Globalization's Social Impact on Developing Countries PDF

DISCUSSION PAPER SERIES IZA DP No. 1925 The Social Impact of Globalization in the Developing Countries Eddy Lee Marco Vivarelli January 2006...

DISCUSSION PAPER SERIES IZA DP No. 1925 The Social Impact of Globalization in the Developing Countries Eddy Lee Marco Vivarelli January 2006 Forschungsinstitut zur Zukunft der Arbeit Institute for the Study of Labor  The Social Impact of Globalization in the Developing Countries Eddy Lee ILO, Geneva Marco Vivarelli Catholic University of Piacenza, Max Planck Institute of Economics, Jena, CSGR, University of Warwick and IZA Bonn Discussion Paper No. 1925 January 2006 IZA P.O. Box 7240 53072 Bonn Germany Phone: +49-228-3894-0 Fax: +49-228-3894-180 Email: [email protected] Any opinions expressed here are those of the author(s) and not those of the institute. Research disseminated by IZA may include views on policy, but the institute itself takes no institutional policy positions. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit company supported by Deutsche Post World Net. The center is associated with the University of Bonn and offers a stimulating research environment through its research networks, research support, and visitors and doctoral programs. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. IZA Discussion Paper No. 1925 January 2006 ABSTRACT The Social Impact of Globalization in the Developing Countries In this paper an ex-post measurable definition of globalization has been used, namely increasing trade openness and FDI. A general result is that the optimistic Heckscher- Ohlin/Stolper-Samuelson predictions do not apply, that is neither employment creation nor the decrease in within-country inequality are automatically assured by increasing trade and FDI. The other main findings of the paper are that: 1) the employment effect can be very diverse in different areas of the world, giving raise to concentration and marginalisation phenomena; 2) increasing trade and FDI do not emerge as the main culprits of increasing within-country income inequality in DCs, although some evidence emerges that import of capital goods may imply an increase in inequality via skill-biased technological change; 3)increasing trade seems to foster economic growth and absolute poverty alleviation, although some important counter-examples emerge. JEL Classification: F02, O1 Keywords: trade, FDI, employment, poverty, within-country income inequality Corresponding author: Marco Vivarelli Facoltà di Economia Università Cattolica Via Emilia Parmense 84 I-29100 Piacenza Italy Email: [email protected] 1. Introduction This paper is one of the outcomes of a four-years economic research programme (2001- 2005), funded by the Department for International Development (DFID) of the UK and developed at the International Labour Office (International Policy Group). The general aim of the project is to fill a gap in understanding - both theoretical and empirical – the impact of globalization. Since the ‘80s, the world economy has become increasingly “connected” and “integrated”; on the one hand the decreasing transportation costs and the diffusion of Information and Communication Technologies have implied a fast downgrading of the concept of “distance”, while – on the other hand – gross trade, Foreign Direct Investment (FDI), capital flows and technology transfers have risen significantly. In most countries, the current wave of “globalization” has been accompanied by increasing concern about its impact in terms of employment and income distribution. Whatever definitions and indicators are chosen (see next section), the current debate is characterized by an acrimonious dispute between advocates and critics of globalization. While this is true even as regards the employment and income distribution effects within the developed world, positions diverge even more sharply over the impact on Developing Countries (DCs). For instance, the optimists underline the link between increasing trade and economic growth and then they conclude that trade is good for growth and growth is good for the poor (both in terms of job creation and poverty alleviation). In contrast, the pessimists show that globalization is quite uneven in its impact and gives rise to negative counter-effects on the previously protected sectors, the marginalisation of entire regions of the world economy and possible increases in within- country income inequality (WCII). Another example of this kind of diversity of opinions is the debate about poverty indicators: supporters of globalization underline the fact that worldwide absolute poverty has decreased over the last two decades, while critics of globalization show that this result is almost entirely due to statistical artefacts and to the fast growth of China, while absolute poverty has increased in many DCs and relative poverty has increased in the majority of countries. 2 The following sections will try to go deeper into these topics and provide some theoretical and empirical answers to the question of whether globalization is good for employment, poverty alleviation and income redistribution within the DCs. In more detail, the rest of the paper is organized as follows: in Section 2 some definitions and methodological choices will be presented; in the next three sections recent theoretical and empirical results will be critically discussed and compared with regard respectively to the impact of globalization on employment, WCII and poverty in DCs, while the concluding Section 6 will summarize the main findings and suggest some policy implications. 2. Definition and methodology “Globalization” is currently a popular and controversial issue, though often remaining a loose and poorly-defined concept. Sometimes too comprehensively, the term is used to encompass increases in trade and liberalization policies as well as reductions in transportation costs and technology transfer. As far as its impact is concerned, discussion of globalization tends to consider simultaneously its effects on economic growth, employment and income distribution - often without distinguishing between- countries and within-country inequalities – and other social impacts such as opportunities for poverty alleviation, human and labour rights, environmental consequences and so on. Moreover, the debate is often confused from a methodological point of view by the interactions between history, economics, political science and other social sciences. Partially as a consequence of the lack of clear definitions and methodological choices, the current debate is characterized by an harsh divide between the supporters and the opponents of globalization, where both groups appear to be ideologically committed and tend to exploit anecdotes (successfully or unsuccessfully respectively), rather than sound, comprehensive empirical evidence to support their cause. Since the debate appears quite confused and the issues overlapping, one of the aims of this contribution is to select some precisely-defined topics and to give an account of 3 theories and applied approaches which have really contributed to the understanding of the social impact of globalization in developing countries (DCs). With this purpose in mind, it is therefore important to clarify the limitations of the discussion put forward in the following sections. Definition. An ex-post measurable and objective definition of globalization has been used, namely increasing trade openness and FDI. The purpose is to discuss whether the actual increase in trade and FDI inflows is favouring or damaging DCs engaging in globalization. In this context, we will not address liberalization policies; these are ex-ante proposals which may be announced and not implemented or implemented but not effective. When evaluating the effect of globalization, what is really important is not the impact of (often ineffective) policies but the consequences of the actual increase in measurable globalization indexes such as trade openness and FDI. An important limitation of the subsequent analysis is that some aspects of globalization will not be treated (see for instance migration) or only marginally discussed (see for instance financial and portfolio flows). Countries and period. We will only discuss the consequences of globalization (as defined above ) on DCs over the last two decades. Although there is much wider economic literature available on the impact of globalization in developed countries, here we will only focus on DCs. Methodology. While this subject may also be fruitfully studied from a historical, sociological, demographical or political viewpoint, here the adopted methodology will be only economic, with particular attention devoted to the applied approaches. Scope. Only some particular aspects of the social consequences of globalization in DCs will be treated, namely the impact of increasing trade and FDI upon domestic employment, within-country income inequality (WCII) and poverty reduction. 