GLOBALIZATION: THREAT OR OPPORTUNITY ?

Index

Introduction

The term "globalization" has acquired considerable emotive force. Some view it as a process that is beneficial—a key to future world economic development—and also inevitable and irreversible. Others regard it with hostility, even fear, believing that it increases inequality within and between nations, threatens employment and living standards and thwarts social progress.

Globalization offers extensive opportunities for truly worldwide development but it is not progressing evenly. Some countries are becoming integrated into the global economy more quickly than others. Countries that have been able to integrate are seeing faster growth and reduced poverty. Outward-oriented policies brought dynamism and greater prosperity to much of East Asia , transforming it from one of the poorest areas of the world 40 years ago. And as living standards rose, it became possible to make progress on democracy and economic issues such as the environment and work standards.

The crises in the emerging markets in the 1990s have made it quite evident that the opportunities of globalization do not come without risks—risks arising from volatile capital movements and the risks of social, economic, and environmental degradation created by poverty. This is not a reason to reverse direction, but for all concerned—in developing countries, in the advanced countries, and of course investors—to embrace policy changes to build strong economies and a stronger world financial system that will produce more rapid growth and ensure that poverty is reduced.

What is Globalization?

Economic "globalization" is a historical process, the result of human innovation and technological progress. It refers to the increasing integration of economies around the world, particularly through trade and financial flows. The term sometimes also refers to the movement of people (labor) and knowledge (technology) across international borders.

Markets promote efficiency through competition and the division of labor—the specialization that allows people and economies to focus on what they do best. Global markets offer greater opportunity for people to tap into more and larger markets around the world. It means that they can have access to more capital flows, technology, cheaper imports, and larger export markets. But markets do not necessarily ensure that the benefits of increased efficiency are shared by all. Countries must be prepared to embrace the policies needed, and in the case of the poorest countries may need the support of the international community as they do so.

Unparalleled Growth, Increased Inequality:
20 th Century Income Trends

Globalization is not just a recent phenomenon. The most striking aspect of this has been the integration of financial markets made possible by modern electronic communication.

The 20 th century saw unparalleled economic growth, with global per capita GDP increasing almost five-fold. But this growth was not steady—the strongest expansion came during the second half of the century, a period of rapid trade expansion accompanied by trade—and typically somewhat later, financial—liberalization. In the inter-war era, the world turned its back on internationalism—or globalization as we now call it—and countries retreated into closed economies, protectionism and pervasive capital controls. For the rest of the century, even though population grew at an unprecedented pace, per capita income growth was over 2 percent, the fastest pace of all coming during the post-World War boom in the industrial countries.

The story of the 20 th century was of remarkable average income growth, but it is also quite obvious that the progress was not evenly dispersed. The gaps between rich and poor countries, and rich and poor people within countries, have grown. The richest quarter of the world's population saw its per capita GDP increase nearly six-fold during the century, while the poorest quarter experienced less than a three-fold increase.

Developing countries: How deeply integrated?

Globalization means that world trade and financial markets are becoming more integrated. A larger number of developing countries have made only slow progress or have lost ground. In particular, per capita incomes in Africa have declined relative to the industrial countries and in some countries have declined in absolute terms.

Consider four aspects of globalization:

• Trade : Developing countries as a whole have increased their share of world trade–from 19 percent in 1971 to 29 percent in 1999. For instance, the newly industrialized economies (NIEs) of Asia have done well, while Africa as a whole has fared poorly. The composition of what countries export is also important. The strongest rise by far has been in the export of manufactured goods. The share of primary commodities in world exports—such as food and raw materials—that are often produced by the poorest countries, has declined.
  
  
• Capital movements : Direct foreign investment has become the most important category. Both portfolio investment and bank credit rose but they have been more volatile, falling sharply in the wake of the financial crises of the late 1990s.
  
  
• Movement of people : Workers move from one country to another partly to find better employment opportunities. Most migration occurs between developing countries. But the flow of migrants to advanced economies is likely to provide a means through which global wages converge.
  
• Spread of knowledge (and technology) : Information exchange is an integral, often overlooked, aspect of globalization. Knowledge about production methods, management techniques, export markets and economic policies is available at very low cost, and it represents a highly valuable resource for the developing countries.

Does Globalization Increase Poverty and Inequality?

