A quarterly magazine of the IMF

September 2002, Volume 39, Number 3

The key difference between our era of globalization and the last one, which ended with the Great Depression, is that, for the first time, many companies are operating on a global basis. Although this change has raised fears among some people in both industrial and developing countries, it offers new and exciting opportunities for raising living standards worldwide.

The dramatic growth in cross-border investment and international trade over the past two decades, combined with the explosive growth in global communications and technology, is what most people think of when they think of globalization. Foreign direct investment (FDI) flows, which totaled $160 billion in 1991, soared to $1.1 trillion in 2000. And, while the volume of international trade also expanded dramatically (16-fold over the past 50 years), trade in components has grown even faster than trade in finished goods—components now make up about a third of world exports of manufactured goods, as firms increasingly outsource the parts they used to produce at home to subsidiaries or firms overseas.

Antiglobalization myths

Some antiglobalization campaigners find something intrinsically sinister in corporations' operating across borders. They seem to believe that, in general, multinational corporations care about nothing more than paying exploitation wages and avoiding taxes. The evidence, however, contradicts these generalizations: real wages have risen in the countries that are attracting FDI, and corporate tax revenues have been rising, not falling. Moreover, the local presence of internationally active companies creates strong pressures to raise local standards rapidly in the key areas of management, technology, and environmental quality and thus enables the host country to participate more effectively in globalization. I am convinced that the vast majority of multinationals conduct their affairs properly. (There are exceptions, of course, but that is what they are.)

The real problem with globalization, contrary to the myths dear to its staunchest opponents, is that the richest countries account for the lion's share of the increase in cross-border investment and trade. All of the developing countries taken together—including the six big Southeast Asian exporters—attracted just over 20 percent of last year's total FDI and accounted for only 27 percent of world exports of manufactures. And the longer developing countries lag behind, as global supply chains become more sophisticated and complex, the harder it becomes for their companies to operate on a global scale.

Many policymakers, business leaders, and ordinary citizens in developing countries are well aware of the need to engage wholeheartedly in globalization. A recent poll conducted by the World Economic Forum found that the peoples of countries like China and India have positive opinions of globalization. They recognize that openness is vital to raising living standards and offers greater choices and more freedom.

Indeed, freer trade offers unprecedented scope to exploit comparative advantage, not only in finished goods but all along the production chain. Moreover, in addition to bringing economic gains to countries that engage in it, trade is also a channel for importing good policies because it undermines inefficient and corrupt practices, thereby improving the business environment. John Stuart Mill argued in Principles of Political Economy that "the economical advantages of commerce are surpassed in importance by those of its effects, which are intellectual and moral. . . ."

Trade barriers

So it is not surprising that developing countries keen to expand their export and investment links are determined to achieve a more level playing field in world trade. These countries played an important role in the World Trade Organization (WTO) talks in Doha, in November 2001, rightly demanding that the powerful trading blocs live up to their own free-trade rhetoric in terms of granting them market access in protected sectors, such as agriculture and textiles.

The launch of the new round of talks is a welcome achievement, especially against the turbulent geopolitical background of the past 12 months. One of the most important responsibilities now facing Western trade negotiators and politicians is freeing up trade in key sectors in ways that will benefit developing countries, but the will to do so is less in evidence today than it was in Doha. U.S. President George W. Bush's decision to protect inefficient U.S. steelmakers and increase farm subsidies substantially is not encouraging (although one must acknowledge that the United States has been the driving force of the global economy for some years, thanks to a largely open trading policy).

Critics of the WTO who claim that the multilateral trading system is stacked unfairly against the developing countries have plenty of other ammunition. To take just one example, last year, the United States levied $1.6 billion in tariffs on auto imports—mainly from other countries in the Organization for Economic Cooperation and Development—worth $110 billion. This was just a shade less than the tariff revenues it raised on a mere $15 billion worth of shoe imports, mainly from poorer countries. The European Union's continuing reluctance to reform its Common Agricultural Policy, which effectively keeps farm products from poor countries out of Europe's markets, is equally troubling.

However, the WTO's critics have overlooked a crucial point—that is, trade barriers are as harmful to the countries that impose them as to the countries whose imports they block. For example, the United States' new protectionist stance in the steel and agricultural sectors will hit American consumers of automobiles and farm products—who far outnumber steel and agricultural workers—with higher prices. The real trade wars take place within countries, between consumers and special interest groups. Trade between countries brings mutual benefits. Those who genuinely wish to reduce barriers between rich and poor should strongly espouse free-trade policies and expose those special interests (for example, steel, textiles, and agriculture) that urge ultimately self-defeating protectionist measures.

Actions for poor countries

But even if rich countries reduce their trade barriers, poor countries will not benefit unless they stop protecting and overregulating their own markets. High tariffs make imported goods much dearer and, in many cases, have cosseted domestic industries to such an extent that few of them could compete effectively in the world market even if all tariffs were abolished overnight. One of the important aspects of trade liberalization is that it increases competition, the lifeblood of a successful market economy. Another is that it combats the corruption that flourishes wherever there are too much red tape and protectionism.

In the end, individual nations bear most of the responsibility for their own success or failure. While good government does not guarantee economic success, bad government does assure failure. And there has been a lot of very bad government in poor countries. Corruption and war, bandit elites, and the strangulation of any incentives to enterprise are responsible for much of the poverty and desperation that afflict poor countries. Excessive and intrusive regulation and protectionism are also the enemies of greater economic opportunity and freedom.

Trade talks

Developing countries thus face enormous challenges. But if globalization has magnified the penalties for failure, it has also increased the rewards for success. The opportunities for gains from freer trade and increased investment are greater than ever. It has therefore never been more important for nations to recognize their interdependence. And there is no better vehicle for advancing mutual self-interest than multilateral trade relationships.

The reduction of trade barriers in much of the world since the late 1940s has been the cornerstone of growth and prosperity. It is vital that this process continue within the proven multilateral framework, which not only allows for the balancing of different national interests and the widest distribution of the benefits of trade but also assures businesses that operating across borders will get easier over time and therefore provides a stable context for making investment decisions.

It is right to focus now on enabling developing countries to play a bigger part in the multilateral talks. Their needs have too often been overlooked. The European Union's Everything But Arms initiative is a step in the right direction. The Doha development agenda itself will go a long way toward redressing the imbalance. The WTO has also made great capacity-building efforts to ensure that developing countries can overcome their technical weaknesses in the course of the negotiations.

This is not to say that opening their markets to developing countries relieves the rich of their obligation to help the poor through aid and debt relief—indeed, these must be increased—but to drive home the point that trade and investment are the keys to development and that we should therefore embrace, not oppose, globalization.