4 Given this general framework, further and more detailed purposes of this paper are as follows: 1) to provide a comprehensive discussion of the recent theoretical and empirical economic literature investigating the three-fold impact of globalization mentioned above; 2) to address the relevant research questions emerging from the existing literature, namely: a) What is likely to happen to local employment and income distribution when a DC chooses to open (or becomes exposed) to globalization? b) Which are the channels through which trade and FDI affect employment, within-country income distribution and poverty reduction? c) What is the role of the level of development and of the institutional framework of a given DC? 3) to derive possible policy implications, useful for national and international policy-makers targeting the social consequences of globalization in DCs. 3. Globalization and employment. According to the theory of the relative comparative advantages, both trade and FDI should take advantage of the abundance of labour in DCs and so trigger a trend of specialization in domestic labour-intensive activities and so involve an expansion in local employment. However, contrary to this Heckscher-Ohlin (HO) prediction, the analysis of the recent literature supports the conclusion that the employment impact of increasing trade is not necessarily positive for a developing country. In particular, a relaxation of the hypothesis of homogeneous production functions across different countries allows for either the possibility of multiple equilibria (Grossman and Helpman, 1991), or for quite differentiated employment trends in the evolutionary “catching-up” models (Fagerberg, 5 1988 and 1994; Dosi et al., 1990; Cimoli and Dosi, 1995; Verspagen and Wakelin, 1997; Targetti and Foti, 1997; Montobbio and Rampa, 2005). In fact, when “total factor productivity” increases in the DCs as a consequence of globalization, the employment enhancing competitive effect has to be compared with the direct labour-saving effect of the imported technologies (see Haddad and Harrison, 1993; Coe et al., 1997; Aitken and Harrison, 1999; Kathuria, 2001). In other words, in a developing country, the final employment impact of increasing trade depends on the interaction between productivity growth and output growth both in traded goods sectors and in non-traded sectors. The final outcome cannot be assessed a priori for different reasons. On the one hand, export may involve a demand-led economic and employment growth, but - on the other hand – import may displace previously protected domestic firms, inducing labour redundancy. Moreover, in the presence of supply constraints (lack of infrastructures, scarcity of skilled labour, under investment, inefficient labour market), even in the exporting sectors productivity growth may exceed output growth, to the detriment of job creation. Finally, domestic sheltered sectors (such as agriculture, public administration, construction, non-traded service) may act as labour sinks, often implying hidden unemployment and underemployment in the informal labour market (see Fosu, 2004 and Reddy, 2004). Shifting our focus from trade to FDI inflows, when a developing country opens its borders to foreign capital, FDIs generate positive employment impacts both directly and indirectly through job creation within suppliers and retailers and also a tertiary employment effect through generating additional incomes and so increasing aggregate demand (see Lall, 2004). Yet, all these positive employment effects of “greenfield” FDI have to be compared with the possible crowding-out of non-competitive and previously sheltered domestic firms (implying bankruptcies and job losses); with the possible labour-saving effects of the new technologies brought about by multinational firms; and with the possible reduction in employment associated with FDI operating through Mergers and Acquisitions (M&A). In fact, both imports and inward FDI may imply a “crowding out” of domestic production (especially formerly protected nascent industries; think, for instance, to the 6 case of large urban state-owned firms in China, see Rawski, 2002; see also Aitken and Harrison,1999). This job displacement effect can be further amplified when FDI inflows are accompanied by financial liberalization and consequent increases in the interest rate, in turn leading to shrinking domestic investments (see Berg and Taylor, 2001). Since the overall employment impact of trade and FDI is uncertain from a theoretical point of view, it is important to collect data on these relationships and to empirically investigate the direct and indirect effects of globalization on the domestic employment of a globalizing DC. Matusz and Tarr (1999) survey the studies carried out before 1995 on the impact of globalization on employment in DCs. Comparing the level of employment before and after trade liberalization the authors conclude that trade and FDI liberalization has been beneficial for labour except in the transition countries of Eastern Europe. Ghose (2000 and 2003) analyses the relationship between trade liberalization and manufacturing employment. He highlights that - although increasing trade and FDI have been relevant only in a small bunch of newly industrialized countries - for those countries the growth of trade in manufactured products has implied a large positive effect on manufacturing employment. More evidence has been collected at the national level mostly for the manufacturing sector. It draws a contrasted picture of the effect of globalization. In successfully integrating DCs, the employment effects of trade liberalization has been mixed (mostly negative) in Latin America (see Rama, 1994; Revenga, 1997; Levinsohn, 1999; ILO, 2002; Cimoli and Katz, 2003) whereas they seem globally positive in Asian countries (see Lee, 1996; Orbeta, 2002). Indeed, the theoretical issues and the empirical evidence discussed in Lee and Vivarelli (2004) lead to the conclusion that the employment impact of trade and FDI is country and sector specific and that the HO theorem is actually rejected in most cases. For instance, Lall (2004) observes that – while there is a clear evidence that several DCs have exhibited export and employment growth as a consequence of opening to trade and FDI (see also UNIDO, 2002) – doubts can be cast about the belief that globalization should always benefit employment growth within a DC; indeed, different “national 7 absorptive capacities” (or “social capabilities”, see Abramovitz, 1986 and 1989) - in terms of institutional setting, labour skills, technological capabilities and competitiveness of domestic firms – can amplify the positive employment impact of globalization, while institutional mismatches between the market, the organisations and the government (see Perez, 1983; Shafaeddin, 2005) and lack of local capabilities can severely jeopardize the potential for economic and employment growth (see also Basu and Weil, 1998). In this framework, Gros (2004) notes that opening to trade implies both an increase in value added and in labour productivity and so that the employment impact cannot be predicted a priori; empirically, the best results in terms of employment growth happen to be within the “non globalizing” DCs (basically because of a lack of any improvement in labour productivity) and in the “slowly globalizing” DCs which are characterised by a labour friendly balance between output and productivity trends. Finally, Spiezia (2004) studies the employment impact of trade on the manufacturing sector. By comparing labour intensities of exported, imported and non-trade goods the author concludes that in 21 out of 39 sampled DCs an increase in the volume of trade resulted in an increase in employment; however, in the second group of 