Globalization and economic development

Outline

• A review of the recent development record– Centrality of economic growth

• What is the relationship between globalization and economic growth?

• Paradoxes of globalization• An interpretation

Global poverty profile: absolute numbers(people living below $1.25 per day poverty line, in 2005 PPP $)

Note: This poverty line corresponds to the average of the national poverty lines for the poorest 15 countries in the world

Global poverty profile: incidence(percent below $1.25 per day poverty line, in 2005 PPP $)

Note: This poverty line corresponds to the average of the national poverty lines for the poorest 15 countries in the world

The global income distribution

Source: http://www.gapminder.org/downloads/presentations/income-distribution-2003.html

Accounting for global income disparities: within versus between countries

(or: would you rather be rich in a poor country, or poor in a rich country?

• Assume you care only about your own consumption• Define rich and poor (within a country) as follows:

– rich : having the same income level as people in the top decile (10%) of a country’s income distribution

– poor: having the same income level as people in the bottom decile of a country’s income distribution

• Define rich and poor country as follows– rich country: a country that is in the top decile of all countries

ranked by per-capita GDP– poor country: a country that is in the bottom decile of all

countries ranked by per-capita GDP• Which would you rather be?

yj per-capita income (GDP) in country j;

dj income share of decile d in country j;

ydj average income level in decile d (=1,2,..,10) in country j.

 

ydj = 10 x dj x yj

 

Inequities in income: within and across countries

yj djRepresentative income of …

Poor country $868 Income share of top decile in poor countries = 0.35

Rich individual in poor country = $3,039

Rich country $34,767 Income share of bottom decile in rich countries

= 0.027

Poor individual in rich country = $9,387

(all figures in 2004 PPP-adjusted $)

Inequities in health: within and across countries

Under-5 mortality rate (per 1000)

country average

bottom income quantile

top income quantile

ratio

representative poor country: Madagascar

123 142 49 2.9

representative rich country:

Denmark*6 7 2

ratio21

Source: WHO, World Bank.

* To be conservative, the distribution in Denmark is assumed to be same as in Madagascar.

Figure 1: World inequality has gone from almost exclusively a "within" country to mostly

an "across" country phenomena

0.0%

10.0%

20.0%

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50.0%

60.0%

70.0%

1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000

Years

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Theil coefficient

Mean ln deviation

Source: Bourguignon and Morrison (2002), via Pritchett (2003)

Source: Maddison (2001), in 1990 international $

The Great DivergenceLong-term economic growth: the Great Divergence

100

1000

10000

100000

1500 1600 1700 1820 1870 1913 1950 1973 1998

19

90

PP

P $

Western Europe

Eastern Europe

Former USSR

United States

Other Western Offshoots

Latin America

Japan

China

India

Other Asia

Africa

Long-term economic growth: the Great Divergence

100

1000

10000

100000

1500 1600 1700 1820 1870 1913 1950 1973 1998

1990

PP

P $

Western Europe

Eastern Europe

Former USSR

United States

Other Western Offshoots

Latin America

Japan

China

India

Other Asia

Africa

Source: Maddison (2001)

Major landmarks in economic growth

Industrial revolution in Europe and the onset of “modern economic growth” (c.1750-1820)

Long-term economic growth: the Great Divergence

100

1000

10000

100000

1500 1600 1700 1820 1870 1913 1950 1973 1998

1990

PP

P $

Western Europe

Eastern Europe

Former USSR

United States

Other Western Offshoots

Latin America

Japan

China

India

Other Asia

Africa

Source: Maddison (2001)

Major landmarks in economic growth

Convergence and catch-up in the U.S. during 19th century

Long-term economic growth: the Great Divergence

100

1000

10000

100000

1500 1600 1700 1820 1870 1913 1950 1973 1998

1990

PP

P $

Western Europe

Eastern Europe

Former USSR

United States

Other Western Offshoots

Latin America

Japan

China

India

Other Asia

Africa

Source: Maddison (2001)

Major landmarks in economic growth

Absence of economic growth in Asia (except Japan) and Africa before 1950)

Long-term economic growth: the Great Divergence

100

1000

10000

100000

1500 1600 1700 1820 1870 1913 1950 1973 1998

1990

PP

P $

Western Europe

Eastern Europe

Former USSR

United States

Other Western Offshoots

Latin America

Japan

China

India

Other Asia

Africa

Source: Maddison (2001)

Major landmarks in economic growth

Japanese catchup post-1950

Long-term economic growth: the Great Divergence

100

1000

10000

100000

1500 1600 1700 1820 1870 1913 1950 1973 1998

1990

PP

P $

Western Europe

Eastern Europe

Former USSR

United States

Other Western Offshoots

Latin America

Japan

China

India

Other Asia

Africa

Source: Maddison (2001)

Major landmarks in economic growth

A world divided between rich and poor countries

How growth matters to poverty: back to poverty incidence

(percent below $1.25 per day poverty line, in 2005 PPP $)(percent below $1.25 per day poverty line, in 2005 PPP $)

Source: Thomas (2007)

Source: Thomas (2007)

Source: Deaton (2007)

How does globalization contribute to economic growth?

• Trade opportunities, capital flows, access to technology increase potential for catch-up

• On the other hand, policies of free trade and free capital mobility do not necessarily provide the most conducive environment for domestic entrepreneurship, investment, and structural change.– Cf. relationships between tariffs and growth in late 19th century;

downside of recent experience with financial globalization

• What does the overall empirical record show?

Economic performance over time: is more globalization always better?

