A quarterly magazine of the IMF

March 2002, Volume 39, Number 1

Globalization—the process through which an increasingly free flow of ideas, people, goods, services, and capital leads to the integration of economies and societies—has brought rising prosperity to the countries that have participated. It has boosted incomes and helped raise living standards in many parts of the world, partly by making sophisticated technologies available to less advanced countries. Since 1960, for example, life expectancy in India has risen by more than 20 years, and illiteracy in Korea has gone from nearly 30 percent to almost zero. These improvements are due to a number of factors, but it is unlikely that they could have occurred without globalization. In addition, greater integration has promoted human freedom by spreading information and increasing choices.

But in recent years, concerns have grown about the negative aspects of globalization and especially about whether the world's poorest—the 1.2 billion people who still live on less than $1 a day—will share in its benefits. The beliefs that free trade favors only rich countries and that volatile capital markets hurt developing countries the most have led activists of many stripes to come together in an "antiglobalization" movement. The activists highlight the costs of rapid economic change, the loss of local control over economic policies and developments, the disappearance of old industries, and the related erosion of communities. They also criticize international organizations for moving too slowly in tackling these concerns.

The year 2001, however, saw the debate undergo a subtle but perhaps profound shift, with both sides seeming to step back from approaching it in terms of whether globalization was "good" or "bad"—an approach that seemed overly simplistic. This recognition gained momentum in the wake of the September 11 terrorist attacks in the United States, which exposed the vulnerability of globalization that stems in part—but only in part—from the sense of hopelessness present in some countries unwilling or unable to embrace it.

Both sides increasingly realized that the debate should center on how best to manage the process of globalization—at the national and international levels—so that the benefits are widely shared and the costs kept to a minimum. There is no question that greater integration into the world economy and more openness to other cultures offers all citizens of the global village a more hopeful future. Globalization, by offering a brighter future for all, provides perhaps the surest path to greater global security and world peace.

This understanding should attract support for the work needed to address the remaining challenges of globalization head-on. But there is an urgent need for a broad global debate on how these challenges can best be met and on who should play what role. This debate is under way through such initiatives as the United Nations Conference on Financing for Development being held March 18-22 in Monterrey, Mexico, and it will need to continue at many other venues. The IMF, along with the World Bank, has contributed significantly to the Monterrey conference by helping to focus the conference on global priorities, such as the Millennium Development Goals. The IMF, focusing on its mandate and areas of expertise, is also continuing to readapt itself to better help countries meet the challenges of globalization.

Globalization today

The world has experienced successive waves of what we now call globalization, going back as far as Marco Polo in the thirteenth century. These periods have all shared certain characteristics with our own: the expansion of trade, the diffusion of technology, extensive migration, and the cross-fertilization of diverse cultures—a mix that should give pause to those who perceive globalization narrowly, as a process nurtured strictly by economic forces.

By the end of the nineteenth century, the world was already highly globalized. Falling shipping costs had led to a rapid rise in trade, and in 1913 the ratio of world trade to world output reached a peak that would not be matched again until 1970. The growth of trade was accompanied by unprecedented flows of capital (as high as 10 percent of GDP, in net terms, in a number of both investor and recipient countries) and migration (for many countries, ½ of 1 percent of population a year), especially to the Americas.

Following the two world wars and the Great Depression, a new wave of globalization began, characterized by further declines in transport costs, which fell by half in real terms from 1940 to 1960; the expansion of modern multinational corporations, which are well suited to working around barriers to trade imposed by language, national commercial policies, and other factors; and unprecedented growth in output and living standards.

More recently, globalization has been reinvigorated by the unprecedented ease with which information can be exchanged and processed thanks to breakthroughs in computer and telecommunications technologies, which since 1970 have reduced real computing and communications costs by 99 percent. This technological progress has steadily expanded the range and quality of services that can be traded, including those that support trade in goods, moving us toward a globally integrated economy.

Is this a development to be welcomed? Economic theory, as represented by the Heckscher-Ohlin-Samuelson model of trade, suggests that a fully integrated world economy provides the greatest scope for maximizing human welfare. This proposition is based on assumptions about the free international movement of goods and factors of production (capital and labor), the availability of information, and a high degree of competition. But benefits accrue even if capital and labor cannot move freely, so long as goods are freely traded.