18 countries, increased integration produced a reduction in employment (in contrast with the HO theorem). As far as FDI is concerned, the author finds out that the impact of FDI on employment is increasing with per-capita income, resulting not significant for low- income DCs. 4. Globalization and within-country income inequality. On the one hand, the Stolper-Samuelson (SS) theorem predicts that both trade and FDI should take advantage of the abundance of low-skilled labour in DCs and so imply an increasing demand for domestic low skilled labour and hence decreasing within-country wage dispersion and income inequality (see Stolper and Samuelson, 1941; for a recent 8 reappraisal of the possible equalizing effect of trade in newly industrialized countries, see Wood, 1994 and 1997; for a critical view, see Milanovic, 2002a). Some important theoretical critiques can be addressed to the SS theorem. First, is the theorem valid in a global sense or in relation to the so-called “cones of diversification” (see Davis, 1996, a cone of diversification being a group of countries characterised by similar endowment proportions, very similar production functions and supplying the same range of goods)? If SS theorem is valid not in relation to the world economy but in relation to a specific cone of diversification, it could be the case that countries abundant in unskilled labour in a global context are abundant in capital and skilled labour in comparison with some other country in the same cone; if such is the case, the SS theorem might have very different distributional consequences from those one would anticipate on the basis of a simplistic North-South interpretation of the theorem (for instance, in Mexico the equalizing effect of trade and FDI with the USA may be more than compensated by the dis-equalizing effect of competition by China and other newly industrialized Asian countries; see also Wood, 1997 and Wood and Ridao-Cano, 1999). Second, Feenstra-Hanson’s (1996 and 1997) model points out that what is unskill- intensive in a developed country may be skill-intensive in terms of the labour market of the recipient DC; accordingly, shifting production from developed towards developing countries (both through FDI and import/export trade relationships) may imply increasing inequality both in the former and in the latter. For instance, outsourcing of production through FDI from the U.S. to Mexico implies that plants which were relatively intensive in unskilled labour in the U.S. would be relatively skill-intensive in Mexico (with a higher ratio of skilled/unskilled labour than domestic plants), thus raising relative wages and income inequality in both countries (see also Zhu and Trefler, 2001). Third, the latter increasing inequality effect may be amplified by a possible “skill- biased” nature of technologies embodied both in FDIs (see Findlay, 1978; Wang and Blomstrom, 1992) and in importation of capital goods. Indeed, capital equipment and intermediate goods constitute the majority of increasing imports by DCs following 9 liberalisation (see Acemoglu, 1998; O’Connor and Lunati, 1999). For sake of clarity, we can look separately at FDI and importation. If we think about FDI as a vehicle of new technologies, in addition to the direct effect, there are different channels through which skilled-biased innovation spill over from foreign to local firms: the demonstration effect (local firms adopt new technologies through imitation and reverse engineering, see Piva, 2003); the vertical spillovers (backward and forward linkages lead to intra and inter-industry technology upgrading: see Saggi, 1999); labour turnover and spin-offs (workers trained in foreign owned firms may transfer important know-how to local firms by switching employers or by starting- up their own business, see Kinoshita, 2000); and the competition effect (technology upgrading in local firms becomes necessary because of competitive pressures from foreign firms, see Bayoumi et al., 1999). More than other imports, imports of capital goods, - embodying technological innovations - are important both because of the role they play in contributing to capital upgrading and more generally to economic growth of DCs (Xu and Wang, 2000; Eaton and Kortum, 2001; Mazumdar, 2001), and because they originate the so-called “skill- enhancing trade”, (see Robbins, 1996 and 2002; Barba Navaretti et al., 1998; Berman and Machin, 2000 and 2004; Vivarelli, 2004). In fact, even without necessarily assuming that developed countries transfer their “best” technologies to the DCs, it is quite reasonable to expect that transferred technologies are relatively skill-intensive, i.e. more skill-intensive than those in use domestically before trade and FDI liberalization. If such is the case, openness – via technology – should imply a counter-effect to the SS theorem prediction, namely an increase in the demand for skilled labour, an increase in wage dispersion and so an increase in income inequality. Finally, globalization is often coupled with market-oriented policy reforms within the globalizing DCs (such as the liberalization of the domestic labour market or the privatisation of previously state-owned firms; see Lee, 2000; Easterly, 2001; Stiglitz, 2002) which often imply possible increases in WCII (Rodrik, 2000; Milanovic, 2003). Hence, on the theoretical side, relaxing the HO hypothesis of technological homogeneity, and allowing for capital deepening and skill-biased technological change 10 (SBTC), opens the way to an important possible counter-effect in terms of the distributional impact of globalization, and so the theoretical prediction ceases to be univocal and becomes open to different outcomes depending on the relative importance of the determinants discussed so far. On the empirical side and starting from simple correlation analyses, both Bowles (2001) and Dollar and Kraay (2001b) do not find any significant correlation between changes in openness and changes in inequality. Turning the attention to more sophisticated econometric analyses, Edwards (1997) does not find any evidence linking trade liberalization to increases in inequality; Higgins and Williamson (1999) – using a framework based on the unconditional Kuznets’ curve - fail to find any significant relationship between economic openness and inequality; Spilimbergo et al. (1999) find that trade openness has a positive impact on income inequality in skill-abundant countries, but when they limit the analysis to DCs, they fail to find any significant relationship between trade and inequality; Ravallion (2001) finds no significant effect of exports as a share of GDP on Gini index changes across 50 countries (both developed and developing countries). However, Birchenall (2001) concludes that, in the case of Colombia, liberalization interpreted as a skill-biased technological change induced wage inequality, polarization and higher labour mobility. Pavcnik et al. (2003) show that trade reform in Brazil has contributed to the growing skill-premium through SBTC instigated by increased foreign competition (even though the overall effect on wage differentials is relatively small). Finally, Vivarelli (2004) does not find any significant distributional effect of trade openness and FDI inflows; however, in his study some evidence emerges that, in the early stages of openness to trade, importation may imply an increase in WCII (possibly via SBTC). The main common conclusion of these empirical studies is that the popular idea that greater economic integration across countries is associated with an increase in inequality within DCs is not necessarily in contrast with theoretical considerations, but it cannot be significantly supported by available recent empirical evidence. As stated by Cornia (2004) globalization in se’ does not emerge as the main culprit of the current 11 increase of WCII in DCs. Yet, recent evidence is consistent with the hypothesis that the diffusion of SBTC from richer to developing countries may imply – at least temporarily - an increase in within-country inequality. 