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Spring 2004
Globalization's Missing Middle
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The benefits of free trade, however, just have not materialized for middle-income countries (with per-capita incomes between $1,000 and $10,000). Notwithstanding the promises made by the Washington consensus and the rhetoric of reformist governments, tariff reductions and freer finance have only been accompanied by stagnant growth and rising inequality particularly in Latin America, but in the post-communist countries as well. This is globalization's missing middle.

Liberalization's supporters respond to the mismatch between the hype and the reality of globalization in middle-income countries with a plea for patience. But this "just wait" optimism belies the fact that global markets have placed the middle-income world in a no-win trap from which it will be hard to escape. These economies cannot hope to compete today with the West; their basic strategy has been to try instead to compete with the Chinas of the world. This has ended up only hurting workers whose wages have been cut, but not by the enormous magnitudes that would be necessary to make the middle-income countries competitive in mass-produced manufacturing and standardized services.

Teching-up rather than dumbing-down is clearly a better long-term strategy for these countries. But it will take decades to reap the benefits and the political costs of globalization's failings are already large and mounting. The European Union's response has been to open itself to new members from central and eastern Europe.

But populist backlashes against globalization and America are increasingly widespread in Mexico and other Latin American nations. If the U.S. wants to change political and economic realities south of the border, it cannot simply propose more free-trade agreements. The U.S. must recognize that these countries can't hope to compete in the knowledge economy until education levels, physical infrastructure and property rights more closely resemble those in the Western world. The role for "smart" development assistance, from the U.S. and the international financial institutions, should be clear. But the U.S. will also have to use soft power to help heal the wounds in countries that have been burned before by unfulfilled promises about the benefits of globalization.

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