, Blomstrom and Kokko (1998, p. 247) of FDI on the basis of the motives of the investing note that “the positive effects of foreign investment fi rm: are likely to increase with the level of local capability • Resource- seeking (RS) investment, in which TNCs and competition.” The internalization of spillovers focus on the exploitation of physical resources and from multinational fi rms thus largely depends on the labor differentials absorptive capacity of local fi rms. Hence only fi rms • Market-seeking (MS) investment, which usually with the technological abilities to absorb spillovers takes place in order to penetrate new markets or are expected to profi t from multinational operation defend existing markets (Georgopoulos and Pre- in the context of their sectors (Barrios, Dimelis, et usse 2006) al. 2002). Additionally, it is crucial to defi ne when a • Effi ciency- seeking (ES) investment, which builds fi rm is considered to be foreign in terms of measur- on existing fi rm activity (RS or MS) and aims at ing spillovers. An interesting example of this can be rationalizing the fi rm’s activities by optimizing the found in the analysis of Barrios, Dimelis, et al. (ibid., intrafi rm division of labor (Georgopoulos and Pre- p. 9), who, when estimating the effects of foreign usse 2006) and taking advantage of economies of presence in the productivity levels of the Greek mar- scale and scope and of the benefi ts of common ownership ket, found that “majority-held foreign fi rms [with more than 50 percent foreign own ership] may be more inde pen dent and hence more isolated from the * This constitutes what we have defi ned as “transnation- -1— alization” in contrast to “multinationalization.” host country environment, causing less technology 0— +1—

561-45401_ch01_8P.indd 200 6/23/11 9:50 AM Globalization: Technology, Trade Regimes, Capital Flows, and the International Economy 201

transfer.” In contrast, minority-held foreign fi rms host country policies and a basic level of develop- (with less than 50 percent foreign own ership) are ment . . . FDI triggers technology spillovers, assists likely to have more interaction with foreign and do- human capital formation, contributes to international mestic fi rms, increasing spillover effects. trade integration, helps create a more competitive Hence foreign own ership should not be consid- business environment, and enhances enterprise devel- ered merely a “relabeling” of fi rms but rather a “po- opment.” The authors conclude that all these effects tential transformation of the economy” (Barrell and contribute to higher levels of economic growth. On the Pain 1997, p. 1778), because these technological spill- whole, one can be quite confi dent that causality be- overs will affect not only productivity rates but also tween FDI and growth rates fl ows in both directions, innovation, R&D, and many other technologically with countries that grow quickly attracting increasing critical variables. volumes of FDI, and FDI leading to increasing real Furthermore, governments can employ clusters* GDP growth rates. both to become more successful in attracting FDI and to increase the economic value that FDI gener- 4.5.3 MNEs: Blessing or Peril? ates for their economies (Porter 1998). FDI fl ows seem to target existing or emerging cluster locations In Section 4.5.1, we noted that mainstream econo- instead of avoiding them (Ketels 2004). Empirical mists have mainly omitted MNEs from their analysis evidence suggests that attracting foreign companies because of modeling diffi culties and a different meth- through the existence of clusters at a national and/ odological focus. However, this has recently started or regional level not only generates direct benefi ts to change, mainly because of advances in industrial through job creation and wage increases but also or ga ni za tion and in strategic trade theory (Gilpin improves the quality of the location for the compa- 2001). In this growing area in the economic litera- nies that already participate in the cluster by im- ture, MNEs have increasingly been considered a proving the overall cluster business environment, means to reduce transaction costs, because vertical which will further attract foreign companies. This orga ni za tion through FDI might be less costly than strategy boosts continuous FDI attraction and helps market transactions (ibid.). avoid short-term arbitrage opportunities that desta- Many critics of globalization consider the role of bilize the economy. MNEs highly controversial, especially in the case of Nevertheless, although there is consensus that in- developing countries. Korten (2001) notes that the ward FDI has increased the growth rates of many de- international integration of economies through free veloping countries (Blomstrom, Lipsey, et al. 1994), trade has weakened the demo cratic accountability of less research has been conducted about the impact of governments through a transfer of power from soci- FDI on the economic perfor mance of developed coun- ety to global fi nancial institutions and corporations. tries, and specifi cally of those of the Euro pe an Union. Gilpin (2001, p. 286) cites Stephen Hymer’s radical An interesting study of the issue conducted by the theories, according to which “FDI was fundamen- OECD (2002, p. 5) notes that “given the appropriate tally different from portfolio investment and could be explained as part of a fi rm’s expansionist strategy and by its desire to control productive or other facili- * According to Porter (1998, pp. 215– 216), “A cluster is a geo graph i cally proximate group of interconnected companies ties in foreign countries.” Hymer considered what he and associated institutions in a partic u lar fi eld, linked by com- called “monopoly capitalism” to be driven by two monalities and complementarities. The geographic scope of a fundamental laws (Gilpin 2001): cluster can range from a single city or state to a country or even a network of neighboring countries. Clusters take varying forms • The law of increasing fi rm size: as fi rms grow in depending on their depth and sophistication, but most include size and scope, they should be expected to expand end-product or service companies; suppliers of specialized inputs, within and across national borders, creating a hier- components, machinery, and ser vices; fi nancial institutions; and fi rms in related industries. Clusters also often include fi rms in archical core/periphery structure and international downstream industries (that is, channels or customers); producers division of labor around the world. of complementary products; specialized infrastructure providers; • The law of uneven development: because of their government and other institutions providing specialized training, large size, mobility, and power, MNEs exercise education, information, research, and technical support (such as universities, think tanks, [and] vocational training providers); and control over and exploit the world to their own ad- standards setting agencies. Government agencies that signifi - vantage. cantly infl uence a cluster can be considered part of it. Finally, many clusters include trade associations and other collective pri- Indeed, MNEs today appear to be richer than vate sector bodies that support cluster members.” most countries in the developing world. As Stiglitz —-1 —0 —+1

561-45401_ch01_8P.indd 201 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 202

