The threat of trade sanctions through the WTO is not supportive but destructive. What is needed is greater support for domestic actions to improve labor and environmental outcomes. Hand-in-hand with trade liberalization, developing countries have reduced restrictions on foreign investment.
Private capital flows to developing countries--especially foreign direct investment FDI --have soared. These flows bring benefits: increased supply of capital and access to technology, management, and markets. Further, official development assistance from rich countries to poor ones has declined. For the poor locations that do not now benefit greatly from globalization, there is a need for more aid, better managed. While there are large and clear benefits from reducing trade barriers, exposure to world capital markets carries both benefits and considerable risks.
Countries need good institutions and policies for strong and sustained benefits from financial integration. Without a sound domestic financial system, integration with global capital markets can lead to disastrous results, as it did in Thailand, Indonesia, and the Republic of Korea in Foreign investment in financial and accounting services can help with the needed strengthening. Even with the best of institutions and policies, countries can be buffeted by international financial crises because these markets are subject to irrational boom and bust cycles.
Better international coordination is needed on accounting standards and transparency and on the management of incipient financial crises in such a way that adequate liquidity is ensured for countries with sound policies while at the same time private investors are discouraged from and penalized for risky lending practices. Migration is the third main global flow. The role of migration is connected to the importance of geography. In regions with poor institutions and high transport costs wages will be low, and free movement of goods and capital will not bring those wages into line with wages in good locations.
Further, within good locations there will be clustering as long as agglomeration economies are important, and hence wage pressure to migrate to towns and cities. Even greater numbers migrated from rural areas to cities within countries. The same forces operate today. Clearly there are huge real gains to individual workers who migrate to more developed economies.
While economic pressures for migration are strong, legal migration is highly restricted. Compared to years ago, the world is much less globalized when it comes to labor flows. At the same time, pressures for migration are mounting. The labor force in OECD countries is aging, while the labor force in the developing world is surging because of high birth rates. Each year 83 million people are added to world population, 82 million of them in developing countries. In Japan and the European Union EU , the ratio of workers to retirees will decline from five to one today to three to one in , without greater migration.
That will put a strain on social security systems. Potentially, there is mutual economic benefit in combining the capital and technology of the OECD countries with the labor of the developing world. To some extent that can occur through the flow of capital and production to developing countries. But geographic factors make it unlikely that capital flows and trade will eliminate the economic rationale for migration. Too many parts of the developing world have poor institutions and infrastructure that will not attract production; at the same time, some of the existing production networks in the North are too deeply rooted to move.
Institutional and policy reform and infrastructure investments in lagging developing countries could address the first concern and reduce, though not eliminate, economic pressures for migration. The experiences of Mexico and the United States illustrate how migration can be a positive factor for both economies. About 7 million Mexican citizens are living legally in the United States, along with an estimated additional 3 million undocumented Mexican workers.
Their work in the United States takes pressure off the Mexican labor market raising wages there and leads to a significant flow of remittances to relatives back home. In the United States, this labor inflow was a key factor contributing to sustained growth with low inflation in the s.
However, migration into the United States is estimated to have reduced the relative wage of unskilled workers by 5 percent, once again demonstrating that globalization typically produces winners and losers. OECD countries are in general highly restrictive about migration, and they tend to discriminate in favor of educated workers leading to a so-called "brain drain" from developing countries.
Labor flows would make a greater contribution to poverty reduction if immigration policies were more neutral and allowed more unskilled workers to immigrate. It is also affected by a host of other institutions and policies. Chapter 3 focuses on this agenda. Countries such as China, India, and Mexico have taken different approaches to integration. There are common issues that must be addressed, but different institutional arrangements and policies for tackling them.
Two of the important issues that need to be faced are the investment climate and social protection for workers. Firms in open economies face more competition. Competition brings many good effects, but there is more entry and exit of firms--"churning"--than in relatively closed economies. Studies of Chile, Colombia, and Morocco after liberalization found that one-quarter to one-third of manufacturing firms turned over in a typical four-year period.
