1

Reflections on Current Perceptions and History of

Globalization: Cure or Curse?

by Can Erbil

Brandeis University and EcoMod

2

Definition of “globalization”:Integration of world economies (O’Rourke & Williamson) through trade, migration and money flows (Rodrik).

Eliminating the artificial obstacles limiting the free flow of goods, services, capital, knowledge and (to a lesser degree) labor (Stiglitz).

3

How to measure globalization?“Increase in the trade volume of countries”

misleading: trade volume can increase due to an increase in the world supply curve.“Price convergence across countries” is a better evidence on globalization (O’R&W)

Trade creating forces should change domestic commodity prices.

The change in prices should change resource allocation between economic activities.

4

When did globalization begin?O’R & W: look for evidence for convergence of prices of traded goods by investigating transportation costs.

A decrease in transportation cost implies price convergence and therefore globalization.

-First Era (Pre 18th Century)

-Second Era (19th Century)

-Third Era (20th Century - Present)

5

O’R & W’s Findings:Data: Evidence on shipping costs for the three era.Findings:

Trade boom during the first era, but no sign of globalization. Dramatic price convergence in 19th Century.Decline in the transport costs between Europe and the rest of the world continued but slowed down during the 20th century.

6

Econometric Test of Globalization:

Theory: Globalization begins in 19th century

Proposition: If countries were not integrated before 19th century then domestic factor and commodity prices should be determined merely by domestic supply and demand. Since globalization is claimed to begin in 19th century, domestic prices in this century should be determined by global supply and demand not domestic supply and demand.

7

Results of Econometric Test: In an open economy, commodity prices will be determined purely by global market and therefore rising land/labor ratio will not have an effect on the relative prices of the goods.

O’R & W divide their data in two parts:

- before 1820 (represents no globalization) and

- after 1820 (represents globalization period).

They employ different tests using this data set.

econometric analysis of the theory also confirms that globalization begins in 19th century (they could pinpoint 1840).

 

8

Coincidence of the take-off and the starting date of globalization:

-Technology, values, politics and economic institutions

9

Current (1990s) record of globalization:-Sub-Saharan Africa: economic growth worse than late 1970s.

-Latin America: worse than in the 1950-80 period.

-Former socialist economies: real output low, poverty rates high.

-Mexico, East Asia, Brazil, Russia, Argentina and Turkey: enormous volatility and painful financial crises.

-Practically in all developing countries: worsening income inequalities and deep economic insecurity.

10

A few success stories:-China: high growth, improving life standards

-India: lower but steady growth and decrease in poverty

-similarly: Vietnam and Uganda

Argument for pro-globalizers:

greater integration with the world higher growth rates and faster poverty reduction

Counter-argument:

Many other countries (such as Argentina) followed the “rules” of globalization much closer than China, and got disappointed repeatedly.

11

What are the “rules” of globalization?Washington Consensus:

1. Fiscal Discipline2. Reorientation of public expenditures3. Tax reform4. Financial liberalization5. Unified and competitive exchange rates6. Trade liberalization7. Openness to Foreign Direct Investment (FDI)8. Privatization9. Deregulation

12

Who determines these “rules”? The IMF and the World Bank (in Washington DC, USA) + WTO

The disappointments and frustration about the results of globalization with its agenda managed by the “Washington Consensus”widespread reaction and protests against “globalization” (Seattle, 1999, Washington DC, 2000, 2001, etc…)

search for a change in the original policy reform agenda

13

A quick fix to globalization, add a new(!) set of rules to the original WC:“Augmented” Washington Consensus:

10. Corporate governance11. Anti-corruption12. Flexible labor markets13. WTO agreements14. Financial codes and standards15. “Prudent” capital account opening16. Non-intermediate exchange rate regimes17. Independent central banks/inflation targeting18. Social safety nets19. Targeted poverty reduction

14

Will the “Augmented” WC work?Rodrik: No!