5. Globalization and poverty alleviation As far as poverty reduction is concerned, trade and FDI are supposed to be beneficial to a DC’s economic growth (see Collier and Dollar, 2002; for a much more critical point of view, see Rodriguez and Rodrik, 1999) and so – given the expected overall neutrality in terms of their impact on income distribution (see Section 4) – globalization should be a way to achieve poverty reduction. Indeed, most DCs experienced a significant reduction in the proportion of their population living below the poverty line, including fast globalizing countries like China, India, Vietnam. Conversely, many slow globalizers in the Sub-Saharan Africa registered an opposite trend. While the apologists of globalization support the view that current trends clearly indicate a decreasing global inequality (Sala-i-Martin, 2002), the critics show that this result mainly depend on the exceptional growth of China, while absolute poverty has increased in SSA and relative poverty (inequality) has increased in the majority of countries (Milanovic 2002b; Reddy and Pogge, 2002). On the theoretical side, economic growth is not the only vehicle through which globalization can affect poverty levels, as broadly discussed by Winters et al. (2004). In fact, globalization deeply influences labour productivity (and this may imply higher wages on the one hand but job losses on the other hand); the demand for skills (with a possible redundancy of low skilled people concentrated below the poverty line, see also previous Section 4); the need for macroeconomic stability (since stability implies low inflation, trade should affect the poor positively because the poor tend to be hardest hit by increasing inflation, see Bhagwati and Srinivasan, 2002; however, liberalization may 12 also involve cautious and restrictive macroeconomic policies with an opposite effect, see Langmore, 2004); relative prices (with possible adverse or positive effects in terms of purchasing power of poor households depending on the basket of tariffs reductions and on the changes in the terms of trade); relative competitiveness of domestic firms (possibly crowded-out by more efficient multinationals), government revenues and expenditures, etc. On the whole, it is true that globalization aids economic growth and that economic growth aids poverty reduction, but not unconditionally: the final outcome in terms of poverty reduction can be actually either amplified or diminished (even cancelled) by the complementary economic factors and policies which are part of the game. To better understand the issue, it is also important to distinguish between trade and FDI on the one hand and financial liberalization on the other hand. While increasing trade and FDIs seem to be associated with increasing economic growth and absolute poverty alleviation (although conditional on the occurrence of many complementary events), poverty can rise rapidly in the wake of increased vulnerability, occurrence of generalised economic crises and contagion of “innocent victims” which can all be related to fast financial liberalization (see Lee, 1998; Cornia, 2004; Taylor, 2004). Hence, the liberalization of capital accounts may counterbalance the poverty alleviation effect of trade and FDI and surely be correlated with possible increases in income inequality (see Taylor, 2004; Santarelli and Figini, 2004; for an opposite view underlining the long-run welfare gains associated with financial liberalization, see Kaminsky and Schmukler, 2003). To conclude, nothing can assure that the relationship between globalization and poverty alleviation has a 1 to 1 nature as implied - for instance, - by the optimistic slogan by Dollar and Kray (2001a and 2001b) when they state that “trade is good for growth, growth is good for the poor and so trade is good for the poor”. Focusing on the empirical studies, the above mentioned Dollar and Kraay (2001a and 2001b) classify countries into globalizers and non-globalizers according to their performance in raising their trade openness (export + import over GDP) and show that the former group has experienced higher growth rates during the period 1977-97. Then 13 they show that the incomes of the poor rise proportionally with average incomes and that globalization does not have any systematic effect on domestic income distribution. They therefore conclude that growth is good for the poor. A summary of the most pertinent criticisms of these papers can be found in Rodrik (2000): the author does not agree with Dollar and Kraay's exogenous definition of globalizers and challenges Dollar and Kraay's arbitrary exclusion of some countries and their use of different base years moving from one country to another. Replicating their empirical exercise, Rodrik finds no support for the hypothesis that globalizers do significantly better in terms of economic growth. Much more cautious conclusions have been derived by Ravallion (2001) who points out that microeconomic and country-specific researches are needed to understand why some poor people are able to take up the opportunities offered by a globalizing developing economy while others not. Finally, UNCTAD (2002) report on low-income developing countries stresses that the current conventional wisdom that persistent poverty in LDCs is mainly due to their low level of trade integration is too simplistic; indeed the characteristics of trade integration are more important than its intensity. In particular, it is underlined that completely different paths in poverty are exhibited by non-oil primary commodity exporters (in which poverty has increased) and by manufacturer exporters, which generally display a trend towards poverty alleviation. Thus, the overall conclusion by Winters (2000) sounds particularly wise: while trade liberalization is generally found to increase economic opportunities and potentialities for DCs, it is absurd to think that globalization never pushes anyone into poverty, if any because the poor are so heterogeneous within a country and because poor countries differ so much among themselves. Using data from 120 DCs, Santarelli and Figini (2004 and 2005) have been able to show that: 1) trade openness helps reducing absolute poverty, measured as people living below the poverty lines; 14 2) FDI flows and especially financial liberalization seems to be detrimental for poverty alleviation, although the relationship is only barely significant; 3) there is no significant relationship between trade or FDI and relative poverty, measured as people below the 50% of the mean income (this result is consistent with what discussed in the previous Section 4). 6. Conclusions and policy implications In Section 2, we posed some general questions to which the following discussion aimed to give analytical and empirical answers. 1) What is likely to happen to local employment and income distribution when a DC chooses to open (or becomes exposed) to globalization? As is obvious from the discussion in the previous sections, both the theory and the empirical evidence did not give us black and white, clear-cut results, but rather nuanced research outcomes. If one is to be found, a general result is that the optimistic HO/SS predictions do not apply to the current wave of globalization; indeed, neither employment creation nor the decrease in within-country inequality are automatically assured by increasing trade and FDI. In contrast, the employment effect can be very diverse in different areas of the world, giving raise to concentration and marginalisation phenomena, with the scope for enhancing the “absorptive capacity” of a given socio-institutional system which is quite large. In more detail, the employment impact depends on the initial labour-intensity, the output effect and the productivity effect characterizing traded goods and non traded goods sectors. According to the values of these three parameters and to the magnitude of possible constraints in the supply of capital, infrastructure and skilled labour, very 15 different results in terms of job creation can emerge. Very similar arguments apply to the employment effects of FDI inflows. As far as income distribution is concerned, while SS’s theorem definitely does not apply, it is also true that increasing trade and FDI do not emerge as the main culprits of increasing within-country income inequality in DCs. However, some evidence emerges that, in the early stages of openness to trade, import of capital goods may imply an increase in within-country inequality via SBTC. Finally, increasing trade seems to foster growth and absolute poverty alleviation, although some important counter-examples emerge, especially in Sub-Saharan Africa. While FDIs seem to be neutral in terms of their impact on income distribution and poverty, financial liberalization seems to have adverse effects on relative poverty. 