(2006, pp. 187– 188) notes, in 2004, the revenues of [MNEs] have been at the center of bringing the General Motors ($191.4 billion) surpassed the GDP benefi ts of globalization to the developing countries, of more than 148 countries, while in 2005, the reve- helping to raise standards of living throughout much nues of Wal- Mart ($285.2 billion) surpassed the of the world. They have enabled the goods of developing countries to reach the markets of the advanced GDP of sub-Saharan Africa. As their sizes suggest, industrial countries; modern corporations’ ability to these behemoths exert signifi cant po liti cal power. If let producers know almost instantly what international governments attempt to signifi cantly regulate their consumers want has been of enormous benefi t to both. activities or tax them, they threaten to relocate be- Corporations have been the agents for the transfer of cause “there is always another country that will wel- technology from advanced industrial countries to come their tax revenues, jobs, and [FDI]” (ibid., developing countries, helping to bridge the knowledge p. 188). Furthermore, on many occasions, MNEs have gap between the two. The almost $200 billion they channel each year in [FDI] to developing countries has acted in ways of disputed legality, undermining soci- narrowed the resource gap. Corporations have etal priorities in their quest for lower costs and brought jobs and economic growth to the developing higher profi ts. Stiglitz (2006) cites a series of such nations, and inexpensive goods of increasingly high cases, such as Nestlé’s campaign to persuade third- quality to the developed ones, lowering the cost of world mothers to use infant formula instead of breast living and so contributing to an era of low infl ation milk to feed their children, Bechtel’s attempt to priva- and low interest rates. tize Bolivia’s water, and Monsanto’s development of Ultimately, Gilpin (2001, 299) argues that “both seeds that grew into plants that produced seeds that extreme positions are exaggerations. Critics exagger- could not be replanted, thus forcing farmers to buy ate the evils of the MNEs and their role in the world new seeds each year. economy. Although some MNEs do exploit and dam- Indeed, Coffey (1996, p. 58) notes that “the inter- age the world, the MNE as an institution is benefi cial national division of labor has been largely regulated to many peoples worldwide; it is, for example, a major by the MNE through its decisions to invest or not source of capital and technology for economic devel- invest in partic u lar countries.” This assertion is de- opment. On the other hand, the proponents of the batable in the context of a series of countries, such as MNEs exaggerate their importance and overstate South Korea or Japan, for example, which permitted the internationalization of services and production. little equity ownership by foreign fi rms. However, it The nation- state remains the predominant actor in does point to the fact that the evolution of the inter- international economic affairs, and domestic econ- national economy is closely related to the changing omies are still the most important feature of the nature of MNEs. world economy.” However, although both of Hymer’s “laws” raise The fi nancial crisis of 2008 brought new attention important points, they seem exaggerated to some to the dominant position of MNEs in developing degree and disregard a series of positive effects em- countries, especially in the least developed countries anating from FDI, which we discussed in Section (LDCs) where local fi rms are at a competitive disad- 4.5.2. Because of increasing scrutiny of the activities vantage as a result of MNE’s better access to ad- of MNEs by stakeholders, they are increasingly vanced technologies, better technical fl exibility and adopting “at- home” environmental and labor prac- faster adaptive capacity to market changes, more tices in their foreign locations. For instance, Wal- available skilled labor and or gan i za tion al capabili- lace (1996, p. 73) sees that there is “much the [MNEs] ties and experience, operation at larger economies of can do to contribute to sustainable patterns of in- scale, production sharing with their other subsidiar- dustrialization in developing countries. In fi nancial ies, and additional features of modernization (South terms, direct investment in developing countries Centre 2010). [generally] exceeds offi cial development assistance. In spite of the mixed critiques, MNEs continue to Investors can bring industry- specifi c and more gen- come under great criticism for exploiting the envi- eral skills, and can potentially have a profound in- ronment and workers. Accidents such as the explo- fl uence on development. This potential can be sion at Bhopal, India, and the use of child labor in realized if it becomes the norm for (MNEs) to trans- Asia are memorable examples. The effects of their fer knowledge and skills, with an emphasis upon great fi nancial power have been recognized as being environmental issues, and to engage with wider so- in need of oversight, and in the fi nancial realm, ciety.” codes of good practice for projects fi nanced by MNEs -1— Along similar lines, Stiglitz (2006, p. 188), a fa- have emerged to address this concern (see Chapter 0— mous critic of present- day globalization, notes: +1—

561-45401_ch01_8P.indd 202 6/23/11 9:50 AM Globalization: Technology, Trade Regimes, Capital Flows, and the International Economy 203

12 for a fuller discussion of the Equator Principles all three.* The fi nancial architecture of Bretton and other vehicles for checking fi nance- related ac- Woods constructed a world of fi xed exchange rates tivities in developing countries). and low capital mobility. In that era, the IMF sanc- Beyond the harmful effects related to their in- tioned capital controls as a means to prevent cur- vestment activities, MNEs have come under direct rency crises and bank runs, which lent some level of scrutiny by the United Nations. More specifi cally, autonomy to governments by providing more power questions have been raised whether corporations have to monetary policy (Obstfeld and Taylor 2002). human rights obligations under national and inter- Nonetheless, by the late 1960s, it was diffi cult to national law (Cernic 2008). A 2003 attempt by the contain global capital in the confi nes of the nation- UN to adopt the UN Norms on the Responsibilities state. of Transnational Corporations and Other Business Key countries in the Bretton Woods system, such Enterprises with Regard to Human Rights5 was not as the United States and Germany, fearful of sluggish successful. In an interim report by John Ruggie, a growth and increased infl ation, respectively, proved special representative of the UN secretary general unwilling to accept the domestic policy implications on the issue of human rights and transnational cor- of maintaining a fi xed- exchange- rate regime. Even in porations and other business enterprises, it was con- the pre- 1970s world of low capital mobility, furious cluded that “states have a duty to protect against speculative attacks on the major currencies led to the human rights abuses by third parties,” and “evidence collapse of fi xed exchange rates. The “adjustable- peg” suggests that corporations operating in only one system of fi xed exchange rates was, to a large extent, country, and state- owned corporations, are often unstable. If a specifi c country faced economic diffi - worse offenders than their highly visible private sec- culties and it started to look as if the country would tor transnational counterparts” (ibid., pp. 4–5). The consider a devaluation of its currency, speculators fi nal report to the UN Human Rights Council con- would start selling its currency in anticipation. This cludes that “the corporate responsibility to respect would force the central bank of the country to raise [human rights] exists inde pen dently of States’ du- interest rates (which would worsen the slump), to de- ties,” recommended “due diligence,” and noted the value the currency, or to impose capital controls commonplace inadequacy of judicial mechanisms (Krugman 2009). After the system of fi xed exchange and remedies to address human rights abuses (Rug- rates was abandoned in March 1973, several major gie 2008, p. 1). countries no longer needed the capital controls that had been put in place in order to protect their monetary policy inde pen dence. That, along with the emer- 4.6 EVOLUTION OF FINANCIAL gence of enhanced communication technologies, made INSTITUTIONS the removal of capital controls imminent.† 4.6.1 Bretton Woods and Its Aftermath In general, we can distinguish between two broad types of capital controls. One category aims to con- In the aftermath of World War II, a new system of trol capital infl ows, while the other aims to control fi nancial architecture was created. The pillars of capital outfl ows. In West Germany, the controls in this system were initially put in place in 1944 during place by the early 1970s were designed to discourage a conference in Bretton Woods, New Hampshire. the acquisition of assets by foreign residents. The The head of the State Department’s delegation at German government prohibited the payment of Bretton Woods and subsequent secretary of state, Dean Acheson, described his participation at the 1944 conference as “being present at the creation.” * Fabella (2008) writes “China devalued the yuan by 40% in January 1994 and stayed with the old- fangled regime of It was in Bretton Woods that the International Mon- fi xed exchange- rates and capital controls to maintain an under- etary Fund (IMF) and the World Bank were created valued Yuan. That effectively burned portfolio investors and in the context of a new international fi nancial sys- cooled off the then-simmering asset-price bubble. That set of tem, where “never again” would a great depression policies, known otherwise as the ‘East Asian model’ and declared dead and buried by the braintrusts of Western banks, ef- occur. fectively kept the Mundell-Fleming ‘Unholy Trinity’ from Relevant to this discussion is the notion of the making a beachhead and saved China from the Asian Crisis con- Mundell-Fleming “unholy” trinity (Obstfeld and Tay- tagion.” † See also the discussion in Section 11.5 in Chapter 11 lor 2002): fi xed exchange rates, capital mobility, and on the limits of countries to use capital controls to restrict capital monetary in de pen dence. A country can choose to infl ows, if they have signed on to certain sections of the WTO’s have any two of these attributes, but it cannot choose Agreement on Trade in Services (GATS) relating to fi nancial —-1 services. —0 —+1

