Globalization Issues Brief PDF 2008

I S S U E 0 2 / 0 8 M A Y 2 0 0 8 Other Resources Globalization: A Brief Overview IMF World Economic Outlook By IMF Staff presents economic analysis at the global le...

I S S U E 0 2 / 0 8 M A Y 2 0 0 8 Other Resources Globalization: A Brief Overview IMF World Economic Outlook By IMF Staff presents economic analysis at the global level, in major county A perennial challenge facing all of the world’s countries, regardless of their level of economic groups, and in many individual development, is achieving financial stability, economic growth, and higher living standards. countries, reviewing global There are many different paths that can be taken to achieve these objectives, and every coun- macroeconomic developments, forecasting growth, and citing try’s path will be different given the distinctive nature of national economies and political risks. systems. The ingredients contributing to China’s high growth rate over the past two decades have, for example, been very different from those that have contributed to high growth in IMF Global Financial Stability Report provides an assessment countries as varied as Malaysia and Malta. of global financial markets, highlighting current potential Yet, based on experiences throughout the world, several basic principles seem risks to financial market stability. to underpin greater prosperity. These include investment (particularly foreign direct investment), the spread of technology, strong institutions, sound macroeco- Globalization, Financial Mar- kets, and Fiscal Policy (IMF nomic policies, an educated workforce, and the existence of a market economy. Policy Paper) describes how Furthermore, a common denominator which appears to link nearly all high- fiscal policy can contribute growth countries together is their participation in, and integration with, the to realizing the benefits of global economy. two important and ongoing developments: globalization and There is substantial evidence, from countries of different sizes and different financial deepening. regions, that as countries “globalize” their citizens benefit, in the form of access These resources are available to a wider variety of goods and services, lower prices, more and better-paying online at www.imf.org. jobs, improved health, and higher overall living standards. It is probably no mere coincidence that over the past 20 years, as a number of countries have become more open to global economic forces, the percentage of the developing world living in extreme poverty—defined as living on less than $1 per day—has been cut in half. As much as has been achieved in connection with globalization, there is much more to be done. Regional disparities persist: while poverty fell in East and South Asia, it actually rose in sub-Saharan Africa. The UN’s Human Develop- ment Report notes there are still around 1 billion people surviving on less than $1 per day—with 2.6 billion living on less than $2 per day. Proponents of global- ization argue that this is not because of too much globalization, but rather too little. And the biggest threat to continuing to raise living standards throughout the world is not that globalization will succeed but that it will fail. It is the people of developing economies who have the greatest need for globalization, as it provides them with the opportunities that come with being part of the Issues Briefs provide nontech- world economy. nical discussions of policy issues and serve as a source of These opportunities are not without risks—such as those arising from volatile information to the public and capital movements. The International Monetary Fund works to help economies as a contribution to debate on issues of topical interest. Issues Brief M AY 2 0 0 8 manage or reduce these risks, through economic analysis The stock of international claims (primarily bank loans), and policy advice and through technical assistance in areas as a percentage of world GDP, increased from roughly such as macroeconomic policy, financial sector sustainability, 10 percent in 1980 to 48 percent in 2006. and the exchange-rate system. The number of minutes spent on cross-border telephone The risks are not a reason to reverse direction, but for all calls, on a per-capita basis, increased from 7.3 in 1991 to concerned—in developing and advanced countries, among 28.8 in 2006. both investors and recipients—to embrace policy changes The number of foreign workers has increased from to build strong economies and a stronger world financial 78 million people (2.4 percent of the world population) system that will produce more rapid growth and ensure that in 1965 to 191 million people (3.0 percent of the world poverty is reduced. population) in 2005. The following is a brief overview to help guide anyone The growth in global markets has helped to promote ef- interested in gaining a better understanding of the many ficiency through competition and the division of labor—the issues associated with globalization. specialization that allows people and economies to focus on what they do best. Global markets also offer greater What is Globalization? opportunity for people to tap into more diversified and larger markets around the world. It means that they can Economic “globalization” is a historical process, the result have access to more capital, technology, cheaper imports, of human innovation and technological progress. It refers and larger export markets. But markets do not necessarily to the increasing integration of economies around the ensure that the benefits of increased efficiency are shared world, particularly through the movement of goods, ser- by all. Countries must be prepared to embrace the policies vices, and capital across borders. The term sometimes also needed, and, in the case of the poorest