”infeasible, inappropriate and irrelevant”

-too broad, undifferentiated agenda of institutional reform

-an impractical blueprint with the “one size fits all” mentality

-leaves no room for policy “space” and local strategies

-describes developed countries, but not how to become one of them

-doesn’t provide a good sense of priorities

15

Costs of AWC (or global integration in general):

long list of admission requirements-new patent laws, banking standards, etc…

successful trade liberalization-Tax reform to make-up lost revenue (Erbil 2002), social safety nets, administrative reform, labor market reform, technological assistance, training programs

standards and codes for sound financial systems (by the Financial Stability Forum)

All very costly, and LDCs have limited sources, binding budget constraints

16

Why insist on the WC?The current agenda calls for liberalization of developing countries in trade of commodities (such as full liberalization in agriculture) and financial markets, while ignoring liberalization in trade of labor service (international labor mobility).primary beneficiaries of this agenda are the developed countries.TRIPS (largely driven by the interests of pharmaceutical companies in the US)

17

Are developed countries benevolent towards developing countries?Foreign Aid“Do Corrupt Governments Receive Less Foreign Aid?” (Alesina and Weder)

“US appears to give more assistance to more corrupt governments”! (which are mostly easier to persuade)

Even in the case of foreign aid, there is some significant concern of benefit and influence

18

Did the developed countries play by the rules of the WC while they were developing?

No.Ex.: US import tariffs in the second half of the 19th century higher than in many developing countries today.Regulations that developing countries face today were non-existent (Ex.: TRIPS increases prices of essential medicine in poor countries).

19

Can we learn from the successful countries?The Case of China:

-trade regime: not liberalized significantly and became member of WTO only 2 years ago, still very protected

-currency markets: not unified until 1994

-financial markets: closed to foreigners until very recently

-no significant privatization and no private property rights in the Western sense

20

Can we learn from the successful countries? (continued)China obviously violated most of the “rules” of globalization set by the Washington Consensus.

Instead, it focused on “institutional innovations suited to its local conditions”:

-household responsibility system

-township and village enterprises

-special economic zones

-two-track pricing regime, etc…

21

Caution: “Institutional innovations do not travel well (Rodrik)!” Mimicking China will most probably will not work for most of the countries.Success strategies vary significantly between different countries.Need home-grown strategies and active policy innovations rather than a consensus.“Global integration is not a substitute for a sound country-specific development strategy”. Globalization is no short cut, but can become rather a dead end if governed badly.

22

Shall we give up on “globalization”?No. world markets are a very vital source of capital and technology, which can provide a set of opportunities for the developing countries.

What needs to be changed is how globalization is “governed”!

developing countries need to have autonomy for developing their own way to integrate their economies to the world economy.

23

How to develop a successful growth strategy?

a la Rodrik:

Two crucial elements:

An investment strategy, and

An institution-building strategy

combination of “carrots and sticks” policies

+

pushing for “international labor mobility”

24

Limitations of the Rodrik Plan:“The trilemma of global economic governance1.Cannot have nation states, democracy and full economic integration simultaneously.2.Shallow integration, “thin” set of rules more appropriate and realistic.3.Policy autonomy for LDCs valuable”(from Rodrik)

25

Caution!

We cannot conduct controlled experiments in economics.Experimentation and self-discovery is costly (both politically and economically).Some developing countries which have already been disappointed by the results that WC generated cannot afford costly “trial and error” approaches and risky innovations.

26

Where are we today regarding “globalization”?It has been a while since Stiglitz published his “Globalization and Its Discontents” where he was calling for action towards change.Dani Rodrik has also been advocating (for a while) for departure from the WC and he has been warning clearly that the AWC is also bound to cause disappointments for the developing countries.Many others (Easterly in particular) joined them since then.

27

Where are we today regarding “globalization”? (continued)

However, since the Fall of 2001, the world’s attention has been drawn away from the debate of how to govern “globalization” correctly.Regionalism and unilateralism came into the foreground (sharp reductions in international movement of capital and labor).This could be an opportunity for the developing countries.Time for experimentation, for implementing gradual and narrow ranged reforms and investing in know-how.