561-45401_ch01_8P.indd 203 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 204

interest from large bank deposits to nonresidents, rists seem to predict. Practice does not corroborate taxed new credits by nonresidents to German banks, the argument that investors have punished countries and prohibited nonresidents from buying German only when governments are following mistaken mac- bonds (Caves, Frankel, et al. 2006). The German gov- roeconomic policies. In many cases, large capital in- ernment was essentially trying to limit the fl ow of fl ows are succeeded by large capital outfl ows, with no capital from the United States to Germany, which signifi cant reasons appearing in the interim that was putting upward pressure on the mark as it put could justify such a shift (Caves, Frankel, et al. 2006). downward pressure on the dollar. The other reason In addition, if international capital controls are re- behind the imposition of such controls was that in the moved prematurely, massive capital infl ows might oc- fi xed- exchange- rate world of Bretton Woods, foreign cur internally. For instance, liberalization in Chile capital infl ow could result in the possible loss of con- resulted in a large trade defi cit fi nanced by a large trol of the money supply, because if a large volume of increase in domestic borrowing, thus leaving the foreign reserves fl owed in, the central bank of the country with an excessive level of debt throughout capital-receiving country might not be able to coun- the 1980s. ter the effects on the money supply, which could lead As with free trade, capital mobility has clear to infl ation. winners and losers. Investors are generally better off Gallagher (2010) has advocated for an expansion because they are offered an expanded portfolio of of vehicles to facilitate capital controls, even for investment options. On the other hand, increasing those countries that are somewhat restrained to do options for capital reduce those of labor, making it so (unless sanctioned by the IMF) by virtue of their less costly for capital to move than to comply with signing on to sections of the General Agreement on labor demands (Frieden 1991). Furthermore, accord- Trade in Services that liberalize certain fi nancial ing to Heckscher and Ohlin, increased capital mobil- services affecting infl ows of capital (see Section 11.5 ity will benefi t capital where it is abundant and hurt in Chapter 11). capital where it is scarce. It is argued that, as a rule, capital fl ows out of capital-rich countries, raising the return to (now- scarcer) local capital, and fl ows to- 4.6.2 The Benefi ts and Perils of Increased ward capital-poor countries, lowering the return to Capital Mobility local capital there. Hence capitalists in capital- rich In general, in a rapidly growing economy with a high countries in the developed world arguably have gained return to domestic capital, investment can be fi - from increased capital mobility, while the opposite nanced more cheaply by borrowing from abroad probably holds true for capitalists in capital-poor than from domestic savings alone. This is perhaps countries. the most signifi cant argument for fi nancial integra- However, despite the theoretical prediction that tion and increased capital mobility. Symmetrically, capital will move from more to less developed coun- investors in wealthier countries can sometimes earn tries, empirical observation suggests the opposite. higher rates of return (for a variety of reasons) by According to Raja (2008, p. 1): investing in emerging markets rather than investing The capital-poor developing world is lately export- domestically. Arguably, this pro cess of openness can ing more capital to developed countries than it further lead to everyone benefi ting from the oppor- receives. . . . In its Trade and Development Report tunity to diversify risks and dampen volatility. 2008 ( http:// www .unctad .org/ en/ docs/ tdr2008 _en .pdf), An additional argument in favor of capital infl ows UNCTAD said that the puzzle is all the more intrigu- is that letting foreign fi nancial institutions into a ing because many of these capital- exporting countries country with an underdeveloped fi nancial system have been achieving higher rates of investment and improves the effi ciency of domestic fi nancial mar- growth than those that rely on the standard economic model of net capital imports. . . . The beginning of the kets. Internationalized fi nancial markets foster a millennium saw the shift of developing countries as a competitive environment, making it more diffi cult group from net capital importers to net capital for overregulated and potentially ineffi cient domes- exporters. Indeed, since the Asian fi nancial crisis in tic institutions to operate as they did previously. Fi- 1997– 1998, capital has increasingly been fl owing nally, governments face the discipline of international “uphill”— from poor to rich countries. The magnitude capital markets in the event they make substantial of this new phenomenon has caused some observers to policy missteps in their domestic regulatory duties. conclude that some developing countries have been creating a global savings glut. The emergence of -1— Nevertheless, recent crises underline that fi nancial developing countries as net capital exporters contrasts 0— markets do not work as perfectly as economic theo- +1—

561-45401_ch01_8P.indd 204 6/23/11 9:50 AM Globalization: Technology, Trade Regimes, Capital Flows, and the International Economy 205

with expectations derived from standard growth to imports of tradable goods, thus dampening do- theories. These theories postulate that with open mestic growth]” (Rodrik and Subramanian 2008, capital markets, capital will fl ow from rich to poor p. 17). countries in order to exploit the higher expected rates Although FDI generally involves the transfer of of return on capital and bridge the “savings gap” in skills and technology, it “may or may not be accom- capital- scarce countries. The theories also predict that capital infl ows will spur economic growth. panied by a capital infl ow” (Rodrik and Subrama- However, . . . these predictions are not supported by nian 2008, p. 16). In fact, depending on the extent of developments over the past few years. Not only is constraints on expatriation of capital by MNCs, cap- capital fl owing “uphill,” but net capital- exporting ital outfl ows may well occur, giving rise to the criti- developing countries also tend to grow faster and cism that foreign investment causes money to fl ow invest more than those developing countries that from the South to the North rather than fulfi lling the receive net capital infl ows. Thus, higher rates of promise of the reverse. investment for diversifi cation and structural change do not always require current- account defi cits or net A theoretical assertion similar to the one made capital infl ows, as suggested by standard economic about capital in capital-rich countries could be made models. Indeed, many developing countries, particu- for labor in capital- poor countries— that in fact, capi- larly in Latin America, failed to achieve higher tal mobility empowers them by increasing investment productive investment under the mainstream ap- in labor- intensive activities— but Frieden (1991) ar- proach because the monetary and fi nancial policies gues that this argument is not clear- cut. Although the that attracted waves of capital infl ows also led to high Heckscher-Ohlin model might be useful with respect domestic fi nancing costs and to currency appreciation. to identifying long- term economic trends, it might [Finally], these developments also call into question another hypothesis of standard economic theory, not be the best tool for analyzing the near-term dis- namely that there is a close and positive relationship tributional effects of international capital move- between capital account liberalization and economic ments. Frieden (1991) identifi es a different conceptual growth. model for analyzing the winners and losers of fi nancial integration. His model follows a sectoral approach In a provocative essay, Rodrik and Subramanian to politi cal economy rather than a class-based ap- (2008) argue: proach like that of Heckscher and Ohlin. The model Financial globalization has not generated increased predicts that in the developed world, winners (and investment or higher growth in emerging markets. thus supporters) of fi nancial openness include the (ibid., p. 18) own ers and managers of fi nancial assets and multina- Countries that grow more rapidly are those that tional fi rms with internationally diversifi ed invest- rely less and not more on foreign capital; and in turn ments. On the other hand, participants in “specifi c” foreign capital tends to go to countries that experience not high, but low productivity growth. (ibid., p. 2) industries, especially those tied to a par tic u lar na- While some nations may be severely constrained by tional market, are among the losers from increased inadequate access to fi nance, others— and perhaps a capital mobility. In broad terms, the model indeed majority— are constrained primarily by inadequate predicts the patterns of po liti cal activity on the is- investment demand, due either to low social returns or sues in question. In the United States, for instance, to low private appropriability. (ibid., pp. 2– 3) the country’s fi nancial centers and its internation- In this case, the effect of fi nancial liberalization is to ally oriented nonfi nancial corporations were among boost consumption, not investment. If the goal of the major proponents of fi nancial deregulation. On aid is to boost consumption of essential goods, like the contrary, domestic manufacturing and farm in- food, drugs, and shelter, that is all well and good, terests have either been ambivalent or even hostile but fi nancial fl ows are not thereby likely to boost (ibid.). self- reliance or transform the domestic economic It is not only the outfl ow of capital from develop- system. ing economies, lowering available capital for invest- Furthermore, the authors observe: “There is a ment, that causes concern. High volatility of capital crucial difference between domestic and foreign fi - fl ows makes it diffi cult, if not impossible, to engage nance: improvements in the former depreciate the in longer- term industrial planning and investment real exchange rate [making export-oriented activi- (Gallagher 2010). Capital controls have been found ties more profi table], while improvements in the to stabilize short-term volatility and give government latter appreciate it [placing domestic producers of a chance to use other policies to improve the invest- tradable goods at more of a disadvantage relative ment picture and discourage capital outfl ows (Ostry, —-1 Ghosh, et al. 2010). —0 —+1

561-45401_ch01_8P.indd 205 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 206