Recent evidence from surveys of firms shows that it is unusual for manufacturing plants to shift from domestic production to exporting. For example, three-quarters of exporting plants in Morocco had exported from their first year of operation. Thus, the process of integrating into world markets is likely to require the opening of new plants and the closure of others. Chapter 3 highlights other stylized facts about domestic firms in open economies. First, while production often becomes more concentrated leading to fewer firms , the presence of imports leads to a more competitive market and lower price-cost mark-ups.
Second, there is some evidence of technology spillovers from foreign trade and investment raising the productivity of domestic firms. Third, there can be learning and threshold effects of exporting that create a better environment for productivity growth of domestic firms. Individual cases and firm-level studies reveal that developing country firms can be competitive. However, they are often hampered by a poor investment climate--including inefficient regulation, corruption, infrastructure weaknesses, and poor financial services.
A recent study of India concludes that it is possible to measure the quality of the investment climate through firm surveys and that this climate is important. With the same trade and macro policies which are national level , Indian states are getting widely different results from liberalization.
Not surprisingly, the states with good climates are getting both more domestic and more foreign investment. Thus, locations within the developing world that are benefiting strongly from globalization have created a reasonably good investment climate in which firms can start up and prosper and exit if they are not successful. Coastal China and northern Mexico are other examples, and here too poverty reduction is quite strong.
Small and medium-sized firms suffer from a poor investment climate even more than the bigger firms. Further, we should emphasize that a good investment climate is crucial for the development of rural as well as urban areas. Off-farm employment is a crucial element in raising rural incomes, and farming suffers just as much from a weak investment climate as other productive activities. Many of the regions that did not participate strongly in the global economy in the s had problems with property rights and overall investment climate.
These locations could use the international market for services such as banking, telecommunications, and power to improve their investment climates. The successful locations have devised their own solutions. China, India, and Mexico have all taken different approaches to opening up, suited to their own circumstances.
This diversity of experience among successful globalizers is one reason why any efforts to promote institutional harmonization should take careful account of differing circumstances. They should not be linked to trade agreements in any mechanical or formulaic way. Together with greater "churning" of firms comes higher labor market turnover, which can be one of the most disruptive aspects of global economic integration. In the long run workers gain from integration. Wages have grown twice as fast in the more globalized developing countries than in the less globalized ones, and faster than in rich countries as well figure 5.
The short-run effects, however, can be quite different. There is evidence that the wages of formal sector workers are reduced by trade openness and increased by direct foreign investment. Thus, in an economy that liberalizes trade and gets little foreign investment either because the investment climate is weak or simply because there is a lagged response of investors , opening up can lead to temporary declines in formal sector wages.
There is also evidence that openness--especially to FDI--increases the return to education and raises the skill premium the extra pay that skilled workers get relative to unskilled workers. Case studies of transition economies and Latin America have found that skill premiums increase after liberalization. Trade liberalization in Costa Rica led to higher demand and higher wages for more skilled workers.
After liberalization in Brazil there was a higher return to workers with a college education and a decreased return to those with intermediate levels of education. These findings highlight the importance of complementary policies both for social protection to help with temporary unemployment and for education. An increased skill premium can be a good thing because it encourages more investment in education. However, if the education system is not serving all levels of society well, then wages could become even more unequal.
Some of the important losers from globalization will be formal sector workers in protected industries. The adjustment is likely to be especially tough for older workers. Government social protection and labor market policies are very important--both for the immediate welfare of affected workers and for the longer-term welfare of all workers. To get reforms underway may require one-time compensation schemes for workers who would otherwise suffer large losses. Well-designed unemployment insurance and severance pay systems can provide protection to formal sector workers in an environment that will now have more entry and exit of firms.
The poorest people cannot be reached by such systems, but there is huge potential to reduce their vulnerability to shocks through self-targeting programs such as food-for-work schemes. Social protection can be a dynamic force for growth and innovation beyond the gaining of acceptance for change--it can be crucial to the ability of poor people to take the risks involved in entrepreneurship. Finally, the combination of openness and a well-educated labor force produces especially good results for poverty reduction and human welfare. Hence, a good education system that provides opportunities for all is critical for success in this globalizing world.