Historical experience with growth

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8

9

1000-1500 1500-1820 1820-1870 1870-1913 1913-1950 1950-73 1973-90 1990-2005

Western Europe United States Other Westernoffshoots

Mexico Norway Japan South Korea China

GDP per capita growth rate of fastest growingcountry/region (annual average, %)

World GDP per capita growth rate (annualaverage, %)

Paradoxes of globalization (I)Countries that have benefited most from

globalization are those that have not played by the rules …

Foreign economic policies in the World Bank’s star “globalizers” of the 1990s growth rate average

tariffs (early to mid-

‘90s)

NTBs? WTO member? (early to mid-

‘90s)

Open capital

account?

China 7.1 31.2 yes no no Vietnam 5.6 30-50 yes no no India 3.3 50.5 yes yes no Uganda 3.0 14.4 yes yes no Note: List of star globalizers taken from World Bank, Globalization, Growth, and Poverty: Building an Inclusive World Economy, 2001.

Paradoxes of globalization (I)... while those that have, have performed worse

Economic growth

3.3%

5.6%

6.4%

1.2%

3.3% 3.3%

2.8%

-0.8%

1.0%

-1.0%

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1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

1960-1980 1980-90 1990-2003

East Asia & Pacif ic

South Asia

Latin America & Caribbean

Paradoxes of globalization (I)Countries that have benefited the most from integration in

the world economy are countries with non-standard policies

Heritage Foundation Index of "Economic Freedom"*

5

5.5

6

6.5

7

7.5

8

China India Vietnam Argentina Bolivia Brazil Chile El Salvador Mexico Uruguay

World Bank's star economic globalizers

*The index is a composite quantitative measure of “the 10 key ingredients of economic freedom such as low tax rates, tariffs, regulation, and government intervention, as well as strong property rights, open capital markets, and monetary stability.”

Paradoxes of globalization (II)Financial globalization has produced frequent and

painful crises…

Source: Jeanne and Ranciere (2005)

Paradoxes of globalization (II)… and has forced countries to engage in costly

strategies of self-insuranceForeign reserves (excluding gold) in months of imports

industrial and non-oil developing countries

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1950

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Industrial Countries

Developing Countries (excl. oil-exportingcountries)

Paradoxes of globalization (II)… with the result that capital now flows in the

“wrong” direction

Source: Prasad, Rajan and Subramanian (2006)

Paradoxes of globalization (III)For the vast majority of countries, domestic policies

trump (nearly) everything else when it comes to economic growth

• A parable of two countriesCountry A

… has preferential, free access to the US market for its exports… can send several millions of its citizens to the US as workers… receives huge volumes of direct investment… is totally plugged in to US production chains… for which the US Treasury stands ready to as lender of last resort… has effective security guarantee from the US military

Does globalization get better than this?• Whereas B is a country for which

… the US maintains a trade embargo, and does not have diplomatic relations… which receives neither aid nor any other kind of assistance… and which is kept outside international organizations like the WTO… which is prevented from borrowing from the IMF and WB.

• Which country did better?

What drives growth in developing countries?

Four models of growth:

1. Foreign borrowing-led growth• countries in the periphery of EU in 1990s, LA in 1970s, …

2. Commodity booms• 19th century, many African countries in the last decade

3. Growth based on deep integration• Goods and factor market integration + institutions + transfers

(convergence within EU)4. Structural transformation-led growth

• From low-productivity traditional products to modern, mostly manufacturing activities (and lately increasingly into tradable services)

• Based not on (static) comparative advantage, but on producing what richer countries produce

• Japan, S. Korea, ChinaOnly the last is a realistic possibility for most countries

Deep vs. shallow integration as drivers of convergence

• EU versus NAFTA models – One is hard because it entails legal, institutional, political

integration• Labor mobility, in addition to capital and product-market integration• Embedded within EU-wide institutions

– Acquis communautaire (>100,000 pages)– European Court of Justice– European Central Bank and a common currency (for most)– Significant inter-regional transfers

• Growing pains of a quasi-federal political system– The other is comparatively easy– But only the first has the potential to foster economic

convergence• The EU model not in the cards for most developing

countries

Where did real growth come from?

• High-growth countries are those that are able to undertake rapid structural transformation– from low-productivity (“traditional”) to high-productivity

(“modern”) activities– to tradables in particular– and to industrial activities within tradables– and also in more recent times, tradable services

• Economic rationale: modern tradables are under-produced in laissez-faire because they suffer disproportionately from the market and institutional failures that are rampant in poor nations (Rodrik 2009)

What has worked: “productivist” policies

• Sound “fundamentals”– Market-friendly policies– Macro stability

• But also: – Industrial policies in support of new economic

activities– Undervalued currencies to promote tradables– A certain degree of repression of finance, to enable:

• Development banking• Subsidized credit• Undervaluation

… combined with an enabling external environment

• Permissive of industrial policies– At least under GATT and– Until recently

• No pressure to liberalize finance and capital accounts– Until recently

• Willing to absorb excess supply of tradables– U.S. attitude of benign neglect towards current account deficits

• BW I and II

– Unconcerned with undervaluation in developing countries– Again, until recently

From this perspective, existing global rules leave lots to be desired…

• Trade regime– Agreements on subsidies, TRIMs, TRIPs, and other negotiations

on services narrowing room for “industrial policies”

• International capital markets– Financial codes and standards no roles for development

banking and credit market interventions

• Monetary rules– CB independence and “free floating” no role for exchange rate

as developmental policy instrument

Hence the chief shortcoming with global economic arrangements …

• is not that they present inadequate levels of market access for developing nations– Doha round and agriculture a sideshow – No developing country’s growth potential is significantly

constrained at present due to inadequate market access

• but that they are premised on the notion that removing remaining impediments to trade in goods, services and capital are the primary lever with which to achieve convergence

• thus forcing developing nations to trade valuable “policy space” in exchange for ephemeral gains in market access