4.6.3 Toward a New Bretton Woods? the driver’s seat, with Brazil, China, India, and South Africa demanding more infl uence. While developing The mainstream belief in fi nancial integration/liber- countries and NGOs are happier with the responses alization seems to have been shaken by recent events. of the UN (World Bank) institutions—which are re- The 2008 fi nancial crisis has led to an increasing garded as advocating for their situation, but also still number of voices demanding a more “fair” and “sta- regarded as not suffi ciently democratized—they are ble” international fi nancial system. We have reached not at all satisfi ed with the IMF which is regarded as a point where, as Wolf (2008a) emphasizes ambitious having gained infl uence over the UN (World Bank) leaders call for a new Bretton Woods. However, is a institutions. In recognition of the demands from de- new Bretton Woods attainable? Perhaps it is, but veloping economies for the IMF to modernize its gov- probably not under the “fi erce urgency of now.” The ernance system, in 2009 it committed to a shift of 5 original Bretton Woods agreement, despite having percent or more of quota shares from over- to under- been achieved during a period when the outcome of represented countries (G20 2009).* The long-term le- World War II was far from certain, was a product of gitimacy of the IMF will likely depend on whether two years of extensive preparation. It is not clear that developing nations feel they have been given a fair an agreement could actually be reached today on the voice in decision making. Interestingly, if the shift in exact nature of a novel fi nancial architecture. The quota shares to emerging and developing countries is Eu ro pe ans, through the statements of their national closer to seven percent, it would give this group a ma- governments, are pushing for the creation of new jority share of the quotas and perhaps signal a major global regulators for the international fi nancial sys- change in IMF governance (see Carrasco 2011). The tem. The Americans and the Chinese, however, de- 2008 fi nancial crisis has provided an opening for despite a change in administration in the fi rst case, veloping nations to obtain a greater voice in formu- should still be expected to be cautious about such a lating global economic and fi nancial policy (ibid.). development (Rachman 2008). In addition, it is very However, the extent to which their voices are heard unclear whether a country like China would accept will depend upon how willing multilateral organiza- changing its reserve accumulation policy to fi t the tions and key economic and fi nancial entities are to needs of the United States or the United Kingdom. fully democratizing their governance systems. There Another point is that multilateral institutions such is also the question of whose interests will really be as the IMF, the World Bank, and the UN were the promoted by emerging economies such as China product of America’s strength in 1944–1945. Gideon and India—those of developing or developed nations Rachman (2008, p. 22) suggests that “one of the rea- (ibid.). sons Bretton Woods worked was that the U.S. was What could a Bretton Woods II agreement con- clearly the most powerful country at the table, and so sist of? First, one needs to approach the subject with ultimately was able to impose its will on others, in- a certain degree of humility. As the Economist (2008) cluding an often- dismayed Britain.” Contrary to Rach- readily points out, “International fi nance cannot just man’s (2008) view that unlike the situation in 1944, be ‘fi xed,’ because the system is a tug- of- war be- the United States “lacks the power and the inclina- tween the global capital markets and national sover- tion to impose a new set of arrangements on the rest eignty.” In general, the most “globalized” component of the world,” the 2008 election of the Obama admin- of the international economy—fi nance— appears to istration perhaps represents a defi ning moment, be its weakest link. Some analysts have argued that where the realm of possibility appears signifi cantly the crisis we are facing is essentially the outcome of expanded, and the “soft power” of the United States the mismatch of international fi nancial markets and seems augmented. However, the interim election of national regulation and control measures (Frieden 2010 throws doubt on the possibility that the Obama 2006). Hence if a new comprehensive architecture administration can come to the table with suffi ciently were to be proposed, some version of a global fi nan- increased authority to forge a politi cally diffi cult cial regulator, or a global lender of last resort, would agreement. This, of course, also depends on the po liti- be vital. cal preferences of other advanced economies which are in fl ux. For a frank and critical description of the responses * The IMF generates most of its fi nancial resources through its quota subscriptions. Each IMF member country is of the developed countries and international fi nanc- assigned a quota based on its relative position in the world econ- ing institutions to the plight of the poor countries see omy. The quota allocated to a member determines its level of fi - -1— Gurtner (2010), who places the G20 over the G8 in nancial commitment to the IMF as well as its voting power and 0— access to IMF fi nancing. +1—

561-45401_ch01_8P.indd 206 6/23/11 9:50 AM Globalization: Technology, Trade Regimes, Capital Flows, and the International Economy 207

Today, noncoordinated national supervisors, in The emergence of signifi cant current-account im- some cases even state based, oversee regulated fi - balances constitutes an important variable of the cri- nancial fi rms, while the “shadow” fi nancial system* sis that needs to be taken into account in any policy is largely unregulated. International differences in prescription. In 2009, the aggregate excess of savings regulation led to what the Economist (2008) calls over investment in surplus countries was over $1.2 “regulatory arbitrage.” The big lesson of the crisis is trillion (IMF 2010b). The countries with the highest that policy makers did not understand the nature of savings were China ($297 billion), Germany ($163 the fi nancial system when they were engaging in billion), and Japan ($142 billion) (ibid.). These three extensive deregulation. Hence instead of just reregu- countries have one- half of the world’s savings. At lating domestically, the new administration should the same time, the big current- account defi cit coun- propose reforms of fi nancial structure and regula- tries were the United States (–$378 billion), Spain tion at both the domestic and the international level, (–$81 billion), Italy (–$67 billion), France (–$51 bil- with less speculation and more real investment. lion), Australia (–$43 billion), Canada (–$38 billion), Greece (–$37 billion), and India (–$35 billion) (ibid.). These seven countries represent around three 4.6.4 Steps toward a New Financial Architecture quarters of the world’s defi cits (ibid.). It is diffi cult to distinguish between the purely do- The sum of net foreign lending (gross savings mestic and the purely international in the policies less domestic investment) and the government and that will need to be adopted on behalf of the United private- sector fi nancial balances must be zero. In the States. In fact, in a world of free trade and low or case of the United States, the counterparts of net non ex is tent capital controls, a domestic fi scal expan- foreign lending were mainly fi scal defi cits, along with sion can, among other things, increase demand for government and house hold defi cits (Wolf 2008b). imports, which can signifi cantly help the prospects During recessions, the government defi cit increases of other economies. According to Frankel (2007), it and the private- sector defi cit retracts, with the exis- was the 1967–1972 U.S. fi scal expansion that led to, tence of a housing boom making huge house hold or at least accelerated, the crash of the Bretton defi cits possible in many of the defi cit countries men- Woods system in 1973. If monetary policy is essen- tioned (the United States, the United Kingdom, tially noncoordinated, then investors and specula- Spain, Australia, and others). However, at this point tors can move their capital to the countries with the of crisis, with house holds and businesses cutting back, highest interest rates for a given level of risk. Hence government defi cits are expected to explode. So, as a certain level of coordination, especially during Wolf (ibid., p. 3a) underlines, “This is the endgame times of crisis, needs to characterize both fi scal and for the global imbalances” because defi cits aimed at monetary policies. sustaining aggregate demand at a time of crisis will In this discussion, one needs to pay greater atten- be added to the fi scal costs of rescuing bankrupt tion to the specifi cs. The world, indeed, appears to banking systems. have run out of creditworthy private borrowers. Sooner or later, the willingness of surplus coun- Governments, through increased fi scal defi cits, can tries to absorb government paper and the liabilities play this role in the short run by replacing private- of central banks will reach a plateau. The probability sector borrowers. However, this does not constitute of facing a crisis will be particularly elevated. For a sustainable policy prescription. As Wolf (2008b, p. crisis to be averted, the private sector of the defi cit 3) notes, “If [current- account] surplus countries do countries will need to be able and willing to borrow, not expand domestic demand relative to potential or the economy must be rebalanced with stronger output, the open world economy may even break external balances and smaller domestic defi cits down.” (Wolf 2008b). Given the characteristics of the current crisis, an increase in private debt seems not only unrealistic but also lethal. Hence a U.S. expansion in * This is a term coined by Krugman (2009, p. 158). The net exports, which took place during recent years, shadow banking system consists of non-depository banks and must continue, a scenario that is not overly realistic, other fi nancial entities (such as investment banks and hedge funds) that provide fi nance/credit to the business sector. In 2007, given the recent dollar appreciation and the nature the credit provided by the traditional depository banking system of the global fi nancial downturn. (~$12 trillion) was less than that provided by market- based insti- The preceding analysis makes the case that the tutions (~$16 trillion) (Tobias and Shin 2009, p. 1). In 2008, the shadow banking system experienced a collapse in its lending ac- current fi nancial crisis is, to some extent, a by-product —-1 tivities, primarily due to the subprime mortgage crisis (ibid). of increasing current-account defi cits on behalf of —0 —+1