But much of the anxiety surrounding globalization concerns issues of power, culture, and the environment. Chapter 4 discusses these concerns. A recent poll of 20, people in 20 countries found that by a margin of two to one people thought globalization would materially benefit their families Environics The survey included developing countries such as Brazil, China, India, and Nigeria. But while people expect the kind of material benefits that we have documented in our report, they also express serious concerns and even fears. Citizens also perceive a lack of global governance in important areas.
About four in 10 respondents named human rights as the area most in need of stronger international control, while three in 10 said that global environmental action was the highest priority.
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- Globalization, Growth, and Poverty: Building an Inclusive World Economy;
The United States is the largest and in some respects the most successful economy on earth, giving millions of poor people, many of them immigrants from developing countries, an opportunity to rise to prosperity. But it is not the only model of success. Several economies match or exceed the American level of income per capita while having radically different policies and more equal social outcomes.
All have far less inequality than the United States with similar average income. By combining prosperity with equity they are the closest the world has yet come to eradicating poverty. Voters in the United States and these five countries have chosen substantially different models, all of which work given their respective histories.
Not only is there no ultimate model of success, there is no fixed formula for reaching success. China, India, and Mexico all globalized during the s as a result of far-reaching reform programs, but the content of these programs has differed. However, without policies to foster local and other cultural traditions, globalization may indeed lead to a dominance of American culture. In most developing countries the state is smaller relative to national income than in either the United States or the five high-income, high-equity countries noted above. Successful globalization--on any of these models--usually enlarges the state, both absolutely and relatively.
However, globalization weakens some aspects of government, making some policy instruments ineffective. Globalization will usually weaken monopolies. As countries open their markets, national monopoly producers face competition from foreign firms. However, one firm will occasionally get a sufficiently large global technological advantage that it acquires a temporary global monopoly, and more commonly oligopolies exert global market power. Such cases pose severe challenges to national anti-trust regulators. Further, there are charges that in developing countries some foreign firms may lobby or bribe to gain special privileges, for example, in telecommunications or minerals.
As global trade becomes more firmly based upon a legal framework, this potentially enhances the power of the developing countries: the weak need rules more than the strong. However, there is a danger that the rules come to favor the strong. For example, rich and poor countries have somewhat different interests regarding intellectual property and global warming. Developing countries want to keep some knowledge as a public good, while industrial countries prefer to turn it into a private good in order to reward innovation.
Developing countries will suffer most from global warming, while rich countries are generating most of the carbon dioxide CO 2 that is causing the problem. In bargaining to achieve fair rules on such issues, poor countries are handicapped by both their poverty and their fragmentation. Globalization does not have to undermine national and local environmental standards through a so-called race to the bottom. Despite widespread fears, there is no evidence of a decline in environmental standards.
In fact, a recent study of air quality in major industrial centers of the new globalizers found that it had improved significantly in all of them. A positive side of globalization is that communities can learn from each other about successful strategies to control pollution. Developing countries usually have serious problems enforcing regulations in the face of powerful vested interests. Indonesia improved compliance dramatically through a program in which environmentally dangerous factories were publicly identified, leading communities to organize against these polluters. Other communities have learned from this example and are introducing similar programs.
As with core labor standards, some groups in the rich countries are proposing that environmental regulations be policed through WTO sanctions. There are better ways to empower local communities. WTO sanctions would carry the risk of being hijacked by protectionist lobbies in rich countries and end up by restricting the opportunities of poor ones. Some environmental issues, such as global warming, are intrinsically global. They require international cooperation, and the habit of such cooperation is easier in an integrated world.
There is broad agreement among scientists that human activity has led to global warming and that much greater climate change is in store unless collective, corrective actions are taken. Where the problem comes from is clear. Seven economies the so-called E-7 account for 70 percent of CO 2 emissions. In per capita terms, the United States with 20 metric tons per capita is far ahead of other economies in terms of CO 2 emissions figure 6.