In the real world, we know that there are still many barriers to the free movement of capital and labor. And, indeed, important barriers to trade remain. There has, however, been substantial progress in trade liberalization since the Second World War. The recently agreed Doha Development Round, for example, will be the tenth comprehensive trade round. Rising merchandise trade has been one of the hallmarks of the globalization process, and the gains from trade liberalization in recent decades have exceeded the costs by a very considerable margin. The Uruguay Round trade agreement reached in 1995 is estimated to have produced over $100 billion a year in net benefits, accruing mainly to those countries that have reduced trade barriers the most.

These trade gains have translated into faster economic growth and higher standards of living, as most clearly seen in East Asia: real incomes in Korea have doubled every 12 years since 1960. In the Spanish-speaking world, countries such as Spain, Mexico, and Chile have sharply boosted their shares of world trade and per capita incomes since 1980 by embracing globalization. A recent World Bank study also suggests that the countries that have opened themselves to trade in the last two decades have, on average, grown the fastest. These "new globalizers" among developing countries have reduced import tariffs, on average, by 34 percentage points since 1980, compared with only 11 percentage points for those developing countries that, on average, saw no growth in per capita incomes over the period.

Moreover, we know that faster growth goes hand in hand with bigger declines in poverty and larger increases in life expectancy. A recent World Bank study by David Dollar and Aart Kraay takes this full circle by deducing that since, in broad terms, trade is good for growth, and growth is generally good for the poor—they find that, on average, increased growth raises the incomes of the poor in proportion to those of the population as a whole—then trade is good for the poor.

Capital market integration has also advanced substantially in recent decades. But while the benefits of trade globalization are relatively clear, developing countries need to have a set of preconditions in place to benefit from financial globalization and not to succumb to an increased probability of a currency or banking crisis occurring. That is why capital account liberalization is being approached with much greater caution than during the bullish years of the mid-1990s. Capital inflows contribute to growth by stimulating investment and technical progress and promoting efficient financial development. Openness to capital flows, when combined with sound domestic policies, gives countries access to a much larger pool of capital with which to finance development. Foreign direct investment in particular—as opposed to potentially volatile portfolio flows—speeds up both capital accumulation and the absorption of foreign technologies and, like trade, has been shown to promote economic growth.

A new approach post-September 11

Clearly, globalization has the potential to make all people better off. The problem is that there is no assurance that all people will be better off or that all changes will be positive. The studies that show that, on average, poverty declines with economic growth are encouraging. But averages hide the negative impact on individual countries and on certain groups within them. In addition, there are important questions about the relationships between economic policies and outcomes, especially the impact of macroeconomic and structural reform policies on poverty. For example, when is growth especially beneficial to the poor? And when does growth not benefit the poor? How does trade generate growth? Does all foreign capital raise growth? How can we best ensure that capital flows do no harm?

These are all questions on which the IMF is seeking a better understanding, and as we gain further insights, we will, if necessary, adjust our policy recommendations accordingly. We are also committed to meeting four key challenges that fall in our areas of responsibility. The first is helping the poorest countries sustain the adjustment policies and structural reforms they need to reap the benefits of globalization. The second is increasing the stability of international financial markets—especially critical, given the importance of global financial stability as an international public good. The third is helping all of our members safely access these markets, including those countries that currently have no access. And the fourth is fostering a stable global macroeconomic environment. Only by addressing these challenges—in part through shared principles and rules—can we help our member countries accommodate the changes brought by globalization and cope with the dislocations such changes unavoidably bring.

But the atmosphere in which we are working has changed in some fundamental ways in the wake of the September 11 terrorist attacks—ways that provide an opportunity for a renewed dialogue. Even the antiglobalization movement that organized mass demonstrations in Seattle, Quebec, Genoa, and elsewhere has undergone profound change, as many of those who had been leading the protests against globalization—and against the IMF, the World Bank, and the World Trade Organization, in particular—are questioning whether such protests are an effective means to their ends. How have perceptions changed?

• It has become clear that the issues over which the debate has been conducted—issues central to the course of economic development—are governed by complex forces that defy glib generalization. It does not make sense to oppose globalization as such: the discussion must shift gears, aiming instead to identify effective ways to increase and spread the benefits of globalization while minimizing its costs.

• The importance of international cooperation has come into sharp focus across the broad spectrum of global issues. A by-product seems to be a renewed appreciation of the role of the Bretton Woods institutions as forums for global economic cooperation and of the role of the IMF in particular.

• It has become even clearer that, in the words of IMF Managing Director Horst Köhler, "there will not be a good future for the rich if there is no prospect of a better future for the poor." Besides being a moral question, poverty reduction is now recognized as a necessity for peace and security. The decision to launch the Doha talks is the first evidence that this recognition will translate into greater attention to the requirements of economic development.

