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Journalist and Pulitzer Prize winner Thomas L. Friedman identifies different bases for the recent process of globalization.

Journalist and Pulitzer Prize winner Thomas L. Friedman locates the underlying force of globalization in the fundamental human need for sustenance. The motivation behind globalization comes from the basic human desire for prosperity.

But, what is the link between the complex process of globalization and the relatively simple desire for prosperity? Friedman says, “When it comes to the question of which system today is the most effective at generating rising standards of living, the historical debate is over. The answer is free-market capitalism.”

In short, globalization proceeds as free-market capitalism extends its reach across the globe, and free-market capitalism expands beyond all historical boundaries because it is the best system for creating prosperity for the largest number of people.

Globalized Markets and the Nation-State

While free-market capitalism and its globalizing effects are not new, the recent phase of globalization (what Friedman calls "Globalization II") is different from the first era of globalization (beginning with the first Industrial Revolution) in both degree and kind. Globalization now reaches not only farther and faster than in the previous era (thanks in part to developments in the technologies of communication and travel), but is restructuring and redefining a centuries-old fixture of the modern era: the nation-State.

Unlike the Cold War era, Friedman argues that the nation-state is no longer able to govern markets completely. Thanks to the “democratizations of technology finance and information,” markets extend beyond the historical boundaries of countries and regions. This has significant implications for the ability of states to govern exactly what goes on within their borders.

As an illustration, Friedman quotes from a statement of the Canadian Finance Ministry in response to a threat by Moody’s Investors Service to downgrade Canada’s credit rating. The Ministry report stated flatly, “We have suffered a tangible loss of economic sovereignty.”

But, how could states lose this kind of sovereignty?

There are two key factors: the flood of individual investment into the global market (what Friedman calls the “Economic Herd”) and the logic of free-market capitalism (in Friedman’s terms, the “Golden Straightjacket”).

From Superpowers to Supermarkets

During the Cold War, developing countries generally had to rely on the patronage of one of the superpowers or cash from an international lending institution to build their economy and their country’s infrastructure. However, when capital controls began to be lifted (starting in the 1970s), it opened up a huge pool of capital potentially available to corporations and states. No longer was investment capital available only through the most powerful countries or international financial institutions. The gradual lifting of capital controls and development of different investment technologies allowed individuals to become a significant source of capital within global markets.

Even though an average individual’s capital pool is dramatically less than a country’s, the democratization of finance—made possible in large part because of the Internet—allows a huge number of individuals across the globe to pool their money into gigantic sums. The U.S. Treasury estimated that nearly $1.3 trillion in private capital flowed to emerging markets during the 1990s. In Friedman’s terms, “Supermarkets” have replaced superpowers as sources for economic growth.

The Electronic Herd

One of the most significant aspects of this new source of capital is that no one is in control. During the Cold War, states could exert tremendous pressure on other states or companies by controlling the flow of capital via central policy making and regulation. Now, there is no center to direct private capital. Individuals across the globe can, with the click of a mouse, move huge sums of capital from one market to another almost instantaneously. There is no central planning, no central command. Friedman describes these anonymous individual investors as the “electronic herd.”

The Golden Rules of the Golden Straightjacket

Even though there is no center of control for private investors around the world, this does not mean that their actions are random or completely unpredictable. Indeed, in order to attract some of the huge pool of private capital, countries must abide by (or be seen to be moving toward) a set of very strict rules.

These are the rules of free-market capitalism. Friedman provides a list of criteria that countries are held to if they are to attract investment:

  • Make the private sector the primary engine of economic growth,
  • Maintain a low rate of inflation and price stability,
  • Shrink the size of state bureaucracy,
  • Maintain as close to a balanced budget as possible,
  • Eliminate and lower tariffs on imported goods,
  • Remove restrictions on foreign investment, get rid of quotas and domestic monopolies,
  • Increase exports,
  • Privatize state-owned industries and utilities, deregulate capital markets,
  • Make its currency convertible,
  • Open its industries and stock and bond markets to direct foreign ownership and investment,
  • Deregulate its economy to promote domestic competition, eliminate government corruption and subsidies and kickbacks,
  • Open its banking and telecommunications systems to private ownership and competition,
  • Allow citizens to choose from competing pension options and foreign-run pension and mutual funds.

Because there is no central control on the private investment market, and because huge amounts of capital can be shifted almost instantaneously, countries have no room to negotiate for more time or plead extenuating circumstances.

If “mom and pop” at the computer in their basement decide they don’t feel right about the way a country is going, they move their investment somewhere else. However, increases in available information and connectivity make it possible that not just one, but potentially millions of private investors can take the same action. The effects on the offending country (e.g., the 1995 peso crash) or region (e.g., the 1997 Asian Economic Crisis) can be devastating.

So, if a country wants to attract private investment it has to hew closely to the rules of free-market capitalism. There is very little room for maneuvering away from these rules. Abide by them and a country may gain access to a great deal of capital. Fail to abide by the rules and the “electronic herd” will take its money elsewhere. In Friedman’s analogy, the “Golden Straightjacket” of free-market capitalism may provide a path to wealth, but it is, after all, a straightjacket.

Data and Methods:

Data Sources:

Based in large measure on interviews conducted as part of the author's work as a journalist.

Funding Sources:

Not provided.

Full Text Availability:
Available for purchase at

Friedman, Thomas L. 2000. The Lexus and the Olive Tree. New York: Anchor Books. Ch. 6-7, pp. 101-144.

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