It is important for the world that the major emitting countries agree on a way to reduce greenhouse gases. This is a classic collective action problem in which each country is reluctant to move on its own because much of the benefit of its reduction in greenhouse gases will accrue to others. The Kyoto protocol is an important step forward in collaborative action to address global warming. However, some of the widespread anxieties are well founded: globalization could be much more effective for poor people, and its adverse effects could be substantially reduced.
In important respects global policies are not keeping pace with global opportunities and global risks. In our report we propose an agenda for action, both global and local, that could make globalization work better and help countries and people that have been marginalized. In part our agenda overlaps with the agenda of those who protest globalization, but it is diametrically opposed to the nationalism, protectionism, and anti-industrial romanticism that is all too prominent. Our study highlights many actions that could help make globalization more beneficial. Of these, we will emphasize seven that we see as particularly important for making globalization work for the poor.
Participation in an expanding global market has basically been a positive force for growth and poverty reduction in developing countries, which is why so many countries have chosen to become more open to foreign trade and investment. Very significant barriers to trade still remain, however, and a first area for action is a "development round" of trade negotiations. A "development round" should focus first and foremost on market access. Rich countries maintain protections in exactly the areas where developing countries have comparative advantage, and there would be large gains to poor countries if these were reduced.
These improvements in access are best negotiated in a multilateral context. Developing countries have a good argument that trade agreements should not impose labor or environmental standards on poor countries. Communities all over the world are struggling to improve living standards and labor and environmental conditions. There are positive ways that rich countries can support this. A real and positive commitment, however, requires real resources more below on this.
Imposing trade sanctions on countries that do not meet first-world standards for labor and environmental conditions can have deeply damaging effects on the living standards of poor people and for that reason is unconstructive. Furthermore, there is all too much danger that trade sanctions to enforce these standards will become new forms of protectionism that make the poor worse off. The more general point here is that trade agreements should leave countries free to take different institutional approaches to environmental standards, social protection, cultural preservation, and other issues.
Among globalized countries there is great diversity of institutions and cultures, and we see no reason why economic integration cannot respect that. Our research shows that open trade and investment policies are not going to do much for poor countries if other policies are bad. The locations in the developing world that are prospering during this most recent wave of globalization are ones that have created reasonably good investment climates in which firms, particularly small domestic firms, can start up, prosper, and expand.
Hence, a second key area for action is improving the investment climate in developing countries. A sound investment climate is not one full of tax breaks and subsidies for firms. It is rather an environment of good economic governance--control of corruption, well-functioning bureaucracies and regulation, contract enforcement, and protection of property rights.
Connectivity to other markets within a country and globally through transport and telecommunications infrastructure is a key part of a good investment climate. A bad investment climate hits agriculture and small firms even harder than bigger firms. Developing a sound investment climate is primarily a national and local responsibility and should focus particularly on the problems facing small firms. Employment in the small and medium-sized firms in towns and rural areas will be central to raising the living standards of the rural poor. Communities can use foreign investment and the international market for services to strengthen the investment climate.
The presence of foreign banks in the local market strengthens the financial infrastructure. With the right incentives, foreign investment can efficiently provide power, ports, telecommunications, and other business services. The evidence is quite strong that integration with the global market raises the return to education in different types of countries both rich and poor.
The higher return to education can be a positive thing, as it encourages households to invest in their children. But this highlights the importance of good delivery of education and health services-the third element in our agenda. If poor people have little or no access to health and education services then it is very hard for them to benefit from the growth spurred by integration. With poor social services, globalization can easily lead to mounting inequality within a country and persistence of extreme poverty.
For the newly globalizing developing countries as a group, there has been impressive progress in educational attainment--especially for primary education--and decline in infant mortality, suggesting that many locations have made the complementary investments in social services that are critical to ensure that the poor benefit from growth.
The combination of strong education for poor people and a more positive investment climate is critical for empowering poor people to participate in the benefits of a more strongly expanding economy. But empowerment goes much deeper than this. It is about organizing property rights and governance in a way that involves poor people in decisions that affect their lives.