561-45401_ch01_8P.indd 207 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 208

the United States. Hence this signifi cant imbalance sitions. Increased transparency has the potential to will need to be alleviated in some way in order to reduce the tendency of very elevated levels of capital avert further global fi nancial turmoil. Unfortu- rushing into a country under favorable fi nancial con- nately, the probability that a country like the United ditions and fl owing out in times of stress. States will signifi cantly rebalance its current ac- Stronger banking systems are also essential. The count does not seem particularly realistic. Hence severity of the Asian fi nancial crisis of the 1990s was attention needs to shift on the other side of the equa- due to the fact that the currency crisis was associated tion. In normal times, current-account surpluses of with bank runs (Krugman and Obstfeld 2003). Had countries that follow mercantilist policies (for exam- the banking institutions been stronger, it is quite pos- ple, China, which keeps its currency artifi cially low sible that the situation would have been milder. A through foreign- currency intervention policies) or stronger banking system denotes a more closely regu- that are structurally mercantilist (for example, Ger- lated banking system with increased capital require- many and Japan, which have a chronic excess of out- ments in order to alleviate moral hazard on behalf of put over spending) can perhaps even be useful (Wolf the bank owners. As Gao Xiqing, president of the 2008a). However, in times of recession and insuffi - China Investment Corporation, underlines, “Thirty cient aggregate demand, these policies are perilous years ago, the leverage of investment banks was like and contractionary. 4- to- 1, 5- to- 1. Today it’s 30- to- 1. This is not just a It becomes more obvious, therefore, that surplus change of numbers. It’s a change of fundamental countries must expand domestic demand relative to thinking” (Fallows 2008, p. 27). Since the 1930s, com- potential output, or, in other words, spend more at mercial banks in the United States have been re- home in order to stabilize the global economy. Global quired to possess adequate capital, hold reserves of imbalances are hurting the international fi nancial liquid assets that can be quickly converted into cash, system, and it is in the interest of the surplus coun- and limit the types of investments they make, all in tries to be accommodating in their policy approach. return for federal guarantees in case of a crisis (Krug- After all, if the surplus countries do not act, they man 2008). Comparable regulation will need to be should not be surprised if the defi cit countries resort put in place for the shadow banking system as well. to protectionist measures in order to alleviate their This point is also made by Soros (2008), who makes troubles. The expansion program announced by the the case that variable margin requirements and Chinese government in early November 2008 is ex- minimal capital requirements that are meant to con- actly in that spirit (Wolf 2008c). Hence the immedi- trol the amount of leverage market participants ate way to deal with this challenge is to demand and can employ should also be instituted. He notes, coordinate a global fi scal stimulus in which the sur- “Central banks even used to issue guidance to banks plus countries will implement the biggest packages about how they should allocate loans to specifi c sec- (ibid.). tors of the economy. Such directives may be prefer- In addition to the aforementioned remedies, the able to the blunt instruments of monetary policy in fundamental reform of additional elements that combating irrational exuberance in partic u lar sec- made this crisis possible is essential. Krugman (2008, tors, such as information technology or real estate” p. 1) notes that “growing international capital fl ows (ibid., p. 2). However, in order to employ such re- set the stage for devastating currency crises in the quirements, fi nancial engineering should also be 1990s and for a globalized fi nancial crisis in 2008. regulated,* and new products should be registered The growth of the shadow banking system, without and approved by the appropriate authorities before any corresponding extension of regulation, set the they can be used. stage for latter- day bank runs on a massive scale. Finally, enhanced credit lines that nations could These runs involved frantic mouse clicks rather than draw from in the event of a credit crisis, adding to frantic mobs outside locked bank doors, but they their foreign-exchange reserves, would also help mod- were no less devastating.” erate the likelihood of having a credit crisis, along Therefore, a higher level of transparency in the with diminishing its potential effects in case such a fi nancial sector, and specifi cally in the shadow bank- crisis becomes unavoidable. ing sector, should be among the fi rst steps. Transpar- Returning to a world of low capital mobility nei- ency should be understood as the better provision of ther constitutes a politi cal reality nor is a develop- fi nancial information in a manner similar to the re- -1— quirement that corporations in the United States * Financial engineering refers to the creation of new fi - 0— provide accurate public reports of their fi nancial po- nancial instruments, such as derivatives. +1—

561-45401_ch01_8P.indd 208 6/23/11 9:50 AM Globalization: Technology, Trade Regimes, Capital Flows, and the International Economy 209

ment that nations should seek. The most realistic and have two fundamental effects: fi rst, it would reduce effective option would be the adoption of coordi- currency speculation by “throwing sand in the nated policies that would modify the composition of wheels” of the fi nancial system and perhaps make it capital infl ows rather than completely discouraging easier for governments to pursue their own mone- them. In general, the higher the reliance on foreign- tary and fi scal policies without excessive concern currency borrowing that is short term or intermedi- about the exchange rate; second, it would also raise ated through banks, the higher the probability of signifi cant amounts of revenue, which could be used having a crisis, because short-term fl ows are prone to for activities such as fi nancing development assis- moral hazard and asset mismatch (Krugman and Ob- tance or alleviating the debt of the developing world stfeld 2003). On the other hand, policies that would (Wolf 2004). Another use of the tax revenue could seek to shift the composition of capital infl ows, in- be to provide insurance in the form of, for example, stead of affecting their total level, would be signifi - a resolution fund that could be drawn upon in cantly benefi cial. These policies would include taxes the time of a future fi nancial crisis (IMF 2010a). or restrictions on short- term infl ows, along with a set Whether a form of Tobin Tax would indeed be ben- of measures that would create incentives for foreign efi cial is still debated (Crouse 2009). Economists direct investment and longer maturities. such as Martin Wolf think that it would actually be A success story in this regard is Chile. Chile im- a bad idea because, in his view, the tax would not posed a tax on infl ows in 1991. This tax took the prevent big jumps in exchange rates and, by reduc- form of a requirement that a percentage of any for- ing hedging activity, might eventually increase vola- eign borrowing be left in a non-interest- bearing de- tility (Wolf 2004). Others, such as investor George posit maintained at the central bank for up to one Soros, do not share this view and believe that some year. Additionally, a requirement was put in place variation of tax would actually be signifi cantly ben- that all FDI must remain in the country for at least efi cial (Soros 2001). In any case, “throwing sand in one year. These controls were successful in changing the wheels” is exactly one of the things that the fi - the composition of the capital infl ows to Chile in the nancial system seems to need right now, so any mea- 1990s in the direction of longer-term maturities while sure that proposes to do so should be thoroughly having a minimal effect on the total magnitude of examined. capital infl ows (Edwards 2000). Hence countries should aim for increased foreign direct investment 4.7 NOTES and long-term infl ows relative to debt and portfolio capital infl ows. Nevertheless, if such a policy is im- 1. Emory University, The Globalization Website, Global- plemented on a country- by- country basis, this will ization Theories, w w w . e m o r y . e d u / S O C / g l o b a l i z a t i o n / t h e o r i e s .html (accessed May 17, 2010). do little to avert a future crisis—it will only better 2. WTO, www .wto .org/ english/ docs _e/ legal _e/ legal _e .htm protect the set of countries that adopt such mea- #GATT94 (accessed May 11, 2010). sures, and only up to a certain degree. Policy coordi- 3. See Deere and Esty (2002), Hufbauer and Goodrich nation again appears to be at the epicenter. (2004), and Hufbauer and Schott (2007). 4. People-Centered Development Forum, History, www Another possibility that should be explored is the .pcdf .org/ About _PCDF/ history .htm (accessed May 17, 2010). adoption of a measure similar to what is now called 5. U.N. Doc. E/CN.4/Sub.2/2003/12/Rev.2 (2003). the “Tobin tax.” The Tobin tax, which was proposed by the late Nobel laureate James Tobin, essentially 4.8 ADDITIONAL READINGS entailed a very low tax imposed on each individual foreign currency transaction* This measure would Kaplinsky, R. (2005). Globalization, Poverty, and In e- quality: Between a Rock and a Hard Place. Cambridge, Polity Press. * In August 2009, the President of the British Financial Rodrik, Dani (2007). Globalization for Whom? One Eco- Ser vices Authority, Adair Turner proposed to the G20 the intro- nomics: Many Recipes. Prince ton, NJ, Prince ton Uni- duction of a fi nancial transactions tax that was not limited to versity Press: 237– 255. foreign fi nancial transactions. It was not seriously considered (cited in Gurtner 2010, paragraph 75). However, a year later, sixty nations proposed a tax on international currency transac- sion has supported the idea of a fi nancial transactions and a fi - tions during the UN MDG Summit (September 20–22, 2010) nancial activities tax (Europa, Commission Outlines Vision for (The Leading Group on Innovative Financing for Development, Taxing the Financial Sector, IP/10/1298, Brussels, October 7, www .leadinggroup .org, accessed January 8, 2011). While the 2010). Some argue, however, that an international FTT system is merits and structure of a fi nancial transactions tax (FTT) con- necessary since a regional system would be ineffi cient and may tinues to be debated by the international community, the idea is force trading outside of the covered area (Crouse 2009; UN Ad- —-1 gaining traction within the EU where the Eu ro pe an Commis- visory Group on Finance 2010). —0 —+1

