How the Globalized Economy Works Today 327The IMF responded to the social and po liti cal upheaval with large, controversial
bailout packages to three of the affected countries (Thailand, $17 billion; Indonesia,
$36 billion; and South Korea, $58 billion); lengthy sets of conditions that each coun-
try was supposed to follow; and monitoring devices to ensure compliance. Extensive
structural reforms would transform their economies from semimercantilist to more
market- oriented ones. In South Korea, for example, the government lifted restrictions
on capital movements and foreign owner ship, permitted companies to lay off workers,
and adopted mea sures to restructure the country’s financial institutions. Bud get cuts
eliminated more social ser vices and pushed more families below the poverty line, lead-
ing to a backlash against governments and the IMF. Solutions that the international
financial institutions implemented in one country proved counterproductive in others,
and marginalized groups suffered. Dissatisfaction with IMF policies led many in devel-
oping countries to conclude that these institutions were captive to the interests of
the developed world.
Yet following two years of economic stress and the wounded credibility of the IMF,
none of the countries involved retreated from globalization or the international finan-
cial markets, and all resumed a path of strong economic growth. Critics of the IMF
response focus on the so- called moral hazard prob lem: states were rescued from the
consequences of their reckless be hav ior, providing little incentive for them to change
that be hav ior. Later in this chapter we will examine the international economic crises
beginning in 2008 and see similar kinds of responses: the contraction of some key
economies, the spillover of economic hardship around the world because of globaliza-
tion, the reaction of governments and international institutions, and reminders of the
moral hazard dilemma.
International trade
Economic growth is fueled by both financial and trade flows. This idea was the key
contribution of liberal economic theorists beginning with Adam Smith. Liberal eco-
nomics recognizes that states differ in their resource endowments of land, labor, and
capital. Under these conditions, worldwide wealth is maximized if states engage in inter-
national trade.
The British economist David Ricardo (1772–1823) developed a theory that states
should engage in international trade according to their comparative advantage.
Because each state differs in its ability to produce specific products— because of differ-
ences in natu ral- resource bases, labor force characteristics, and land values— each state
should produce and export that which it can produce most efficiently and import goods
that other states can produce more efficiently. Thus, states maximize gains from trade.
However, individual actors can be hurt in this pro cess, necessitating periodic govern-
ment intervention to ensure that all people gain.