While integration has on average been a positive force for growth and poverty reduction in developing countries, there are inevitably specific winners and losers, especially in the short run. This is true in rich and poor countries. The firm-level evidence shows that much of the dynamic benefit of open trade and investment comes from more "churning" of plants--less efficient ones die, and new ones start up and expand.
With this comes more labor market churning as well--probably the key reason why globalization is so controversial. It raises wages on average in both rich and poor countries, but there are some significant losers. Thus, the fourth area for action is to provide social protection tailored to the more dynamic labor market in an open economy.
This is important to help individual workers who will lose in the short run from opening up, as well as to create a solid social foundation on which households--especially poor ones--feel comfortable taking risks and showing entrepreneurship. We try to document what works in a relatively rich country, and for formal sector workers, and what works in poor countries and for the large number of poor in the informal sector and rural areas.
If policymakers do not put workable social protection measures into place, then many individual people will be hurt and the whole integration undertaking becomes suspect. The fifth component of our action program is a greater volume of foreign aid, better managed. Aid should be targeted to a number of different problems. The evidence shows that, when low-income countries reform and improve the investment climate and social services, private investment--both domestic and foreign--responds with a lag. It is precisely in this environment that large-scale aid can have a great impact on growth and poverty reduction.
Thus, while creating a sound policy environment is primarily a national and local responsibility, the world can help societies making difficult changes with financial support. Supporting low-income reformers--both at the national level and at the local level--is a key role for aid. Another important role for aid is to address some of the specific health and geographic challenges of marginalized countries and people. We have emphasized that there are locations that face difficult geographic challenges and that policy reform alone is not going to do much in these places.
More aid should be targeted to research into health and agricultural technologies that could make a large difference in locations suffering from malaria and other challenges. Beyond research, there is obviously a need for assistance to deliver these health innovations to those who would benefit from them. Our sixth area for action is debt relief. This is a kind of aid, but we do not want our recommendation here to get lost in our more general call for greater aid.
Many of the marginalized countries, especially in Africa, are burdened with unsustainable debts. Reducing the debt burdens of these countries will be one factor enabling them to participate more strongly in globalization. Debt relief is particularly powerful when combined with policy reform improvements in the investment climate and social services. Debt relief should make a significant difference for countries that have reasonably sound policy environments for poverty reduction, as in the Heavily Indebted Poor Country HIPC initiative.
It is important to put debt relief in the larger context of the overall foreign aid for marginalized countries. Debt relief should not come out of the existing envelope for aid in which case little of real value will result but rather needs to be complemented with greater overall volumes of assistance. The six areas that we have highlighted for policy action on globalization are primarily in the economic realm and aim to raise the income and living standards of poor people.
However, our report also examines a wide range of non-economic issues--power, culture, environment--and presents evidence about the effect of globalization on these important issues. We highlight many specific actions that can mitigate the risks and costs of globalization. Here in the action program, the seventh measure to highlight is the importance of tackling greenhouse gases and global warming.
There is broad agreement among scientists that human activity is leading to climate change and that disastrous global warming is in store unless collective, corrective action is taken. This is one example of a critical area in which there a lack of effective global cooperation at this point. It is also one of the global problems that is going to particularly burden poor countries and poor people if it is not addressed. The falling costs of communications, information, and transport that have contributed to globalization will not be reversed, but the reduction in trade and investment barriers could be reversed by protectionism and nationalism--as happened in the s.
However, protectionism and nationalism would be a profoundly damaging reaction to the challenges created by globalization. The problems must be addressed, but they are manageable. The reasonable concerns about globalization can be met without sacrificing the potential for global economic integration to dramatically benefit poor countries and poor people. Many poor people are benefiting from globalization. The challenge is to bring more of them into this process, not to retreat to the insularity and nationalism of the s. Globalization has happened before, but not like this.
Economic integration occurs through trade, migration, and capital flows. Figure 1. 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 none of these flows was sufficiently large to warrant the term globalization. For about 45 years, starting around , all these flows rapidly became substantial, driven by falling transport costs. However, globalization is not an inevitable process; this first wave was reversed by a retreat into nationalism.