countries, may need refers to the movement of people (labor) and knowledge the support of the international community as they do so. (technology) across international borders. There are also broader cultural, political, and environmental dimensions The broad reach of globalization easily extends to daily of globalization. choices of personal, economic, and political life. For ex- ample, greater access to modern technologies, in the world The term “globalization” began to be used more com- of health care, could make the difference between life and monly in the 1980s, reflecting technological advances death. In the world of communications, it would facilitate that made it easier and quicker to complete international commerce and education, and allow access to independent transactions—both trade and financial flows. It refers to media. Globalization can also create a framework for coop- an extension beyond national borders of the same market eration among nations on a range of non-economic issues forces that have operated for centuries at all levels of human that have cross-border implications, such as immigration, economic activity—village markets, urban industries, or the environment, and legal issues. At the same time, the financial centers. influx of foreign goods, services, and capital into a country There are countless indicators that illustrate how goods, can create incentives and demands for strengthening the capital, and people, have become more globalized. education system, as a country’s citizens recognize the com- petitive challenge before them. The value of trade (goods and services) as a percentage of world GDP increased from 42.1 percent in 1980 to Perhaps more importantly, globalization implies that 62.1 percent in 2007. information and knowledge get dispersed and shared. Foreign direct investment increased from 6.5 percent of world GDP in 1980 to 31.8 percent in 2006.  BIS Quarterly Review, Bank for International Settlements (December 2006), p. 29.  IMF and International Telecommunications Union data.  Issues Brief M AY 2 0 0 8 Innovators—be they in business or government—can draw advantage. Trade promotes economic resilience and flexibil- on ideas that have been successfully implemented in one ity, as higher imports help to offset adverse domestic supply jurisdiction and tailor them to suit their own jurisdiction. shocks. Greater openness can also stimulate foreign invest- Just as important, they can avoid the ideas that have a ment, which would be a source of employment for the local clear track record of failure. Joseph Stiglitz, a Nobel laureate workforce and could bring along new technologies—thus and frequent critic of globalization, has nonetheless ob- promoting higher productivity. served that globalization “has reduced the sense of isolation Restricting international trade—that is, engaging in pro- felt in much of the developing world and has given many tectionism— generates adverse consequences for a country people in the developing world access to knowledge well that undertakes such a policy. For example, tariffs raise the beyond the reach of even the wealthiest in any country a prices of imported goods, harming consumers, many of century ago.” which may be poor. Protectionism also tends to reward concentrated, well-organized and politically-connected International Trade groups, at the expense of those whose interests may be A core element of globalization is the expansion of world more diffuse (such as consumers). It also reduces the variety trade through the elimination or reduction of trade barri- of goods available and generates inefficiency by reducing ers, such as import tariffs. Greater imports offer consumers competition and encouraging resources to flow into pro- a wider variety of goods at lower prices, while providing tected sectors. strong incentives for domestic industries to remain com- Developing countries can benefit from an expansion in petitive. Exports, often a source of economic growth for international trade. Ernesto Zedillo, the former president developing nations, stimulate job creation as industries sell of Mexico, has observed that, “In every case where a poor beyond their borders. More generally, trade enhances na- nation has significantly overcome its poverty, this has been tional competitiveness by driving workers to focus on those achieved while engaging in production for export markets vocations where they, and their country, have a competitive and opening itself to the influx of foreign goods, invest- ment, and technology.” And the trend is clear. In the late 1980s, many developing countries began to dismantle Trade in Goods and Services their barriers to international trade, as a result of poor (Percent of regional GDP) economic performance under protectionist polices and 140 various economic crises. In the 1990s, many former Eastern Sub-Saharan Africa CEE & CIS bloc countries integrated into the global trading system 120 Developing Asia Middle East and North Africa and developing Asia—one of the most closed regions 100 Latin America to trade in 1980—progressively dismantled barriers to Advanced economies trade. Overall, while the average tariff rate applied by devel- 80 oping countries is higher than that applied by advanced 60 countries, it has declined significantly over the last several decades. 40 20 0 1970 73 76 79 82 85 88 91 94 97 2000 03 06  Remarks by former President of Mexico Ernesto Zedillo at the  Joseph Stiglitz (2003), Globalization and Its Discontents (New York: plenary session of the World Economic Forum, Davos, Switzerland, W.W. Norton & Company), p. 4. January 28, 2000.  