28

What else could be done?determine the reasonable framework of experimentation (with disciplined and systematic economic analysis)

work on “mapping desirable institutions to initial structural conditions and political economy” (case studies) – enhances the multiplicity of alternatives instead of “one size fits all”

work on a “narrow range of policy reforms and institutional arrangements”

self-confident political leadership with a strong political and social base (working democracy)

29

What else could be done? (cont’d)target high economic growth in the short-run with narrow ranged policy reforms and institutional arrangementsand use the high growth period for building high quality institutions

strengthen the institutional base of marketsavoid growth collapses

30

Not everybody agrees!

Sachs “Institutions Don’t Rule” (2002)

geography is more important

malaria risk

But then, policy implications don’t matter a whole lot (not much one can do about geography).

31

Partial association between income and distance from equator

(Source: Rodrik) e

( lg

dp

85 |

X,d

ista

nce

) +

b*d

ista

nce

distance.002533 .709911

-1.35559

2.05646

UGANDA

GABON

KENYAZAIRE

SINGAPOR

ECUADOR

TANZANIA

MALAYSIACONGO

COLOMBIA

IVORY CO

SURINAME

GUYANA

TOGO

LIBERIA

NIGERIA

INDONESI

PAPUA N.

GHANA

SRI LANK

SIERRA L

ANGOLA

ETHIOPIA

PANAMA

VENEZUEL

COSTA RI

TRINIDAD

SOMALIA

CAMEROON

GUINEA

PERU

BURKINA

NICARAGU

GUINEA-B

MALI

ZAMBIA

GAMBIA

THAILAND

EL SALVA

NIGER

PHILIPPI

SUDAN

HONDURAS

GUATEMAL

SENEGAL

BOLIVIA

YEMEN

MALAWI

MEXICO

MYANMAR

ZIMBABWEJAMAICA

MOZAMBIQ

DOMINICA

HAITI

MADAGASC

BRAZIL

BOTSWANA

HONG KON

BANGLADE

BAHAMAS

TAIWAN

INDIA

PARAGUAYSOUTH AF

CHINA

EGYPT

PAKISTAN

JORDANISRAEL

AUSTRALI

SYRIA

CHILEMOROCCO

U.S.A.

URUGUAYCYPRUSJAPANMALTA

ARGENTIN

TUNISIA

NEW ZEAL

SPAIN

KOREA, R

GREECE

PORTUGALTURKEY

CANADA

YUGOSLAV

ITALY

SWITZERL

HUNGARY

MONGOLIA

AUSTRIA

FRANCE

LUXEMBOU

POLANDBELGIUM

GERMANY,U.K.

NETHERLA

IRELAND

DENMARKSWEDENNORWAY

FINLANDICELAND

32

Partial association between income and quality of institutions (Source: Rodrik)

e(

lgd

p8

5 |

X,ic

rge

80

) +

b*i

crg

e8

0

institutions2.27083 10

-.815427

2.64108

BOLIVIA

HAITI

EL SALVA

SUDAN

BANGLADE

GUATEMAL

GUYANA

MONGOLIA

LIBERIA

PHILIPPI

UGANDA

ZAIRE

NICARAGU

MALI

SURINAMESYRIA

NIGERIA

GUINEA-B

PERU

HONDURAS

PANAMA

YEMEN

INDONESI

CONGO

GHANA

SOMALIA

MYANMAR

JORDAN

PAKISTAN

ZAMBIA

ANGOLA

ARGENTIN

MOROCCO

SRI LANK

TOGO

EGYPTPARAGUAY

ETHIOPIA

GUINEA

ZIMBABWE

MALAWI

DOMINICA

TUNISIA

TANZANIAMADAGASC

JAMAICA

YUGOSLAV

SENEGAL

BURKINA

MALTA

POLAND

URUGUAY

MOZAMBIQ

TURKEY

COLOMBIAGABON

MEXICO

ECUADOR

SIERRA L

COSTA RIGREECE

VENEZUEL

KENYA

GAMBIA

CAMEROON

CHINA

INDIA

NIGER

CYPRUS

TRINIDAD

ISRAEL

THAILAND

CHILE

BRAZIL

KOREA, R

IVORY CO

MALAYSIA

SOUTH AF

BOTSWANA

BAHAMAS

PAPUA N.