Between and transport costs continued to fall, but trade barriers rose as countries followed beggar-thy-neighbor policies. By the end of that period trade had collapsed back to around its level. After governments 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 , was approximately a return to the patterns of the first wave. Since 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 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 integration, 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. Before about neither of these potentials was realized and international trade was negligible. 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 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 b 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.
The production of primary commodities for export required not just labor but large amounts of capital. As of the foreign capital stock in developing countries was only about 9 percent of their income figure 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 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. Did this lead to more or less equality? The countries that participated in it often took off economically, both the exporters of manufactures, people and capital, and the importers.
Argentina, Australia, New Zealand, and the United States became among the richest 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. Immigration is estimated to have lowered Argentine wages by 22 percent, Australian by 15 percent, Canadian by 16 percent and American by 8 percent.
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 inherent 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 describes the spectacular economic collapse of the English aristocracy between and 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 Ever since years before globalization--world income inequality as measured by the mean log deviation had started to increase drastically figure 1.
Despite widening world inequality, the unprecedented increase in growth reduced poverty as never before. In the 50 years before , the incidence of poverty had been virtually constant, falling at the rate of just 0. During the first globalization wave, the rate of decline more than doubled to 0. Even this was insufficient to offset the increase in population growth, so that the absolute number of poor people increased.
The retreat into nationalism: Technology continued to reduce transport costs: during the inter-war years sea freight costs fell by a third. However, trade policy went into reverse. As Mundell puts it: "The twentieth century began with a highly efficient international monetary system that was destroyed in World War I, and its bungled recreation in the inter-war period brought on the great depression. The United States led the way into the abyss: the Smoot-Hawley tariff, which led to retaliation abroad, was the first: between and U. Globally, rising protectionism drove international trade back down.
By exports as a share of world income were down to around 5 percent--roughly back to where it had been in Protectionism had undone 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 controls preventing the export of capital, and many developing countries defaulted on their liabilities. By the foreign capital stock of developing countries was reduced to just 4 percent of income--far below even the modest level of 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 million during to 6 million between and The massive retreat from globalization did not reverse the trend to greater world inequality. By the world was far less equal than it had been in figure 1. Average incomes were, however, substantially lower than had the previous trend been maintained: the world rate of growth fell by about a third. The economic historian Angus Maddison summarizes it thus: "Between and the world economy grew much more slowly than in , world trade grew much less than world income, and the degree of inequality between regions increased substantially" Maddison , p.
The combination of a slowdown in growth and a continued increase in inequality sharply reduced the decline in the incidence of poverty--approximately back to what it had been in the period from to The decline in the incidence was now well below the rate of population growth, so that the absolute number of poor people increased by about 25 percent. Despite the rise in poverty viewed in terms of income, this was the great period of advances in life expectancy, due to the global 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: The horrors of the retreat into nationalism gave an impetus to internationalism. The same sentiments that led to the founding of the United Nations persuaded governments to cooperate to reduce the trade barriers they had previously erected. However, trade liberalization was selective both in terms of which countries participated and which products were included.
Broadly, by trade between developed countries in manufactured goods had been substantially freed of barriers, but barriers 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 countries 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 and the late s 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 primary 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 differences in factor endowments but by cost savings from agglomeration and scale. Because such cost savings are quite specific to each activity, 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 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 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 coordination, 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. Smith argued that a larger market permits a finer division of labor, which in turn facilitates innovation. For example, Sokoloff shows that as the Erie Canal progressed westward in the first half of the 19 th century, patent registrations rose county by county as the canal reached them. 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. 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 countries, confined them to dependence on primary commodities. Even by only 25 percent of the merchandise exports of developing countries 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 the U.
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 s the whole industry relocated to the Carolinas. The effect on inequality and poverty.
The intra-North system was quite powerfully equalizing: lower-income industrial countries caught up with higher-income ones. 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. The second wave of globalization was thus spectacularly successful in reducing poverty within the OECD countries. Rapid growth coincided with greater equity, both to an extent without precedent.