2) Which are the channels through which trade and FDI affect employment, within- country income distribution and poverty reduction? The positive outcome of increasing trade on poverty reduction is mediated by increasing economic growth. Since overall trade (import+export) is neutral in terms of income distribution and fosters economic growth, the final outcome is an overall reduction in poverty. As far as employment and income distribution are concerned, a clear message emerging from many studies is that technology matters. If trade (especially through importation of machinery) and FDI are characterized by labour-saving and skilled-biased technologies, globalization implies consequences which are opposite to the HO/SS predictions, i.e. decreasing employment and increasing within-country income inequality. In this context, the preliminary theoretical and empirical results discussed in Section 4 – concerning the spreading of SBTC from developed to middle income DCs – open the way to a very promising avenue of further research. Another important mediating channel of the social consequences of increasing trade and FDI is the institutional organization of the labour market (including the informal sector). The presence of labour market flexibility and extensive use of informal labour may increase the positive employment impact, in quantitative terms, of globalization. 16 However, possible counter-effects are quite serious and negative, and they entail increasing income-inequality and social dumping (a sort of “race to the bottom” and “beggar thy neighbour” race induced by globalization). In the end, this regressive race may imply a substantial reduction in the socio-economic capabilities of a given DC, finally affecting the “absorptive capacity” of that country in terms of political institutions, social cohesion and technological opportunities. 3) What is the role of the level of development and of the institutional framework of a given DC? On the whole, the level of economic and human development does matter in shaping the direction and the impact of the current wave of globalization. For instance, the role of the physical and human infrastructures within a DC is crucial in maximizing the positive employment and distributional effects of increasing trade and FDI. Conversely, bottlenecks in the supply of educated and skilled labour and in public and private investments (including R&D) may condemn a country to marginalisation, exploitation and high levels of domestic unemployment and income inequality. Examples and policy implications are quite straightforward and concern: the role of education and training; the institutions regulating the labour and the capital markets; the modes of “governance” at the local, regional and national levels (including tax reforms and eradicating of corruption); industrial and innovation policies targeting new and fast growing sectors and products; the construction of a welfare system able to create safety nets for possible victims of the globalization process. 4) Given the results from the previous points, what policy suggestions can be made to a globalizing DC? Needless to say, here we cannot go into a deep analysis of possible national and international policy options; however, we can briefly highlight from the previous discussion four main avenues for policies devoted to amplifying the positive impacts of globalization in terms of a DC’s domestic employment and within-country income distribution. 17 a) Market failures and disparities in the initial levels of economic and human development, technological “absorptive capacity” and “social capabilities” call for “controlled liberalization” as the best way to foster globalization. Indeed cautious globalizers seem to be characterised by the best employment performances, while faster globalization may imply a wider income inequality trough increasing import. Together with some form of policy controls on trade and FDI, financial liberalization should be even more restrained in particular historical circumstances. In fact, a sudden financial liberalization can be accompanied by increasing vulnerability and increasing poverty. b) Given the crucial role of the specific institutional, structural and technological characteristics and the uneven distribution of the positive employment effects of globalization (both in terms of countries and in terms of economic sectors), a possible new role emerges for regional, industrial and innovation policies at the national level. c) Given the possible adverse distributional effect of importing pervasive SBTC, a crucial role has to be attributed to national and local education and training policies, in order to increase the supply of skills. Conversely, skill shortage implies an output constraint and an increasing wage dispersion with negative effects both in terms of domestic employment and within-country income inequality. d) Heterogeneous and country-specific impacts in terms of employment and income distribution call for preventive intervention (for instance through insurance schemes and/or social safety nets) at the international level by means of adequate social, labour and income multilateral policies. 18 References - Abramovitz, M. (1986), “Catching-up, Forging Ahead and Falling Behind”, Journal of Economic History, vol.46, pp.385-406. - Abramovitz, M. (1989),, Thinking about Growth, Cambridge University Press, Cambridge. - Acemoglu, D. (1998), Why do New Technologies Complement Skills? Directed Technical Change and Wage Inequality, Quarterly Journal of Economics, vol. 113, pp. 1055-89. - Aitken, B. and A. Harrison (1999), Do Domestic Firms Benefit from Direct Foreign Investment? 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C. and D. Trefler (2001), Ginis in General Equilibrium: Trade, Technology and Southern Inequality, NBER Working Paper no. 8446, National Bureau of Economic Research, Cambridge (Mass.). 26 CHAPTER ONE The New Wave of Globalization and Its Economic Effects S INCE ABOUT 1980 THERE HAS BEEN UNPRECEDENTED global economic integration. Globalization has happened before, but not like this. Economic integration occurs through trade, migration, and capital flows. Figure 1.1 tracks these flows. World trade is measured relative to world income. Capital flows are proxied by the stock of foreign capital in developing countries relative to their GDP. Migration is proxied by the number of immigrants to the United States. Historically, before about 1870 none of these flows was sufficiently large to warrant the term globalization. Figure 1.1 Three waves of globalization Percent Millions 40 12 Immigrants to the United States by decade, millions (right axis) Merchandise exports/world GDP (left axis) 10 30 Foreign capital stock/developing country GDP (left axis) 8 20 6 4 10 2 0 0 1870 1914 1950 1980 2000 Wave 1 Retreat Wave 2 Wave 3 Source: Foreign capital stock/developing country GDP: Maddison (2001), table 3.3; Merchandise exports/world GDP: Maddison (2001), table F-5; Migration: Immigration and Naturalization Service (1998). 