• The weakening of world economic growth, manifest in early 2001 but exacerbated by the September 11 attacks, has revealed the fragility of global economic prosperity. The need for the kind of high-quality analysis that the IMF provides, helping to keep the global economy on an even keel, has become more evident.

• Some of the protesters seem to have decided to channel their energies less against the international organizations themselves and more toward their member governments. They see that pressing national governments to increase foreign aid and market access for exports from poor countries can result in far greater benefits for the poor than changes in the policies of international lending institutions.

So how should all parties proceed? First, besides finding solutions to problems, we need to find ways to implement them effectively. This means keeping in mind that issues formerly seen as national—including financial markets, the environment, labor standards, and economic accountability—are now seen to have international aspects. The ripple effects of actions taken in one country tend to be far greater and to travel faster than ever before. A purely national approach to solving some problems risks merely pushing the problem across the frontier without providing a lasting solution even at the national level.

Second, we need to ensure that measures are taken to meet internationally agreed targets, such as the Millennium Development Goals, which include halving world poverty by 2015. Such measures would involve debt relief (especially for the heavily indebted poorest countries), social safety nets to cushion the short-term impact of economic reforms on the vulnerable, and higher social outlays, especially on health and education. In recent years, social outlays have been rising in countries with IMF-supported programs—significantly in countries benefiting from debt relief. Of course, this is only a modest beginning. For example, enormous additional resources are needed to improve health conditions in low-income and (for the poor) in middle-income countries, as pointed out in the World Health Organization's recent report of the Commission on Macroeconomics and Health.

Similarly, concerted action is needed to achieve the United Nations target that calls on rich countries to spend 0.7 percent of their GNP on development assistance. Action by the international community is also needed to open markets more broadly and effectively to exports from poor countries and to provide several of the poorest countries with life-saving drugs at lower cost; the commitments made in Doha should serve as a minimum threshold for these goals.

Third, we need to revisit the institutions of global governance, to establish mechanisms to implement global solutions to global problems and to ensure that governments become more accountable. On economic issues, the importance countries attach to the open and cooperative multilateral system is reflected in the now virtually universal membership of the IMF and the World Bank and the prospective accession of all major trading countries to the World Trade Organization. These three organizations address a very wide range of international economic issues, but they were not designed to be all-encompassing. Issues not central to any of their mandates are pressing and worthy of national and international attention. These include the environment, labor rights, international and local migration, and human rights, which must be addressed if globalization is to be sustained. As pointed out in the report by Michel Camdessus and others to the Bishops of the European Community, there are still many important institutional gaps in the present system.

Overall, this adds up to a weighty agenda for the international community, but perhaps never has so much been at stake, with so much potential within our reach. Globalization holds the promise of enormous benefits for the peoples of the world. To make this promise a reality, however, we must find a way to carefully manage the process. Better attention must be paid to reducing the negative effects and ensuring that the benefits are widely and fairly distributed. In this global village, we all need to work energetically toward that goal.

References:

Eduardo Aninat, 2001, "Reflections on Globalization, Spain, and the IMF," speech given at the General Meeting of ELKARGI, San Sebastian, Spain, June 29.

Eduardo Aninat, Peter Heller, and Alfredo Cuevas, 2001, "Reflections on Globalization," Special Lecture for the XVIII Latin American Meetings of the Econometric Society.

Michel Camdessus and others, 2001, Global Governance, Bishops' Conferences of the European Community (COMECE).

David Dollar and Aart Kraay, 2001, "Trade, Growth, and Poverty," World Bank Policy Research Working Paper No. 199 (Washington).

Dolia Estévez, 2001, "Completar la globalización, clave para eliminar la pobreza: una entrevista con Sr. Eduardo Aninat," Mexico City: El Financiero, December 10.

Horst Köhler, 2001, "A Global Partnership for African Economic Development," address to the United Nations Economic and Social Council (ECOSOC), Geneva, July 16.

Michael Mussa, 2000, "Factors Driving Global Economic Integration," in Global Economic Integration: Opportunities and Challenges, Federal Reserve Bank of Kansas City, pp. 9-55.

World Bank, 2002, Globalization, Growth, and Poverty: Building an Inclusive World Economy, World Bank Policy Research Report (New York: Oxford University Press for the World Bank).

World Health Organization, 2001, Macroeconomics and Health: Investing in Health for Economic Development, Report of the Commission on Macroeconomics and Health (Geneva).

Ernesto Zedillo and others, 2001, Recommendations of the High-Level Panel on Financing for Development (New York: United Nations).