Issues Brief M AY 2 0 0 8 Cross-Border Assets and Liabilities (Percent GDP) 1990 1 2006 300 300 FDI FDI 250 Equity 250 Equity 200 Debt 200 Debt 150 Reserves 150 Reserves 100 100 50 50 0 0 -50 -50 -100 -100 -150 -150 -200 -200 -250 -250 Latin America Sub-Saharan Central and Commonwealth Developing Middle East Newly Advanced Latin America Sub-Saharan Central and Commonwealth Developing Middle East Newly Advanced and the Africa Eastern of Independent Asia and Industrialized Economies and the Africa Eastern of Independent Asia and Industrialized Economies Caribbean Europe States North Africa Asian Caribbean Europe States North Africa Asian Economies Economies 1 Data series begin in 1995 for Central and Eastern Europe and the Commonwealth of Independent States The implications of globalized financial markets ization. The analysis of the past 30 years of data reveals two main lessons for countries to consider. The world’s financial markets have experienced a dramatic increase in globalization in recent years. Global capital flows First, the findings support the view that countries must fluctuated between 2 and 6 percent of world GDP ­during carefully weigh the risks and benefits of unfettered capital the period 1980–95, but since then they have risen to flows. The evidence points to largely unambiguous gains 14.8 percent of GDP, and in 2006 they totaled $7.2 trillion, from financial integration for advanced economies. In more than tripling since 1995. The most rapid increase has emerging and developing countries, certain factors are likely been experienced by advanced economies, but emerging to influence the effect of financial globalization on eco- markets and developing countries have also become more nomic volatility and growth: countries with well-developed financially integrated. As countries have strengthened their financial sectors, strong institutions, sounds macroeconomic capital markets they have attracted more investment capital, policies, and substantial trade openness are more likely to which can enable a broader entrepreneurial class to devel- gain from financial liberalization and less likely to risk in- op, facilitate a more efficient allocation of capital, encour- creased macroeconomic volatility and to experience finan- age international risk sharing, and foster economic growth. cial crises. For example, well-developed financial markets help moderate boom-bust cycles that can be triggered by Yet there is an energetic debate underway, among lead- surges and sudden stops in international capital flows, while ing academics and policy experts, on the precise impact of strong domestic institutions and sound macroeconomic poli- financial globalization. Some see it as a catalyst for economic cies help attract “good” capital, such as portfolio equity flows growth and stability. Others see it as injecting dangerous— and FDI. and often costly—volatility into the economies of growing middle-income countries. The second lesson to be drawn from the study is that there are also costs associated with being overly cautious A recent paper by the IMF’s Research Department takes about opening to capital flows. These costs include lower in- stock of what is known about the effects of financial global-  Reaping the Benefits of Financial Globalization, IMF Discussion Paper, (http://www.imf.org/external/np/res/docs/2007/0607.htm).  Issues Brief M AY 2 0 0 8 ternational trade, higher investment costs for firms, poorer countries—some people have, inevitably, been bigger ben- economic incentives, and additional administrative/moni- eficiaries of globalization than others. toring costs. Opening up to foreign investment may encour- Over the past two decades, income inequality has risen age changes in the domestic economy that eliminate these in most regions and countries. At the same time, per capita distortions and help foster growth. incomes have risen across virtually all regions for even the Looking forward, the main policy lesson that can be poorest segments of populations, indicating that the poor drawn from these results is that capital account liberaliza- are better off in an absolute sense during this phase of glo- tion should be pursued as part of a broader reform package balization, although incomes for the relatively well off have encompassing a country’s macroeconomic policy frame- increased at a faster pace. Consumption data from groups of work, domestic financial system, and prudential regulation. developing countries reveal the striking inequality that exists Moreover, long-term, non-debt-creating flows, such as FDI, between the richest and the poorest in populations across should be liberalized before short-term, debt-creating in- different regions. flows. Countries should still weigh the possible risks involved As discussed in the October 2007 issue of the World Eco- in opening up to capital flows against the efficiency costs nomic Outlook, one must keep in mind that there are many associated with controls, but under certain conditions (such sources of inequality. Contrary to popular belief, increased as good institutions, sound domestic and foreign policies, trade globalization is associated with a decline in inequal- and developed financial markets) the benefits from financial ity. The spread of technological advances and increased globalization are likely to outweigh the risks. financial globalization—and foreign direct investment in particular—have instead contributed more to the recent Globalization, income inequality, and poverty rise in inequality by raising the demand for skilled labor As some countries have embraced globalization, and expe- and increasing the returns to skills in both developed and rienced significant income increases, other countries that developing countries. Hence, while everyone benefits, those have rejected globalization, or embraced it only tepidly, with skills benefit more. have fallen behind. A similar phenomenon is at work within Share of Poorest and Richest Quintiles in National Consumption Individual countries’ income distribution data are aggregated to create regional income distribution data, so both inter- and intra-country inequality are ­assessed. The data use purchasing power parities based on 2005 prices and cover 93 percent of developing countries’ total population. 