23 G L O B A L I Z AT I O N , G R O W T H , A N D P O V E R T Y For about 45 years, starting around 1870, all these flows rapidly became substantial, driven by falling transport costs. What had been many separate national economies started to integrate: the world’s econo- mies globalized. However, globalization is not an inevitable process; this first wave was reversed by a retreat into nationalism. Between 1914 and 1945 transport costs continued to fall, but trade barriers rose as coun- tries followed beggar-thy-neighbor policies. By the end of that period trade had collapsed back to around its 1870 level. After 1945 govern- ments cooperated to rein in protectionism. As trade barriers came down, and transport costs continued to fall, trade revived. This second wave of globalization, which lasted until around 1980, was approximately a re- turn to the patterns of the first wave. Since 1980 many developing countries—the “new globalizers”— have broken into world markets for manufactured goods and services. There has been a dramatic rise in the share of manufactures in the exports of developing countries: from about 25 percent in 1980 to more than 80 percent today. There has also been a substantial increase in FDI. This marks an important change: low-income countries are now competing head-on with high-income countries while previously they specialized in primary commodities. During this new wave of global market inte- gration, world trade has grown massively. Markets for merchandise are now much more integrated than ever before. In this chapter we contrast this new third wave of globalization with the two previous waves. We analyze its main processes and show how it is affecting poverty and inequality. Previous waves of globalization and reversals M OST DEVELOPING COUNTRIES HAVE TWO POTENTIAL sources of comparative advantage in international markets: abundant labor and abundant land. Before about 1870 neither of these potentials was realized and international trade was negligible. The first wave of globalization: 1870–1914 The first wave of global integration, from 1870 to 1914, was triggered by a combination of falling transport costs, such as the switch from sail to steamships, and reductions in tariff barriers, pioneered by an 24  T H E N E W W AV E O F G L O B A L I Z AT I O N A N D I T S E C O N O M I C E F F E C T S Anglo-French agreement. Cheaper transport and the lifting of man- made barriers opened up the possibility of using abundant land. New technologies such as railways created huge opportunities for land- intensive commodity exports. The resulting pattern of trade was that land-intensive primary commodities were exchanged for manufactures. Exports as a share of world income nearly doubled to about 8 percent (Maddison 2001). The production of primary commodities required people. Sixty million migrated from Europe to North America and Australia to work on newly available land. Because land was abundant in the newly settled areas, incomes were high and fairly equal, while the labor exodus from Europe tightened labor markets and raised wages both absolutely and relative to the returns on land. South-South labor flows were also extensive (though less well documented). Lindert and Williamson (2001b) speculate that the flows from densely populated China and India to less densely populated Sri Lanka, Burma, Thailand, the Philippines, and Vietnam were of the same order of magnitude as the movements from Europe to the Americas.1 That would make the total labor flows during the first wave of globaliza- tion nearly 10 percent of the world’s population. The production of primary commodities for export required not just labor but large amounts of capital. As of 1870 the foreign capital stock in developing countries was only about 9 percent of their income (figure 1.1). However, institutions needed for financial markets were copied. These institutions, combined with the improvements in information permitted by the telegraph, enabled governments in developing countries to tap into the major capital markets. Indeed, during this period around half of all British savings were channeled abroad. By 1914 the foreign capital stock of developing countries had risen to 32 percent of their income. Globally, growth accelerated sharply. Per capita incomes, which had risen by 0.5 percent per year in the previous 50 years, rose by an annual average of 1.3 percent. Did this lead to more or less equality? The coun- tries that participated in it often took off economically, both the export- ers of manufactures, people and capital, and the importers. Argentina, Australia, New Zealand, and the United States became among the rich- est countries in the world by exporting primary commodities while importing people, institutions, and capital. All these countries left the rest of the world behind. Between the globalizing countries themselves there was convergence. Mass migration was a major force equalizing incomes between them. “Emigration is estimated to have raised Irish wages by 32 percent, Italian 25 G L O B A L I Z AT I O N , G R O W T H , A N D P O V E R T Y by 28 percent and Norwegian by 10 percent. Immigration is estimated to have lowered Argentine wages by 22 percent, Australian by 15 percent, Canadian by 16 percent and American by 8 percent.” Indeed, migration was probably more important than either trade or capital movements (Lindert and Williamson 2001b). The impact of globalization on inequality within countries depended in part on the ownership of land. Exports from developing countries were land-intensive primary commodities. Within developing countries this benefited predominantly the people who owned the land. Since most were colonies, land ownership itself was subject to the power imbalance inher- ent in the colonial relationship. Where land ownership was concentrated, as in Latin America, increased trade could be associated with increased inequality. Where land was more equally owned, as in West Africa, the benefits of trade were spread more widely. Conversely, in Europe, the region importing land-intensive goods, globalization ruined landowners. For example, Cannadine (1990) describes the spectacular economic col- lapse of the English aristocracy between 1880 and 1914. In Europe the first wave of globalization also coincided with the establishment for the first time in history of the great legislative pillars of social protection—free mass education, worker insurance, and pensions (Gray 1998). Ever since 1820—50 years before globalization—world income inequality as measured by the mean log deviation had started to increase Figure 1.2 Worldwide drastically (figure 1.2).2 This continued during the first wave of global- household inequality, ization. Despite widening world inequality, the unprecedented increase 1820–1910 in growth reduced poverty as never before. In the 50 years before 1870, Mean log deviation the incidence of poverty had been virtually constant, falling at the rate 0.8 of just 0.3 percent per year. During the first globalization wave, the rate of decline more than doubled to 0.8 percent. Even this was insufficient 0.6 to offset the increase in population growth, so that the absolute number of poor people increased. 0.4 0.2 The retreat into nationalism: 1914–45 Technology continued to reduce transport costs: during the inter-war years 0.0 1820 1850 1870 1890 1910 sea freight costs fell by a third. However, trade policy went into reverse. Source: Bourguignon and Morrisson As Mundell (2000) puts it: “The twentieth century began with a highly (2001). efficient international monetary system that was destroyed in World War I, 26  T H E N E W W AV E O F G L O B A L I Z AT I O N A N D I T S E C O N O M I C E F F E C T S and its bungled recreation in the inter-war period brought on the great depression.” In turn, governments responded to depression by protectionism: a vain attempt to divert demand into their domestic mar- kets. The United States led the way into the abyss: the Smoot-Hawley tariff, which led to retaliation abroad, was the first: between 1929 and 1933 U.S. imports fell by 30 percent and, significantly, exports fell even more, by almost 40 percent. Globally, rising protectionism drove international trade back down. By 1950 exports as a share of world income were down to around 5 per- cent—roughly back to where it had been in 1870. Protectionism had un- done 80 years of technical progress in transport. During the retreat into nationalism capital markets fared even worse than merchandise markets. Most high-income countries imposed con- trols preventing the export of capital, and many developing countries defaulted on their liabilities. By 1950 the foreign capital stock of devel- oping countries was reduced to just 4 percent of income—far below even the modest level of 1870. Unsurprisingly, the retreat into nationalism produced anti-immigrant sentiment and governments imposed drastic restrictions on newcomers. For example, immigration to the United States declined from 15 mil- lion during 1870–1914 to 6 million between 1914 and 1950. The massive retreat from globalization did not reverse the trend to greater world inequality. By 1950 the world was far less equal than it had been in Figure 1.3 Worldwide household inequality, 1914 (figure 1.3). Average incomes were, however, substantially lower than 1910–50 had the previous trend been maintained: the world rate of growth fell by about a third. The world’s experiment with reversing globalization showed Mean log deviation that it was entirely possible but not attractive. The economic historian 0.8 Angus Maddison summarizes it thus: “Between 1913 and 1950 the world economy grew much more slowly than in 1870–1913, world trade grew 0.6 much less than world income, and the degree of inequality between regions increased substantially” (Maddison 2001, p. 22). 