Book reviews and notes

The Wind of the Hundred Days How Washington Mismanaged Globalization

Jagdish Bhagwati

Cambridge, Massachusetts, MIT Press, 2000, xxiv + 383 pp., $32.95 (cloth).

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...