80 70 Richest 20% 60 Poorest 20% 50 40 30 20 10 0 Europe and Central Asia South Asia East Asia and Pacific Middle East and North Africa Latin America and the Caribbean Sub-Saharan Africa Source: World Bank  Issues Brief M AY 2 0 0 8 It is important to ensure that the gains from globaliza- lated into higher incomes for the poor.” Dollar and Kraay tion are more broadly shared across the population. To this also found that in virtually all events in which a country effect, reforms to strengthen education and training would experienced growth at a rate of two percent or more, the help ensure that workers have the appropriate skills for income of the poor rose. the evolving global economy. Policies that broaden the Critics point to those parts of the world that have access of finance to the poor would also help, as would achieved few gains during this period and highlight it as further trade liberalization that boosts agricultural exports a failure of globalization. But that is to misdiagnose the from developing countries. Additional programs may in- problem. While serving as Secretary-General of the United clude providing adequate income support to cushion, Nations, Kofi Annan pointed out that “the main losers in but not obstruct, the process of change, and also making today’s very unequal world are not those who are too much health care less dependent on continued employment exposed to globalization. They are those who have been and increasing the portability of pension benefits in some left out.” A recent BBC World Service poll found that on countries. average 64 percent of those polled—in 27 out of 34 coun- Equally important, globalization should not be rejected tries—held the view that the benefits and burdens of “the because its impact has left some people unemployed. The economic developments of the last few years” have not been dislocation may be a function of forces that have little to do shared fairly. In developed countries, those who have this with globalization and more to do with inevitable technolog- view of unfairness are more likely to say that globalization is ical progress. And, the number of people who “lose” under growing too quickly. In contrast, in some developing coun- globalization is likely to be outweighed by the number of tries, those who perceive such unfairness are more likely to people who “win.” say globalization is proceeding too slowly. Martin Wolf, the Financial Times columnist, highlights As individuals and institutions work to raise living stan- one of the fundamental contradictions inherent in those dards throughout the world, it will be critically important who bemoan inequality, pointing out that this charge to create a climate that enables these countries to realize amounts to arguing “that it would be better for everybody to maximum benefits from globalization. That means focusing be equally poor than for some to become significantly better on macroeconomic stability, transparency in government, off, even if, in the long run, this will almost certainly lead to a sound legal system, modern infrastructure, quality educa- advances for everybody.” tion, and a deregulated economy. Indeed, globalization has helped to deliver extraordinary Myths about globalization progress for people living in developing nations. One of the most authoritative studies of the subject has been car- No discussion of globalization would be complete without dis- ried out by World Bank economists David Dollar and Aart pelling some of the myths that have been built up around it. Kraay. They concluded that since 1980, globalization has Downward pressure on wages: Globalization is rarely the contributed to a reduction in poverty as well as a reduction primary factor that fosters wage moderation in low-skilled in global income inequality. They found that in “globaliz- work conducted in developed countries. As discussed in a ing” countries in the developing world, income per person recent issue of the World Economic Outlook, a more significant grew three-and-a-half times faster than in “non-globalizing” factor is technology. As more work can be mechanized, and countries, during the 1990s. In general, they noted, “higher as fewer people are needed to do a given job than in the growth rates in globalizing developing countries have trans-  Martin Wolf (2005), Why Globalization Works (New Haven and Lon- don: Yale University Press), p. 157.  From remarks at an UNCTAD conference in February 2000, in  “Growth is Good for the Poor” Journal of Economic Growth (2002), and Johan Norberg (2003), In Defense of Global Capitalism (Washington: “Trade, Growth, and Poverty”, The Economic Journal (2004). Cato Institute), p. 155.  