561-45401_ch01_8P.indd 209 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 210

4.9 REFERENCES Cole, M. A. (2000). Trade Liberalisation, Economic Growth and the Environment. Cheltenham, Edward Elgar. Amsden, A. H. (1994). “Why Isn’t the Whole World Ex- Conca, K. (2002). Consumption and Environment in a perimenting with the East Asian Model to Develop? Global Economy. Confronting Consumption. T. Prin- Review of ‘The East Asian Miracle’.” World Develop- cen, M. Maniates, and K. Conca. Cambridge, MA, MIT ment 22(4): 627– 633. Press: 133– 153. Barrell, R., and N. Pain (1997). “Foreign Direct Invest- Costanza, R., J. Cumberland, et al. (1997). An Introduc- ment, Technological Change and Economic Growth tion to Ecological Economics. Boca Raton, FL, St. Lu- within Eu rope.” Economic Journal 107: 1770– 1786. cie Press. Barrios, S., S. Dimelis, et al. (2002). Effi ciency Spillovers Crouse, E. C. (2009). Look! Up in the Sky! It’s a Bird . . . from Foreign Direct Investment in the EU Periphery: A It’s a Plane . . . It’s the Tobin Tax! Is a Global Financial Comparative Study of Greece, Ireland and Spain. FE- Transactions Tax the World’s Next Economic Super- DEA Discussion Paper 2002- 02. hero? Available at SSRN: http:// ssrn .com/ abstract Benton, T., and M. Redclift (1994). Introduction. Social =1649572 (accessed Janruary 8, 2011). Theory and the Global Environment. M. Redclift and Daly, H. E. (1993). “The Perils of Free Trade.” Scientifi c T. Benton (Eds.) London, Routledge: 1– 27. American 269(5): 50– 54. Berger, S. (2006). How We Compete: What Companies Daly, H. E. (1999). “Globalization versus around the World Are Doing to Make It in Today’s Internationalisation—Some Implications.” Ecological Global Economy. Cambridge, MA, MIT Press. Economics 31: 31–37. Bhagwati, J. (1993). “The Case for Free Trade.” Scientifi c Deere, C., and D. C. Esty (2002). Greening the Americas: American 269(5): 42– 49. NAFTA’s Lesson for Hemispheric Trade. Cambridge, Blomstrom, M., and A. Kokko (1998). “Multinational MA, MIT Press. Corporations and Spillovers.” Journal of Economic Dicken, P. (1994). “The Roepke Lecture in Economic Ge- Surveys 12(3): 247– 277. Available at http:// onlinelibrary ography. Global-Local Tensions: Firms and States in .wiley .com/ doi/ 10 .1111/ 1467 -6419 .00056/ pdf (accessed the Global Space-Economy.” Economic Geography January 17, 2011). 70(2): 101– 128. Blomstrom, M., R. E. Lipsey, et al. (1994). What Explains Driesen, M. (2001). “What Is Free Trade? The Real Issue the Growth of Developing Countries? Convergence of Lurking behind the Trade and Environment Debate.” Productivity: Cross-National Studies and Historical Virginia Journal of International Law 41(Winter): 279– Evidence. W. J. Baumol, R. R. Nelson, and E. N. Wolff. 369. New York, Oxford University Press. Dunning, J. (1993). Multinational Enterprises and the Bordo, M. D., B. Eichengreen, et al. (1999). Is Globalization Global Economy. Reading, MA, Addison- Wesley. Today Really Different than Globalization a Hundred Economic Commission for Latin America and the Ca rib- Years Ago? NBER Working Paper 7195. Cambridge, be an (ECLAC) (2002). Globalization and Develop- MA, National Bureau of Economic Research. ment. Santiago, United Nations. Borghesi, S., and A. Vercelli (2003). “Sustainable Globali- Economist (2008). “Redesigning Global Finance.” Econ- sation.” Ecological Economics 44: 77– 89. omist, November 15. Carrasco, E. R. (2011). An Opening for Voice in the Edwards, S. (2000). Capital Flows and the Emerging Global Economic Order: The Global Financial Crisis Economies. Chicago, University of Chicago Press. and Emerging Economies. University of Iowa Legal Fabella, R. (2008). The Peso Appreciation and the Sus- Studies Research Paper 11- 05. Available at http:// pa tainability of Philippine Growth: Need We Worry? pers .ssrn .com/ sol3/ papers .cfm ?abstract _id = 1754690 # Discussion Paper 0803, Manila, the University of (accessed March 3, 2011). the Philippines. Available at www .econ .upd .edu .ph/ Caves, R., J. Frankel, et al. (2006). World Trade and Pay- respub/ dp/ pdf/ DP2008 -03 .pdf (accessed January 17, ments. Boston, Addison Wesley Longman. 2011). Cernic, J. L. (2008). Corporate Responsibility for Human Fallows, J. (2008). “Be Nice to the Countries That Lend Rights: A Critical Analysis of the OECD Guidelines You Money: Interview of Gao Xiqing.” Atlantic Monthly, for Multinational Enterprises. Libertas Working Paper December, p. 27. Available at http:// bassimalim .com/ 1/2008. Ljubljana, Slovenia, Pravni Institute for Eu ro- pictures/ pdf/ s _s _cfc9c96d -d742 -46df -8c8b pe an, Constitutional International Law and Law of -1c1260891904.pdf (accessed February 13, 2011). Economics. Faux, J. (2007). Globalization That Works for Working Charles, T., and F. Lehner (1998). “Competitiveness and Americans. Briefi ng Paper 179. Washington, DC, Eco- Employment: A Strategic Dilemma for Economic Pol- nomic Policy Institute. icy.” Competition and Change 3(1/2): 207– 236. Frankel, J. (2007). “Responding to Crises: Federal Re- Clegg, J. (1996). The Development of Multinational En- serve Policy in the Face of Crises.” Cato Journal 27(2): terprises. The Global Economy in Transition. P. W. 165– 178. Daniels and W. F. Lever. London, Addison Wesley Frieden, J. (1991). “Invested Interests: The Politics of Longman: 103– 134. National Economic Policies in a World of Global Coffey, W. J. (1996). The “Newer” International Division Finance.” I n t e r n a t i o n a l O r g a n i z a t i o n 45(4): 425– of Labour. The Global Economy in Transition. P. W. 451. Daniels and W. F. Lever. London, Addison Wesley Frieden, J. (2006). Global Capitalism: Its Fall and Rise in -1— Longman: 40– 61. the Twentieth Century. New York, W. W. Norton. 0— +1—