For the industrial world it is often referred to as the "golden age. Second wave globalization was not golden for developing countries. Although per capita income growth recovered from the inter-war slowdown, it was substantially slower than in the rich economies. The number of poor people continued to rise. Non-income dimensions of poverty improved--notably rising life expectancy and rising school enrollments.
In terms of equity, within developing countries in aggregate there was little change either between countries or within them figure 1. As a group, developing countries were being left behind by developed countries. World inequality was thus the sum of three components: greater equity within developed countries, greater inequality between developed and developing countries, and little net change in developing countries.
The net effect of these three very different components was broadly no change. World inequality was about the same in the late s as it had been a quarter of a century earlier figure 1. First, and most spectacularly, a large group of developing countries broke into global markets. Second, other developing countries became increasingly marginalized in the world economy and suffered declining incomes and rising poverty.
Third, international migration and capital movements, which were negligible during second wave globalization, have again become substantial. We take these features of the new global economy in turn. The changing structure of trade: the rise of the new globalizers The most encouraging development in third wave globalization is that some developing countries, accounting for about 3 billion people, have succeeded for the first time in harnessing their labor abundance to give them a competitive advantage in labor-intensive manufactures and services. In only 25 percent of the exports of developing countries were manufactures; by this had risen to 80 percent figure 1.
Davis and Weinstein forthcoming show that developing country exports are indeed now labor-intensive. This is an astonishing transformation over a very short period. The developing countries that have shifted into manufactures trade are quite diverse. Relatively low-income countries such as China, Bangladesh, and Sri Lanka have manufactures shares in their exports that are above the world average of 81 percent. Others, such as India, Turkey, Morocco, and Indonesia, have shares that are nearly as high as the world average.
Another important change in the pattern of developing country exports has been their substantial increase in exports of services. In the early s, commercial services made up 17 percent of the exports of rich countries but only 9 percent of the exports of developing countries. During the third wave of globalization the share of services in rich country exports increased slightly--to 20 percent--but for developing countries the share almost doubled to 17 percent.
What accounted for this shift? Partly it was changing economic policy.
Globalization, Growth, and Poverty: Building an Inclusive World Economy
Tariffs on manufactured goods in developed countries continued 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 climate. Partly it was due to continuing technical progress in transport and communications Venables 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 activities are "weightless" so their inputs and outputs digitized information can be shipped at virtually no cost. Some analysts have suggested that new technologies lead to the "death of distance" Cairncross undermining the advantage of agglomeration. This is likely true in a few activities, while for other activities 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 technological change may even be increasing these advantages.
Even within well-located countries there will be clustering as long as agglomeration economies are important, and hence wage pressure to migrate to towns and cities. For example, within the United States, which has similar institutions 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 competitiveness of U. 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 concentrated geographically map 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 is much less densely populated than Europe, and the importance of migration to create agglomerations is therefore greater. 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 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 remaining two-thirds.
We label the top third "more globalized" without in any sense implying that they adopted pro-trade policies. By construction, the "more globalized" had a large increase in trade relative to income: percent, compared to 71 percent for the rich countries. The remaining two-thirds of developing countries have actually had a decline in trade to GDP over this period. The variation in export performance is illustrated in figure 1. The more globalized were not drawn from the higher-income developing countries. Indeed, in they were poorer as a group. Since , the more globalized have made very significant gains in basic education: the average years of primary schooling for adults increased from 2.
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Preview this item Preview this item. This book explores the ways in which globalization can overcome poverty or make it worse. The book defines the big historical trends, identifies the main globalization processes - trade, finance, aid, migration, and ideas - and examines how each can contribute to economic development.
By considering what helps and what does not, the book presents policy recommendations to make globalization more effective as a vehicle for shared growth and poverty reduction. It will be of interest to students, research. Read more Show all links. Allow this favorite library to be seen by others Keep this favorite library private.
Find a copy in the library Finding libraries that hold this item Reviews Editorial reviews. Publisher Synopsis This is a clearly written and well-planned book focusing on how globalisation can help alleviate povery in the developing world. User-contributed reviews Add a review and share your thoughts with other readers.
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