Issues Brief M AY 2 0 0 8 past, the demand for that labor will fall, and as a result the kets also poses great difficulty for the stability and reliability prevailing wages for that labor will be affected as well. of those markets, as well as for the global economy. Credit market strains have intensified and spread across asset The “race to the bottom”: Globalization has not caused the classes and banks, precipitating a financial shock that many world’s multinational corporations to simply scour the have characterized as the most serious since the 1930s. globe in search of the lowest-paid laborers. There are These episodes are reminders that a breakdown in global- numerous factors that enter into corporate decisions on ization—meaning a slowdown in the global flows of goods, where to source products, including the supply of skilled la- services, capital, and people—can have extremely adverse bor, economic and political stability, the local infrastructure, consequences. the quality of institutions, and the overall business climate. In an open global market, while jurisdictions do compete Openness to globalization will, on its own, deliver economic with each other to attract investment, this competition growth: Integrating with the global economy is, as econo- incorporates factors well beyond just the hourly wage rate. mists like to say, a necessary, but not sufficient, condition for According to the UN Information Service, the developed economic growth. For globalization to be able to work, a world hosts two-thirds of the world’s inward foreign direct country cannot be saddled with problems endemic to many investment. The 49 least developed countries—the poorest developing countries, from a corrupt political class, to poor of the developing countries—account for around 2 percent infrastructure, and macroeconomic instability. of the total inward FDI stock of developing countries. The shrinking state: Technologies that facilitate commu- Nor is it true that multinational corporations make a con- nication and commerce have curbed the power of some sistent practice of operating sweatshops in low-wage coun- despots throughout the world, but in a globalized world tries, with poor working conditions and substandard wages. governments take on new importance in one critical respect, While isolated examples of this can surely be uncovered, it is namely, setting, and enforcing, rules with respect to con- well established that multinationals, on average, pay higher tracts and property rights. The potential of globalization can wages than what is standard in developing nations, and offer never be realized unless there are rules and regulations in higher labor standards. place, and individuals to enforce them. This gives economic actors confidence to engage in business transactions. Globalization is irreversible: In the long run, globalization is likely to be an unrelenting phenomenon. But for signifi- Further undermining the idea of globalization shrinking cant periods of time, its momentum can be hindered by a states is that states are not, in fact, shrinking. Public expen- variety of factors, ranging from political will to availability of ditures are, on average, as high or higher today as they have infrastructure. Indeed, the world was thought to be on an been at any point in recent memory. And among OECD irreversible path toward peace and prosperity in the early countries, government tax revenue as a percentage of GDP 20th century, until the outbreak of Word War I. That war, increased from 25.5 percent in 1965 to 36.6 percent in 2006. coupled with the Great Depression, and then World War II, dramatically set back global economic integration. And in The future of globalization many ways, we are still trying to recover the momentum we Like a snowball rolling down a steep mountain, globaliza- lost over the past 90 years or so. tion seems to be gathering more and more momentum. That fragility of nearly a century ago still exists today—as And the question frequently asked about globalization is not we saw in the aftermath of September 11th, when U.S. air whether it will continue, but at what pace. travel came to a halt, financial markets shut down, and the A disparate set of factors will dictate the future direc- economy weakened. The current turmoil in financial mar- tion of globalization, but one important entity—sovereign governments—should not be overlooked. They still have the  Linda Lim (2001) The Globalization Debate: Issues and Challenges (Geneva: International Labor Organization). power to erect significant obstacles to globalization, ranging  Issues Brief M AY 2 0 0 8 from tariffs to immigration restrictions to military hostilities. Indeed, the lessons included avoiding fragmentation and Nearly a century ago, the global economy operated in a very the breakdown of cooperation among nations. The world is open environment, with goods, services, and people able to still made up of nation states and a global marketplace. We move across borders with little if any difficulty. That open- need to get the right rules in place so the global system is ness began to wither away with the onset of World War I in more resilient, more beneficial, and more legitimate. Inter- 1914, and recovering what was lost is a process that is still national institutions have a difficult but indispensable role underway. Along the process, governments recognized the in helping to bring more of globalization’s benefits to more importance of international cooperation and coordination, people throughout the world. By helping to break down bar- which led to the emergence of numerous international or- riers—ranging from the regulatory to the cultural—more ganizations and financial institutions (among which the IMF countries can be integrated into the global economy, and and the World Bank, in 1944). more people can seize more of the benefits of globalization. The IMF staff who contributed to this Issues Brief are Julian Di Giovanni, Glenn Gottselig, Florence Jaumotte, Luca Antonio Ricci, and Stephen Tokarick, with assistance from Mary Yang. Matt Rees served as a consultant on the project. The Issues Briefs series is produced by the Policy Communication Division of the External Relations Department in collaboration with staff in other IMF departments. The series is published by the IMF in English, French, and Spanish and is also available electronically on the IMF’s website, http://www.imf.org. To request hard copies please contact IMF Publication Services 700 19th Street, N.W. Washington, D.C. 20431. Telephone: (202) 623-7430 Fax: (202 623-7201 Email: [email protected]