561-45401_ch01_8P.indd 210 6/23/11 9:50 AM Globalization: Technology, Trade Regimes, Capital Flows, and the International Economy 211

G20 (2009). Leaders’ Statement: The Pittsburgh Summit. Kleinknecht, A., and J. ter Wengel (1998). “The Myth of The Pittsburg Summit, September 24–25, Pittsburg. Economic Globalisation.” Cambridge Journal of Eco- Available at www .pittsburghsummit .gov/ mediacenter/ nomics 22: 637– 647. 129639 .htm (accessed March 5, 2011). Korten, D. C. (2001). When Corporations Rule the World. Gallagher, K. P. (2010). Policy Space to Prevent and Mit- San Francisco, Berrett- Koehler Publishers. igate Financial Crises in Trade and Investment Agree- Krugman, P. (2008). “What to Do?” The New York ments, G-24 Discussion Paper Series 58, May 2010. Review of Books 55(20): 1– 2 (electronic version). Intergovernmental Group of Twenty- four, United Na- Available at www .nybooks .com/ articles/ archives/ tions Conference on Trade and Development. 2008/dec/ 18/ what -to -do/ (accessed February 13, Georgopoulos, A., and H. Preusse (2006). “Eu ro pe an In- 2011). tegration and the Dynamic Process of Investments and Krugman, P. (2009). The Return of Depression Econom- Divestments of Foreign TNCs in Greece.” E u r o p e a n ics and the Crisis of 2008. New York, W. W. Norton. Business Review 18(1): 50– 59. Krugman, P., and M. Obstfeld (2003). International Eco- Gilpin, R. (2001). Global Po liti cal Economy: Understand- nomics: Theory and Policy. Boston, Addison- Wesley, ing the International Economic Order. Prince ton, NJ, World Student Series. Available at www .scribd .com/ Prince ton University Press. doc/ 7258029/ Krugman -and -Obstfeld -International Gordon, R. (1995). Globalization, New Production Sys- -Economics-Theory -and -Policy (accessed February 13, tems, and the Spatial Division of Labor. The New Divi- 2011). sion of Labor: Emerging Forms of Work Or ga ni za tion Lall, S. (2002). The Employment Impact of Globalisation in International Perspective. W. Littek and C. Tony. in Developing Countries. QEH Working Paper Series. New York, Walter de Gruyter: 161– 207. Geneva, International Policy Group (IPG) unit of the Greider, W. (1997). One World, Ready or Not: The Manic International Labour Offi ce (ILO). Logic of Global Capitalism. New York, Simon and Lee, E. (1996). “Globalization and Employment: Is Schuster. the Anxiety Justifi ed?” International Labour Review Gurtner, B. (2010). The Financial and Economic Crisis 135(5): 485– 497. and Developing Countries. International Policy Devel- Lee, E. (2008). Harnessing Globalization for Develop- opment Series. Available at http:// poldev .revues .org/ 144 ment: Opportunities and Obstacles. Geneva, Interna- (accessed December 21, 2010). tional Institute for Labour Studies, International Labour Hart, S., and M. B. Milstein (1999). “Global Sustainability O r g a n i z a t i o n . and the Creative Destruction of Industries.” Sloan Lewis, W. A. (1954). Economic Development with Unlim- Management Review 41(1): 23– 33. ited Supplies of Labour. The Economics of Underdevel- Held, D., and A. McGrew, Eds. (2002). The Global Trans- opment (1958). A. N. Agarwala and S. P. Singh. Oxford, formations Reader: An Introduction to the Globaliza- Oxford University Press. tion Debate. Malden, MA, Polity Press. London, T., and S. L. Hart (2004). “Reinventing Strate- Hirst, P., and G. Thompson (2002). Globalization in gies for Emerging Markets: Beyond the Transnational Question, 2nd ed. Cambridge, Polity Press. Model.” Journal of International Business Studies 35: Hufbauer, G. C., and B. Goodrich (2004). Free Trade 350– 370. Agreements: US Strategies and Priorities. Washington, Lopatin, J. (2004). Environmental Justice Case Study: DC, Peterson Institute. Union Carbide Gas Release in Bhopal, India. Available Hufbauer, G. C. and J. Schott, J. (2007). “NAFTA Revis- at www .umich .edu/ %7Esnre492/ lopatin .html (accessed ited.” Policy Options: 83– 88. April 8, 2006). International Monetary Fund (IMF) (2010a). A Fair and Markusen, J. R. (1995). “The Boundaries of Multinational Substantial Contribution by the Financial Sector. Final Enterprises and the Theory of International Trade.” Report for the G-20. Washington, DC, International Journal of Economic Perspectives 9: 169– 189. Monetary Fund. Marshall, D. D. (1996). “National Development and the IMF (2010b). World Economic Outlook (WEO) Data- Globalisation Discourse: Confronting ‘Imperative’ and base. Washington, DC, IMF. Available at www .imf .org/ ‘Convergence’ Notions.” Third World Quarterly 17(5): external/ pubs/ ft/ weo/ 2010/ 02/ weodata/ index .aspx (ac- 875–901. cessed February 12, 2011). Morris, D. (2001). Free Trade: The Great Destroyer. The Judt, T. (2005). “Eu rope vs. America.” New York Review Case against the Global Economy: And for a Turn to- of Books 52(2): 37– 41. wards the Local. J. Mander and E. Goldsmith. London, Kaplinsky, R. (2005). Globalization, Poverty, and In e- Earthscan: 115– 124. quality: Between a Rock and a Hard Place. Cambridge, Mowery, D. C., and N. Rosenberg (1989). Technology and Polity Press. the Pursuit of Economic Growth. Cambridge, Cam- Kaplinsky, R., and D. Messner (2007). “Introduction: The bridge University Press. Impact of Asian Drivers on the Developing World.” Muradain, R. (2004). Economic Globalisation and the World Development 36(2): 197– 209. Environment. Internet Encyclopaedia of Ecological Kaplinsky, R., and M. Morris (2007). “Do the Asian Driv- Economics. International Society for Ecological Eco- ers Undermine Export- Oriented Industrialization in nomics. SSA [Sub-Saharan Africa]?” World Development 36(2): Najam, A., and N. Robins (2001). “Seizing the Future: 254– 273. The South, Sustainable Development and International —-1 Ketels, C. (2004). Interview. FDI Magazine, June 2. Trade.” International Affairs 77: 49– 67. —0 —+1

561-45401_ch01_8P.indd 211 6/23/11 9:50 AM Technology, Globalization, and Sustainable Development 212

