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IMF Economic Forum: Globalization: a blessing or a curse?

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2002
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Graciela Kaminsky pinpointed the dichotomy that characterizes most discussions of globalization by asking if financial liberalization is a blessing or a curse. The answer depends on what literature you read. Those who consider globalization a blessing, she explained, look at the long-run effects, arguing that it improves the functioning of financial markets, allows risk to be diversified across countries, and triggers economic growth.

The opposing view, that globalization is a curse, looks at the short-run impact, citing evidence that most of the financial crises of the 1980s and 1990s were preceded by financial liberalization. This was true of all the Asian crisis countries, Kaminsky noted, which suffered recessions caused by excessive booms and busts in stock and real estate markets.

However, she said, there is evidence that, as liberalization persists, financial markets become much more stable. And this leads to the important question of how—and whether—liberalization and reform should be sequenced. Some argue that it is risky to open up a financial system that is not prepared to cope with free capital movements. For example, if a country has capital controls, its banks tend to be inefficient and have poor balance sheets. Dismantling the controls opens the floodgate to capital flows, and already-bankrupt banks can easily obtain new funding. A financial crisis is likely to erupt.

Thus, the solution appears to lie in cleaning up the institutional system before deregulation occurs. But others point to evidence that changes in institutions do not occur before financial liberalization, Kaminsky said. In fact, liberalization is needed to trigger an improvement in institutions. She urged policymakers to proceed carefully: if a financial crisis takes place after liberalization, capital controls are reinstated—as has happened in Latin America—too soon for the country to derive any benefits.

Trade benefits the poor

Turning to trade, David Dollar said that North-South relations had changed dramatically over the past 20 years. Developing countries once exported mostly primary products, but many have now switched to services and manufactured products, which are also tied to foreign direct investment. Some developing countries may trade less today than they did 20 years ago, but some others are participating very actively in the trade side of globalization. These “new globalizers,” as he called them (such as Bangladesh, Brazil, China, India, Mexico, and Vietnam), include some of the world’s poorest countries. The countries that are less well integrated with the global economy are often poor (some sub-Saharan African countries fall in this group) but also include a number of lower-middle-income countries.

What is the impact of integration and nonintegra-tion on poor countries and poor people? Some argue that expanded trade makes the rich richer and the poor poorer, while others say that, under some conditions, globalization helps developing countries grow and reduce poverty. Dollar said that World Bank and other studies support the second belief.

First, the research shows that developing countries that embraced globalization have generally seen accelerations in their growth rates over the past 20 years. During the 1990s, Dollar noted, they grew almost twice as fast as the rich countries (5 percent versus 2 percent)—and even excluding China, the most populous nation, the rate is still 3.5 percent. While acknowledging that causality was difficult to prove, he said there was pretty solid evidence that participation in trade and foreign direct investment was very good for developing country growth.

Second, Dollar said that World Bank studies also show that globalizing developing countries reduced their poverty rates in the 1990s and, at the same time, made rapid social progress. Wages and school enrollment rates have risen, and infant mortality and child labor have declined. Nor is there evidence that a systematic relationship exists between measures of globalization and changes in inequality. In some of the new globalizers, inequality has increased, while in others income distribution has shifted in favor of the poor.

Third, integrating with the global economy is not only about trade and investment policies. Developing countries also need to put in place a range of other policies that will enhance the investment climate. For example, Bangladesh has reduced formal tariffs enough to qualify as a globalizer, but corruption and inefficient practices at its main port create bottlenecks in the transportation network that are tantamount to an 8 percent export tax. Problems clearing goods through customs are also common in a number of other developing countries and need to be addressed.

The bottom line? According to Dollar, since 1980, despite increases in world population, the number of poor people has declined by about 200 million because of rapid growth in low-income countries. Integration, he concluded, has been “one part of a successful strategy for many low-income countries to grow faster and reduce poverty.”

Are the poor getting poorer?

Carol Graham explored the question of income inequality in more depth. Much of the work examining this question has looked at Gini coefficients, which she described as “static measures—snapshots in time of particular countries’ income distributions and of the whole distribution.” So Graham and Nancy Birdsall (President, Center for Global Development) studied movements up and down the income ladder. Income mobility, Graham granted, is harder to measure—it involves obtaining data for the same group of people over time—but reveals much more than Gini coefficients.

To illustrate the relationship between globalization and income mobility, Graham and Birdsall compared mobility rates in Peru for the period during which it liberalized trade and implemented market-oriented reforms (that is, it embraced globalization) with those in the United States. They found that Peru, an emerging market economy, had both more upward and more downward mobility than the United States, widely known as the land of opportunity. Although unable to provide the reason, they reported that Peru’s opening to free trade had changed the rewards for education. Contrary to the expectation that unskilled labor would benefit the most from the opening to free trade, Graham said, skilled labor and better-educated groups saw the highest rewards. The explanation, she suggested, was that the real rewards went to countries with cheaper unskilled labor in Asia.

How well do people think they are doing? According to Graham, people’s perceptions do not necessarily match the facts. In a sample survey, Peruvians with the greatest income gains over a 10-year period tended to have the most negative perceptions. They were generally not the poorest people, who tend to do quite well when trade is liberalized, but those who fell roughly in the middle of the income distribution. These “frustrated achievers,” Graham observed, not only saw themselves as doing less well than they actually were, but they also rated themselves less satisfied with their jobs and less optimistic about their economic situations. They also tended to be less favorably disposed to democracy and to feel that society should limit the incomes of the rich. Although surprising, these results are not unique to Peru. Over a 5-year period, Russians, even more than Peruvians, perceived themselves as doing very badly when they were, in fact, doing very well.

These beliefs, Graham said, have major policy implications. For example, insecurity is a huge issue. Most Latin American countries have no unemployment insurance or broadly available social insurance. Although the poorest members of society are generally protected during a recession, those in the middle do not have a safety net. “If we’re interested in sustained public support for globalization and the kinds of policies that reduce poverty and help countries grow over time,” Graham concluded, “we should think about this”

How to measure openness

In the question-and-answer session that followed, Dollar fielded several questions about the connection between openness and growth. Hans Peter Lankes, Chief of the Trade Policy Division in the IMF’s Policy Development and Review Department, pointed out that the countries that scored highest on Dollar’s empirical tests of openness and growth were not actually the most open and had not liberalized as much as some other countries that had lower scores. In fact, he noted, China, India, and Vietnam were late liberalizers.

Dollar responded that he had defined globalizers factually, on the basis of increases in trade over the past 20 years, which he believes is a better measure of globalization than a country’s policies. Having served as an advisor to Vietnam, he had firsthand knowledge of that country’s reforms, in which trade liberalization played an important part. Vietnam reduced and stabilized inflation, gave land to peasant families, and liberalized trade simultaneously in 1989. Almost overnight, the rice crop increased, and Vietnam became the third largest exporter of rice in the world. In the first year, the income of the poor began to rise. This is a nice example of how different reforms interact,” Dollar said, and shows that trade liberalization is tied directly to the improvement in people’s lives in Vietnam.

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