HUNGARY

SPAIN

PORTUGAL

HONG KON

ITALY

TAIWAN

IRELAND

SINGAPOR

FRANCE

U.K.

JAPAN

AUSTRALI

AUSTRIA

ICELAND

GERMANY,

NORWAY

NEW ZEAL

SWEDEN

CANADA

DENMARKFINLANDBELGIUM

U.S.A.

NETHERLA

SWITZERL

LUXEMBOU

33

Partial association between income and trade (Source: Rodrik)

e(

lgd

p8

5 |

X,o

pe

n )

+ b

*op

en

open13.16 318.07

-1.45529

1.81157

MYANMAR

INDIA

ARGENTINU.S.A.

MOZAMBIQ

SIERRA L

BRAZIL

CHINATANZANIA

GHANASUDAN

UGANDA

GUATEMAL

JAPAN

SOMALIA

MEXICO

BANGLADE

COLOMBIA

NIGERIA

BOLIVIA

MADAGASC

PAKISTAN

ETHIOPIA

POLAND

AUSTRALINICARAGU

SYRIA

HAITI

PERU

VENEZUEL

INDONESI

SPAIN

TURKEY

PHILIPPI

ITALY

FRANCE

ECUADOR

URUGUAY

YEMEN

PARAGUAY

THAILAND

NIGER

KENYA

EGYPT

EL SALVA

BURKINA

ZAIRE

CHILE

GREECE

MALAWI

HONDURASCANADA

SOUTH AF

ZIMBABWE

U.K.

FINLANDCAMEROON

YUGOSLAV

MOROCCOGERMANY,

TRINIDAD

GUINEA-B

SRI LANK

COSTA RI

DOMINICANEW ZEAL

KOREA, R

SWEDEN

ANGOLA

SENEGAL

PANAMA

TUNISIA

GUINEA

DENMARK

MALI

ZAMBIA

SWITZERL

PORTUGALIVORY CO

LIBERIA

AUSTRIA

ICELANDHUNGARY

MONGOLIA

SURINAME

ISRAEL

NORWAY

GAMBIA

PAPUA N.

TAIWAN

GABON

MALAYSIA

TOGO

CYPRUSGUYANA

CONGOJORDAN

NETHERLA

IRELANDBOTSWANA

BAHAMAS

JAMAICABELGIUM

MALTA

HONG KON

LUXEMBOU

SINGAPOR

34

ReferencesAlesina, Alberto and Weder, Beatrice, “Do Corrupt Governments Receive Less Aid?”, May 1999, NBER working paper.

Becker, Gary, “When Globalization Suffers, the Poor Take the Heat”, April 21st, 2003, Business Week,.

O’Rouke, Kevin and Williamson, Jeffery, “When Did Globalization Begin?”, April 2000, NBER working paper.

Rodrik, Dani, “In Search of Prosperity: Analytic Narratives on Economic Growth”,  Edited and with an introduction by Dani Rodrik.  Princeton University Press, 2003.

Rodrik, Dani, “Globalization for Whom?”,  July 2002.  Published in Harvard Magazine.

Rodrik, Dani, “After Neoliberalism, What?”, August 2002.  Remarks at a conference on Alternatives to Neoliberalism. 

Rodrik, Dani, "Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-National Evidence," (with Francisco Rodríguez), Macroeconomics Annual 2000, eds. Ben Bernanke and Kenneth S. Rogoff, MIT Press for NBER, Cambridge, MA, 2001.

Rodrik, Dani, “Has Globalization Gone Too Far?”, Institute for International Economics, Washington, DC, 1997. 

35

ReferencesSachs, Jeffery, “Institutions Don’t Rule: A Refutation of Institutional Fundamentalism”, December 2002, Working Paper, Columbia University. Williamson, John, “What Should the World Bank Think about the Washington Consensus?”, The World Bank Research Observer Volume 15, Number 2, August 2000