Professor Bhagwati's innovative and wide-ranging contributions to trade theory and development economics have, in Paul Samuelson's words, ushered in "the Age of Bhagwati." Bhagwati has now become a passionate advocate for righting wrongs in the economic policies of both industrial and developing countries, writing extensively on this subject in the popular press. Like Bhagwati's earlier work of the same genre, the present volume is addressed to nonspecialist readers. Presented with clarity, humor, and a light touch, the essays educate readers about complex economic issues and the significance of economic policies that affect their well-being.
Bhagwati deals with several themes, but his central conception is that "the best economy and better society . . . combined both markets and democracy." This implies free trade and freedom of choice in economics and politics and less state interference in economic activity.
By far the most novel theme, and one with far-reaching implications in today's integrated world, is the "asymmetry between the case for free trade and the case for free capital mobility." Bhagwati points out that liberalizing trade and freeing up capital, particularly short-term capital, are distinct activities and that economists and policymakers have erred in treating them as identical. While restrictions on trade in goods will yield efficiency losses, the same cannot be said of capital mobility, because capital flows are often characterized by what economic historian Charles Kindleberger called "panics" and "manias." Bhagwati refers to a voluminous body of evidence showing that while free trade has led to immense efficiency gains across countries, capital mobility does not benefit developing countries unless their financial systems are well developed and their regulatory mechanisms well honed. He is critical of the U.S. administration for its role in influencing the IMF to press for rapid capital account convertibility in emerging and other developing countries. Bhagwati's critique presumably resulted in the IMF's softening of its stance on capital account convertibility over the past two years.
Choosing from a plethora of explanations of the East Asian "miracle," Bhagwati convincingly demonstrates that this phenomenon could be attributed to these countries' pursuit of an export promotion strategy, which led to a sharp rise in investment. He gives short shrift to other, facile theories—for example, that East Asia's growth was purely the consequence of capital accumulation and not technical change (Paul Krugman) or that its explanation lies in the industrial policy of "getting prices wrong" (Alice Amsden and Robert Wade). Bhagwati's analysis challenges the theory that the 1997 East Asian financial crisis was caused by cronyism and, at the same time, makes a meaningful distinction between "rent-creating corruption" and "profit-sharing corruption." The latter, he says, together with the outward orientation of economic policies, propelled East Asia's rapid and sustained growth.
Bhagwati discusses the "reversal of roles," which refers to the way policymakers, politicians, and the so-called spokespeople of civil society often change their positions in policy debates about globalization. During the 1950s and 1960s in industrial countries, such groups publicly sang the praises of open economies, free trade, and a liberal international economic order. In the 1990s, however, they denounced free trade with equal aplomb, arguing that trade with poor countries would produce more poor at home. Bhagwati demolishes this "pauperization" bogey, which he says was spread by the Clinton administration and U.S. politicians. In contrast, during the 1950s and 1960s, intellectuals and politicians in developing countries subscribed to the "malign neglect and malign intent views of trade and investment interactions with the world economy." By the 1990s, their earlier fears about free trade had dissipated, partly because of the perceived successes of the East Asian economies and partly because of the policy conditions attached to financial assistance from the IMF and the World Bank, which encouraged borrowing countries to open their economies and liberalize trade.
This volume shows to advantage Bhagwati's rapier-like wit, amazing command of language (reminiscent of John Maynard Keynes), insight into the innards of social and political processes, and abiding concern for human welfare. The book also testifies to the validity of his statement that "economics is literature with immediacy of experience." He seems to be asking myopic politicians and fear-mongering nongovernmental organizations the world over to shape up, echoing the main character in Philip Roth's Sabbath's Theater: "You can be young once but you can be immature forever." Bhagwati clearly enjoyed writing this book, and readers will certainly take pleasure in reading it.
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