0.4 The combination of a slowdown in growth and a continued increase in inequality sharply reduced the decline in the incidence of poverty— 0.2 approximately back to what it had been in the period from 1820 to 1870. The decline in the incidence was now well below the rate of popu- 0 lation growth, so that the absolute number of poor people increased by 1910 1929 1950 about 25 percent. Despite the rise in poverty viewed in terms of income, Source: Bourguignon and Morrisson this was the great period of advances in life expectancy, due to the global (2001). 27 G L O B A L I Z AT I O N , G R O W T H , A N D P O V E R T Y spread of improvements in public health. Poverty is multi-dimensional, and not all its aspects are determined by economic performance. The second wave of globalization: 1945–80 The horrors of the retreat into nationalism gave an impetus to interna- tionalism. The same sentiments that led to the founding of the United Nations persuaded governments to cooperate to reduce the trade barri- ers they had previously erected. However, trade liberalization was selec- tive both in terms of which countries participated and which products were included. Broadly, by 1980 trade between developed countries in manufactured goods had been substantially freed of barriers, but barri- ers facing developing countries had been substantially removed only for those primary commodities that did not compete with agriculture in the developed countries. For agriculture and manufactures, developing coun- tries faced severe barriers. Further, most developing countries erected barriers against each other and against developed countries. The partial reduction in trade barriers was reinforced by continued reductions in transport costs: between 1950 and the late 1970s sea freight charges again fell by a third. Overall, trade doubled relative to world income, approximately recovering the level it had reached during the first wave of globalization. However, the resulting liberalization was very lopsided. For developing countries it restored the North-South pattern of trade—the exchange of manufactures for land-intensive pri- mary commodities—but did not restore the international movements of capital and labor. By contrast, for rich countries the second wave of globalization was spectacular. The lifting of barriers between them greatly expanded the exchange of manufactures. For the first time international specialization within manufacturing became important, allowing agglomeration and scale economies to be realized. This helped to drive up the incomes of the rich countries relative to the rest. Economies of agglomeration. The second wave introduced a new type of trade: rich country specialization in manufacturing niches that gained productivity from agglomerated clusters. Most trade between developed countries became determined not by comparative advantage based on dif- ferences in factor endowments but by cost savings from agglomeration and scale. Because such cost savings are quite specific to each activity, 28  T H E N E W W AV E O F G L O B A L I Z AT I O N A N D I T S E C O N O M I C E F F E C T S although each individual industry became more and more concentrated geographically, industry as a whole remained very widely dispersed to avoid costs of congestion. Firms cluster together, some producing the same thing and others connected by vertical linkages (Fujita, Krugman, and Venables 1999). Japanese auto companies, for example, are well known for wanting certain of their parts suppliers to locate within a short distance of the main assembly plant. As Sutton (2000) describes it: “Two-thirds of manufacturing output consists of intermediate goods, sold by one firm to another. The presence of a rich network of manufacturing firms provides a positive externality to each firm in the system, allowing it to acquire inputs locally, thus reducing the costs of transport, of coordi- nation, of monitoring and of contracting.” Clustering enables greater specialization and thus raises productivity. In turn, it depends upon the ability to trade internationally at low cost. The classic statement of this was indeed Adam Smith’s: “The division of labor is limited only by the extent of the market” (The Wealth of Nations). Smith argued that a larger market permits a finer division of labor, which in turn facilitates innovation. For example, Sokoloff (1988) shows that as the Erie Canal progressed westward in the first half of the 19th cen- tury, patent registrations rose county by county as the canal reached them. This pattern suggests that ideas that were already in people’s heads became economically viable through access to a larger market. However, while agglomeration economies are good news for those in the clusters, they are bad news for those left out. A region may be uncompetitive simply because not enough firms have chosen to locate there. As a result “a ‘divided world’ may emerge, in which a network of manufacturing firms is clustered in some ‘high wage’ region, while wages in the remaining regions stay low” (Sutton 2000). Firms will not shift to a new location until the gap in production costs becomes wide enough to compensate for the loss of agglomeration economies. Yet once firms start to relocate, the movement becomes a cascade: as firms re-base to the new location, it starts to benefit from agglomeration economies. During the second globalization wave most developing countries did not participate in the growth of global manufacturing and services trade. The combination of persistent trade barriers in developed countries, and poor investment climates and anti-trade policies in developing coun- tries, confined them to dependence on primary commodities. Even by 29 G L O B A L I Z AT I O N , G R O W T H , A N D P O V E R T Y 1980 only 25 percent of the merchandise exports of developing coun- tries were manufactured goods. Cascades of relocation did occur during the second wave, but they were to low-wage areas within developed countries. For example, until 1950 the U.S. textile industry was clustered in the high-wage Northeast. The cost pressure for it to relocate built up gradually as northern wages rose and as institutions and infrastructure improved in southern states. Within a short period in the 1950s the whole industry relocated to the Carolinas. The effect on inequality and poverty. During globalization’s second wave there were effectively two trading systems: the old North-South system, and the new intra-North system. The intra-North system was quite powerfully equalizing: lower-income industrial countries caught up with higher-income ones. Figure 1.4 shows this pattern of long-term convergence among OECD economies. Second wave globalization coincided with the growth of policies for redistribution and social protection within developed societies. Not only did inequalities reduce between countries—probably an effect of globalization—but inequality was reduced within countries, probably as a result of these social programs. Figure 1.5 shows the dramatic reduction both in between-country and within-country inequality that occurred in developed countries during the period. The second wave Figure 1.4 Long-term convergence among OECD countries Percent annual growth rate 1820–1990 2.0 Japan Canada 1.8 Finland Germany United States Norway Sweden 1.6 Denmark Italy France Belgium Austria Ireland 1.4 Spain Australia Netherlands United Kingdom 1.2 6.4 6.6 6.8 7.0 7.2 7.4 7.6 GDP per capita in 1820 (Geary-Khamis dollars, log) Source: Maddison (1995). 