During the 20th century, global average per capita income rose strongly, but with considerable variation among countries. It is clear that the income gap between rich and poor countries has been widening for many decades. It reaches the conclusion that output per capita has risen appreciably but that the distribution of income among countries has become more unequal than at the beginning of the century. But incomes do not tell the whole story; broader measures of welfare that take account of social conditions show that poorer countries have made considerable progress

Indeed the gaps may have narrowed. A striking inference from the study is a contrast between what may be termed an "income gap" and an "HDI gap". The (inflation-adjusted) income levels of today's poor countries are still well below those of the leading countries in 1870. And the gap in incomes has increased. But judged by their HDIs, today's poor countries are well ahead of where the leading countries were in 1870. This is largely because medical advances and improved living standards have brought strong increases in life expectancy.

Countries with a strong growth record, pursuing the right policies, can expect to see a sustained reduction in poverty, since recent evidence suggests that there exists at least a one-to-one correspondence between growth and poverty reduction.

How Can the Poorest Countries Catch Up More Quickly?

Growth in living standards springs from the accumulation of physical capital (investment) and human capital (labor), and through advances in technology. Many factors can help or hinder these processes. The experience of the countries that have increased output most rapidly shows the importance of creating conditions that are conducive to long-run per capita income growth. Economic stability, institution building, and structural reform are at least as important for long-term development as financial transfers, important as they are.

Components of such a package might include:

• Macroeconomic stability to create the right conditions for investment and saving;
• Outward oriented policies to promote efficiency through increased trade and investment;
• Structural reform to encourage domestic competition;
• Strong institutions and an effective government to foster good governance;
• Education, training, and research and development to promote productivity;
• External debt management to ensure adequate resources for sustainable development.

Advanced economies can make a vital contribution to the low-income countries' efforts to integrate into the global economy:

• By promoting trade. One proposal on the table is to provide unrestricted market access for all exports from the poorest countries. This should help them move beyond specialization on primary commodities to producing processed goods for export.
• By encouraging flows of private capital to the lower-income countries, particularly foreign direct investment, with its twin benefits of steady financial flows and technology transfer.
• By supplementing more rapid debt relief with an increased level of new financial support.

An Advanced Country Perspective:
Does Globalization Harm Workers' Interests?

Anxiety about globalization also exists in advanced economies. Economies are continually evolving and globalization is one among several other continuing trends. One such trend is that as industrial economies mature, they are becoming more service-oriented to meet the changing demands of their population. Another trend is the shift toward more highly skilled jobs. But all the evidence is that these changes would be taking place—not necessarily at the same pace—with or without globalization.

Governments should pursue policies that encourage integration into the global economy while putting in place measures to help those adversely affected by the changes. The economy as a whole will prosper more from policies that embrace globalization by promoting an open economy, and, at the same time, squarely address the need to ensure the benefits are widely shared. Government policy should focus on two important areas:

• education and vocational training, to make sure that workers have the opportunity to acquire the right skills in dynamic changing economies; and
• Well-targeted social safety nets to assist people who are displaced.

The Role of Institutions and Organizations

National and international institutions, inevitably influenced by differences in culture, play an important role in the process of globalization. It may be best to leave an outside commentator to reflect on the role of institutions:

That the advent of highly integrated commodity and financial markets has been accompanied by trade tensions and problems of financial instability should not come as a surprise. The surprise is that these problems are not even more severe today, given that the extent of commodity and financial market integration is so much greater.

One possibility in accounting is the stabilizing role of the institutions built in the interim. At the national level this means social and financial safety nets. At the international level it means the WTO, the IMF, the Basle Committee of Banking Supervisors. These institutions may be far from perfect, but they are better than nothing, judging from the historical correlation between the level of integration on one hand and the level of trade conflict and financial instability on the other.

Conclusion

As globalization has progressed, living conditions have improved significantly in virtually all countries. However, the strongest gains have been made by the advanced countries and only some of the developing countries.

That the income gap between high-income and low-income countries has grown wider is a matter for concern. But it is wrong to jump to the conclusion that globalization has caused the divergence, or that nothing can be done to improve the situation. To the contrary: low-income countries have not been able to integrate with the global economy as quickly as others, partly because of their chosen policies and partly because of factors outside their control. No country, least of all the poorest, can afford to remain isolated from the world economy. Every country should seek to reduce poverty. The international community should endeavor—by strengthening the international financial system, through trade, and through aid—to help the poorest countries integrate into the world economy, grow more rapidly, and reduce poverty. That is the way to ensure all people in all countries have access to the benefits of globalization.

Article from: IMF