Dean Baker - Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer

In winter 2016, near the peak of Bernie Sanders bid for the Democratic presidential nomination, a new line became popular among the nations policy elite: Bernie Sanders is the enemy of the worlds poor. Their argument was that Sanders, by pushing trade policies to help U.S. workers, specifically manufacturing workers, risked undermining the well-being of the worlds poor because exporting manufactured goods to the United States and other wealthy countries is their path out of poverty. The role model was China, which by exporting has largely eliminated extreme poverty and drastically reduced poverty among its population. Sanders and his supporters would block the rest of the developing world from following the same course.

This line, in its Sanders-bashing permutation, appeared early on in Vox, the millennial-oriented media upstart, and was quickly picked up elsewhere (Beauchamp 2016). After all, it was pretty irresistible. The ally of the downtrodden and enemy of the rich was pushing policies that would condemn much of the world to poverty.

The story made a nice contribution to preserving the status quo, but it was less valuable if you respect honesty in public debate.

The problem in the logic of this argument should be apparent to anyone who has taken an introductory economics course. It assumes that the basic problem of manufacturing workers in the developing world is the need for someone who will buy their stuff. If people in the United States dont buy it, then the workers will be out on the street and growth in the developing world will grind to a halt.

In this story, the problem is that we dont have enough people in the world to buy stuff. In other words, there is a shortage of demand. But is it really true that no one else in the world would buy the stuff produced by manufacturing workers in the developing world if they couldnt sell it to consumers in the United States? Suppose people in the developing world bought the stuff they produced raising their living standards by raising their own consumption.

That is how the economics is supposed to work. In the standard theory, general shortages of demand are not a problem. Economies adjust so that shortages of demand are not a problem.

In this standard story (and the Sanders critics are people who care about textbook economics), capital flows from slow-growing rich countries, where it is relatively plentiful and so gets a low rate of return, to fast-growing poor countries, where it is scarce and gets a high rate of return ( Figure 1-1 ).

FIGURE 1-1

Theoretical and actual capital flows

Source and notes: See text.

So the United States, Japan, and the European Union should be running large trade surpluses, which is what an outflow of capital means. Rich countries like ours should be lending money to developing countries, providing them with the means to build up their capital stock and infrastructure while they use their own resources to meet their peoples basic needs.

This wasnt just theory. That story accurately described much of the developing world, especially Asia, through the 1990s. Countries like Indonesia and Malaysia were experiencing rapid annual growth of 7.8 percent and 9.6 percent, respectively, even as they ran large trade deficits, just over 2 percent of GDP each year in Indonesia and almost 5 percent in Malaysia.

These trade deficits probably were excessive, and a crisis of confidence hit East Asia and much of the developing world in the summer of 1997. The inflow of capital from rich countries slowed or reversed, making it impossible for the developing countries to sustain the fixed exchange rates most had at the time. One after another, they were forced to abandon their fixed exchange rates and turn to the International Monetary Fund (IMF) for help.

Rather than promulgating policies that would allow developing countries to continue the textbook development path of growth driven by importing capital and running trade deficits, the IMF made debt repayment a top priority. The bailout, under the direction of the Clinton administration Treasury Department, required developing countries to switch to large trade surpluses (Radelet and Sachs 2000, ONeil 1999).

The countries of East Asia would be far richer today had they been allowed to continue on the growth path of the early and mid-1990s, when they had large trade deficits ( Figure 1-2 ). Four of the five would be more than twice as rich, and the fifth, Vietnam, would be almost 50 percent richer. South Korea and Malaysia would have higher per capita incomes today than the United States.

In the wake of the East Asia bailout, countries throughout the developing world decided they had to build up reserves of foreign exchange, primarily dollars, in order to avoid ever facing the same harsh bailout terms as the countries of East Asia. Building up reserves meant running large trade surpluses, and it is no coincidence that the U.S. trade deficit has exploded, rising from just over 1 percent of GDP in 1996 to almost 6 percent in 2005. The rise has coincided with the loss of more than 3 million manufacturing jobs, roughly 20 percent of employment in the sector.

There was no reason the textbook growth pattern of the 1990s could not have continued. It wasnt the laws of economics that forced developing countries to take a different path, it was the failed bailout and the international financial system. It would seem that the enemy of the worlds poor is not Bernie Sanders but rather the engineers of our current globalization policies.

FIGURE 1-2

Per capita income of East Asian countries, actual vs. continuing on 1990s growth path