30  T H E N E W W AV E O F G L O B A L I Z AT I O N A N D I T S E C O N O M I C E F F E C T S of globalization was thus spectacularly successful in reducing poverty Figure 1.5 Household within the OECD countries. Rapid growth coincided with greater inequality in rich countries, equity, both to an extent without precedent. For the industrial world 1960–80 it is often referred to as the “golden age.” Mean log deviation Second wave globalization was not golden for developing coun- 0.4 tries. Although per capita income growth recovered from the inter-war slowdown, it was substantially slower than in the rich economies. The 0.3 number of poor people continued to rise. Non-income dimensions of poverty improved—notably rising life expectancy and rising school 0.2 enrollments. In terms of equity, within developing countries in aggre- gate there was little change either between countries or within them 0.1 (figure 1.6). As a group, developing countries were being left behind by developed countries. World inequality was thus the sum of three components: greater eq- 0 1960 1965 1970 1975 1980 uity within developed countries, greater inequality between developed Within a country and developing countries, and little net change in developing countries. Between countries The net effect of these three very different components was broadly no Source: Clark, Dollar, and Kraay (2001). change. World inequality was about the same in the late 1970s as it had been a quarter of a century earlier (figure 1.7). The new wave of globalization Figure 1.6 Household inequality in the developing T HE NEW WAVE OF GLOBALIZATION, WHICH BEGAN ABOUT 1980, world, 1960–80 is distinctive. First, and most spectacularly, a large group of devel- oping countries broke into global markets. Second, other Mean log deviation developing countries became increasingly marginalized in the world 0.6 economy and suffered declining incomes and rising poverty. Third, 0.5 international migration and capital movements, which were negligible 0.4 during second wave globalization, have again become substantial. We take these features of the new global economy in turn. 0.3 0.2 The changing structure of trade: the rise of the new globalizers 0.1 0 The most encouraging development in third wave globalization is that 1960 1965 1970 1975 1980 some developing countries, accounting for about 3 billion people, have Within a country succeeded for the first time in harnessing their labor abundance to Between countries give them a competitive advantage in labor-intensive manufactures and Source: Clark, Dollar, and Kraay (2001). 31 G L O B A L I Z AT I O N , G R O W T H , A N D P O V E R T Y Figure 1.7 Worldwide services. In 1980 only 25 percent of the exports of developing coun- household inequality, 1960–79 tries were manufactures; by 1998 this had risen to 80 percent (figure Mean log deviation 1.8). Davis and Weinstein (forthcoming) show that developing coun- 1.0 try exports are indeed now labor-intensive. This is an astonishing transformation over a very short period. The 0.8 developing countries that have shifted into manufactures trade are quite diverse. Relatively low-income countries such as China, Bangladesh, 0.6 and Sri Lanka have manufactures shares in their exports that are above the world average of 81 percent. Others, such as India, Turkey, Morocco, 0.4 and Indonesia, have shares that are nearly as high as the world average. 0.2 Another important change in the pattern of developing country exports has been their substantial increase in exports of services. In the 0 1960– 1965– 1970– 1975– early 1980s, commercial services made up 17 percent of the exports of 64 69 74 79 rich countries but only 9 percent of the exports of developing coun- Within a country tries. During the third wave of globalization the share of services in Between countries rich country exports increased slightly—to 20 percent—but for devel- Source: Clark, Dollar, and Kraay (2001). oping countries the share almost doubled to 17 percent. What accounted for this shift? Partly it was changing economic policy. Tariffs on manufactured goods in developed countries contin- ued to decline, and many developing countries undertook major trade liberalizations. At the same time many countries liberalized barriers to foreign investment and improved other aspects of their investment cli- mate. Partly it was due to continuing technical progress in transport Figure 1.8 Shares in merchandise exports in developing country exports Percent 90 80 Manufactures 70 60 50 40 30 Minerals 20 10 Agriculture 0 1965 1970 1975 1980 1985 1990 1995 Source: Martin (2001). 32  T H E N E W W AV E O F G L O B A L I Z AT I O N A N D I T S E C O N O M I C E F F E C T S and communications (Venables 2001). Containerization and airfreight brought a considerable speeding up of shipping, allowing countries to participate in international production networks. New information and communications technologies mean it is easier to manage and control geographically dispersed supply chains. And information based activi- ties are “weightless” so their inputs and outputs (digitized informa- tion) can be shipped at virtually no cost. Some analysts have suggested that new technologies lead to the “death of distance” (Cairncross 1997) undermining the advantage of agglomeration. This is likely true in a few activities, while for other activi- ties distance seems to be becoming even more important—for example, the proximity requirements of “just-in time” technologies. The OECD agglomerations continue to have massive cost advantages and technologi- cal change may even be increasing these advantages. Even within well- located countries there will be clustering as long as agglomeration econo- mies are important, and hence wage pressure to migrate to towns and cities. For example, within the United States, which has similar institu- tions across the country, there has been a clear trend for economic activity and labor to migrate away from the center of the country. One hundred years ago the Mississippi River and the Great Lakes provided reasonably good transport links. But recent increases in the scale of ocean-going ships and related declines in ocean shipping rates have increased the competi- tiveness of U.S. coastal locations compared to the center. It is cheaper to ship iron ore from Australia to Japan than the much shorter distance across the Great Lakes from Minnesota to the steel mills of Illinois and Indiana. For large countries such as China and India we can expect to see more migration toward coastal areas as development proceeds. By the end of the millennium economic activity was highly concen- trated geographically (map 1.1). This reflects differences in policies across countries, natural geographic advantages and disadvantages, and agglomeration and scale economy effects. As the map shows, Africa has a very low output density and this is unlikely to change through a uniform expansion of production in every location. Africa has the po- tential to develop a number of successful manufacturing/service ag- glomerations, but if its development is like that of any other large re- gion, there will be several such locations around the continent and a need for labor to migrate to those places. Africa is much less densely populated than Europe, and the importance of migration to create agglomerations is therefore greater. 33 G L O B A L I Z AT I O N , G R O W T H , A N D P O V E R T Y Map 1.1 GNP density GNP per square kilometer $0–499 $0–499 $500–1,099 $1,100–2,999 $500–1,099 $3,000–8,099 $8,100–21,199 $1,100–2,999 $22,000–59,999 $3,000–8,099 $60,000–162,999 $163,000–441,999 $8,100–21,199 $442,000–546,000,000 $22,000–59,999 $60,000–162,999 $163,000–441,999 $442,000–546,000,000 Source: Sachs, Mellinger, and Gallup (2001). However, most countries are not just victims of their location. The newly globalizing developing countries helped their firms to break into industrial markets by improving the complementary infrastructure, skills and institutions that modern production needs. So, to some extent those developing countries that broke into world markets just happened to be well located, and to some extent they shaped events by their own actions. To get some understanding of this distinction it is useful to look at the characteristics of the post-1980 developing globalizers. We rank developing countries by the extent to which they increased trade relative to income over the period, and compare the top third with the remain- ing two-thirds. The one-third/two-thirds distinction is of course arbi- trary. We label the top third “more globalized” without in any sense implying that they adopted pro-trade policies.3 The rise in trade may have been due to other policies or even to pure chance. By construction, the “more globalized” had a large increase in trade relative to income: 104 percent, compared to 71 percent for the rich countries. The re- maining two-thirds of developing countries have actually had a decline in trade to GDP over this period. The variation in e