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One of the most influential trade theorists of his generation, Jagdish Bhagwati is a professor of economics at Columbia University and a Senior Fellow in International Economics at the Council[…]

Planning for panic.

Jagdish Bhagwati: If I had to choose one, let me choose it in the area in which I have written quite a bit and taught quite a bit. It’s about globalization. There is a weak underbelly as it were. And that has to do with capital flows. It’s in my book “In Defense of Globalization.” I have a separate chapter on capital flows.

Capital flows, we still really don’t know – in an interdependent system where capital can move very fast – what we can do if suddenly panic materializes. Right now – in fact as we talk – we’re on edge as a result of the subprime lending and so on. In international capital flows, there’s always this continuous anxiety – no matter what people say in public who are involved in it – as to whether one day something will break up the system. And there’s no way to feel completely secure about it.

That is something I wrote at the time of the East Asian financial crisis in foreign affairs. It was called “The Capital Myth,” and I was simply saying that with trade, of course there can be problems; but they’re minor problems. Like if I exchange my toothbrush for your toothpaste. And if we remember to brush our teeth, we will both look rather good, right? And the probability of our teeth being knocked out in the process of exchange is rather small. There’s nothing _________ life.

But with the analogy for capital flows, it’s like with fire. Fire can be used to turn raw meat into a wonderful steak. But it can also burn your house down. And that is the worry. And I think we really haven’t scorched that. I don’t know whether one ever can, and that remains today with very rapid flows of capital __________; with people continuously playing, and with people unscrupulously ________ advantage.

For instance George Soros was asked, why did you bet against the Malaysian currency. ______ was mad as hell, so mad that he made some anti-Semitic slurs which are totally uncalled for. I don’t even know if George Soros is a practicing Jew. But it was such a crazy thing to say. But he had a point about George Soros himself. Leave my currency alone.

So George Soros eventually said look, I believe there should be control. _________capital flows are a problem. But as long as they are possible, I’m going to make money out of it.

Now there are many people who don’t care. George cares; but you know if there is money to be made he will make it until the system changes.

And then there’s the rest of us. This I do worry about, and this is the most important problem because multinational investments, trade, even migration, we are beginning to learn how to handle that. And I think some of the evolutionary thinking there, we want to manage it between _________.

It’s moving in the right direction, in my view. And international patents and so on. And letting generic drugs develop, that has also moved along the way.

So the only place where I don’t think anybody can reassure me actually, because it’s not possible right now. All we can do is whistle in the dark and hope nothing will happen, which is exactly where we are on the emerging crisis, which I hope will disappear. But it’s only a hope. It’s not an expectation.


Recorded On: Aug 14, 2007