Obstfeld, M., and A. Taylor (2002). Globalization and Ruggie, J. (2008). Promotion and Protection of All Human Capital Markets. NBER Working Paper 8846. Cam- Rights, Civil, Politi cal, Economic, Social and Cultural bridge, MA, National Bureau of Economic Research. Rights, Including the Right to Development: Protect, Olson, M. (1982). The Rise and Decline of Nations: Eco- Respect and Remedy; a Framework for Business and nomic Growth, Stagfl ation, and Social Rigidities. New Human Rights. Report of the Special Representative of Haven, CT, Yale University Press. the Secretary-General on the issue of human rights Organisation for Economic Co- operation and Develop- and transnational corporations and other business en- ment (OECD) (1994). The Environmental Effects of terprises. New York, UN Human Rights Council. Trade. Paris, OECD. Saha, S. K. (2002). Theorising Globalisation and Sustain- OECD (1997). Economic Globalization and the Environ- able Development. Globalisation and Sustainable De- ment. Paris, OECD. velopment in Latin America: Perspectives on the New OECD (2002). Foreign Direct Investment for Develop- Economic Order. S. K. Saha and D. Parker (Eds.). Chel- ment: Maximizing Benefi ts, Minimizing Costs. Com- tenham, Edward Elgar: 13– 50. mittee on International Investments and International Schmidheiny, S. (1992). Changing Course: A Global Busi- Enterprises (CIME). Paris, OECD. Available at www ness Perspective on Development and the Environment. .oecd.org/ dataoecd/ 47/ 51/ 1959815 .pdf (accessed Febru- Cambridge, MA, MIT Press. ary 13, 2011). Scott, R. (2002). “Globalization and Employment” Paper Ostry, J. D., A. R. Ghosh, et al. (2010). Capital Infl ows: The presented at the MIT Symposium on Exploring the Role of Controls. IMF Staff Position Note, SPN/10/04. Many Dimensions of Sustainable Development, Cam- Washington, DC, International Monetary Fund. bridge, MA, MIT. Pierrakakis, Kyriakos (2009). The Sustainable Growth Soros, G. (1997). “The Capitalist Threat.” Atlantic Monthly Paradigm: Implications for Technology and Policy. 279(2): 45– 58. Masters thesis, Technology and Policy Program. Cam- Soros, G. (2001). Keynote Address, Asia Society Hong bridge, MA, MIT. Kong Center, 11th Annual Dinner. Porter, M. E. (1986). Competition in Global Industries: A Soros, G. (2002). George Soros on Globalization. New Conceptual Framework. Competition in Global Indus- York, Public Affairs. tries. M. E. Porter. Cambridge, MA, Harvard Business Soros, G. (2008). “The Crisis and What to Do about It.” School Press: 15– 60. New York Review of Books 55(19): 1– 4 (electronic ver- Porter, M. E. (1990). The Competitive Advantage of Na- sion). Available at www .nybooks .com/ articles/ archives/ tions. New York, Free Press. 2008/dec/ 04/ the -crisis -what -to -do -about -it/ (accessed Porter, M. E. (1998). On Competition. Boston, Harvard February 13, 2011). Business School Press. South Centre (2010). The Impact of the Global Economic Prahalad, C. K., and S. L. Hart (2002). “The Fortune at the Crisis on the Industrial Development of the Least De- Bottom of the Pyramid.” Strategy + Business (26): 2– 14. veloped Countries. Research Paper 28, May. Available Princen, T. (2002). Distancing: Consumption and the Sev- a t h t t p : / / c i t e s e e r x . i s t . p s u . e d u / v i e w d o c / d o w n l o a d ? d o i ering of Feedback. Confronting Consumption. T. Prin- = 10 .1 .1 .168 .3265 & rep = rep1 & type = pdf (accessed De- cen, M. Maniates, and K. Conca. Cambridge, MA, MIT cember 21, 2010). Press: 103– 131. Speth, J. G. (2003). Two Perspectives on Globalization Rachman, G. (2008). “The Bretton Woods Sequel Will and the Environment. Worlds Apart: Globalization and Flop.” Financial TimesI 19(November 11): 22. the Environment. J. G. Speth. Washington, DC, Island Raja, K. (2008). “The Paradox of Capital Flows from Press: 1– 18. South to North.” The second part of a two- part article Stiglitz, J. (2002). Globalization and Its Discontents. New on the Trade and Development Report 2008. See United York, W. W. Norton. Nations Conference on Trade and the Environment, Stiglitz, J. (2006). Making Globalization Work. New York, Trade and Development Report, 2008: Commodity W. W. Norton. Prices, Capital Flows and the Financing of Investment. Streeten, P. (2001). Globalisation: Threat or Opportunity? Available at www .unctad .org/ en/ docs/ tdr2008 _en .pdf Handelshojskolens Forlag, Copenhagen, Copenhagen (accessed February 13, 2011). Business School Press. Rees, W. E., and L. Westra (2003). When Consumption Tobias, A. and H. S. Shin (2009). The Shadow Banking Does Violence: Can There Be Sustainability and Envi- System: Implications for Financial Regulation. Staff Re- ronmental Justice in a Resource- Limited World? Just port 382. New York, Federal Reserve Bank of New York. Sustainabilities: Development in an Unequal World. J. Todaro, M. P., and S. C. Smith (2009). Economic Develop- Agyeman, R. D. Bullard, and B. Evans. Cambridge, ment. 10th ed. Boston, Addison- Wesley. MA, MIT Press: 99– 124. United Nations Advisory Group on Finance (2010). Work Reid, D. (1995). Sustainable Development: An Introduc- Stream 5 on Financial Transaction Tax (FTT). New tory Guide. London, Earthscan. York, UN Advisory Group on Finance. Rodrik, D. (2007). One Economics, Many Recipes: Glo- United Nations Economic and Social Council (ECOSOC) balization, Institutions, and Economic Growth. Prince- (2003). Norms on the Responsibilities of Transnational ton, NJ, Prince ton University Press. Corporations and Other Business Enterprises with Re- Rodrik, D., and A. Subramanian (2008). Why Did Finan- gard to Human Rights. Doc. E/CN.4/Sub.2/2003/12/ cial Globalization Disappoint? Unpublished manu- Rev.2. Geneva, Offi ce of the United Nations High Com- -1— script, Cambridge, MA, Harvard University. missioner for Human Rights, United Nations. Available 0— +1—

561-45401_ch01_8P.indd 212 6/23/11 9:50 AM Globalization: Technology, Trade Regimes, Capital Flows, and the International Economy 213

at www .unhchr .ch/ huridocda/ huridoca .nsf/ %28Symbol Whitford, J. (2006). The New Old Economy: Networks, %29/E .CN .4 .Sub .2 .2003 .12 .Rev .2 .En (accessed Febru- Institutions, and the Or gan i za tion al Transformation of ary 31, 2011). American Manufacturing. Oxford, Oxford University Vernon, R. (1971). Sovereignty at Bay. New York, Basic Press. Books. Wolf, M. (2004). In Defense of Globalization. New Haven, Voisey, H., and T. O’Riordan (2001). Globalization and CT, Yale Nota Bene Books. Localization. Globalism, Localism and Identity. T. Wolf, M. (2008a). Fixing Global Finance. Baltimore, O’Riordan. London, Earthscan: 25– 42. Johns Hopkins University Press. Wallace, David. (1996) Sustainable Industrialization. Lon- Wolf, M. (2008b). “Global Imbalances Threaten the Sur- don, Earthscan Publications/Royal Institute of Interna- vival of Liberal Trade.” Financial Times, December 2, tional Affairs. p. 3. Warf, P., and S. Kull (2002). Tepid Traders: US Public Wolf, M. (2008c). “Obama’s Economic Challenges.” Fi- Attitudes on NAFTA and Free Trade Expansion. nancial Times, November 11. NAFTA in the New Millennium. E. J. Chambers and P. World Commission on the Social Dimension of Globaliza- H. Smith. Edmonton, University of Alberta Press: tion (WCSDG) (2004). A Fair Globalization: Creating 214– 238. Opportunities for All. Geneva, ILO Publications.

—-1 —0 —+1

561-45401_ch01_8P.indd 213 6/23/11 9:50 AM