January 16, 2004
Globalization, the growing integration of economies and societies around the world, has sparked one of the most highly charged debates of the past decade. Critics of globalization have argued that the process has exploited people in developing countries, caused massive disruptions and produced few benefits. Supporters point to the significant reductions in poverty achieved by countries that have embraced integration with the world economy such as China, Vietnam, India and Uganda. Below, David Dollar, the World Bank's director of Development Policy, discusses the globalization phenomenon.
Q: What is globalization?
A: I prefer to use the term integration, because it is more precise than globalization. Economic integration occurs when countries lower barriers such as import tariffs and open themselves up to investment and trade with the rest of the world.
Q: Why were many developing countries encouraged by international institutions such as the World Bank to open themselves to international trade?
A: In the early 1980s, most developing countries had high barriers against imports. Many countries in Sub-Saharan Africa, for example, had small economies with high import barriers. So they were trying to develop a full range of industries in economies that did not offer sufficient scale to be efficient. It is fair to say that, as of the early 1980s, the results in terms of growth and poverty reduction were not impressive. People in Africa were struggling for new models because they felt that the old model had failed. Even very large countries such as China and India did not get good results from inward-focused development models. In India the poverty rate barely changed between independence in 1949 and 1978. China reacted to its poor economic results with it program of Gai Ge Kai Fang: "change the system, open the door." In that environment the World Bank certainly did encourage trade liberalization and in many cases gave good practical advice about gradual liberalization of import tariffs.
Q: What were the results of opening up to the international economy?
A: In many cases the results have been good. China, India, and Vietnam have benefited dramatically and poverty rates have fallen. In Vietnam, the government conducted a household survey at the beginning of reform and went back six years later to the same households and found impressive reductions in poverty. People had more food to eat, and children were attending secondary school. Trade liberalization was one factor among many that contributed to Vietnam's success. China's reform led to the largest poverty reduction in history. India has cut its poverty rate in half in the past two decades. Uganda is an example of success in Africa.
Q: But was the success shared in all cases where countries opened their economies to international trade?
A: In several African countries, it is hard to find encouraging progress. But the argument that liberalization has delivered bad results is not really supported by the evidence either. Many of these economies were not doing well for a variety of reasons before trade liberalization. Looking back, there was probably too much optimism that trade reform alone was going to stimulate the development of manufacturing in Africa.
Q: Why did some of the African nations struggle while South-East Asian countries thrived when they opened themselves to the international trading environment?
A: If you look at some of the South-East Asian countries that share characteristics with the African economies, they liberalized trade when agricultural products were their principal exports, but they also moved quickly into labor-intensive manufacturing. That was the hope for some of the African economies, but it hasn't been realized to a great extent. The lesson I've drawn from this, after additional work, is that the investment climate issues turned out to be so serious in some of the African countries, that reducing import tariffs really didn't have very much effect. Tariffs were a barrier, certainly, but experience suggests that other barriers were more important. How easy is it to start a firm, hire labor, get reliable electricity? Even with formal tariffs lowered, can a firm get the necessary inputs through customs? The developing countries that have done well with globalization are those that fostered reasonably sound investment climates so that their firms can take advantage of opportunities on the world market.
The whole model of trade is based on taking advantage of opportunities to shift productive factors. "Shift" is the crucial word. For it to work, a country has to have an environment in which labor and capital can start producing, say, labor-intensive garments or cut flowers. There is a ready market for cut flowers in Europe. Lots of African countries could potentially get into it. But you have to have an environment in which labor and capital can shift to that more viable activity, and away from what they are doing at present.
Q: Was it a mistake to encourage these countries, that failed to see large reductions in poverty, to attempt to integrate into the international economy?
A: There was, perhaps, too much unjustified optimism. But I don't accept the argument that liberalization has wiped out a lot of successful industries in developing countries because, frankly, in the countries that are not doing well there were not a lot of successful industries there in the first place.
Q: There have been protests about the effects of globalization in the United States and Europe. But is there the same level of opposition to integration with the international economy in developing countries?
A: The Pew Center did a global attitudes survey which I thought was quite interesting. In Sub Saharan Africa, 75 percent of households said they thought it was a good thing that multinational corporations were investing in their countries. The survey showed that in a lot of developing countries there was very strong support for different aspects of integration – especially trade and direct investment.
Q: Has the process of integrating into the international economy brought disruption to developing countries?
A: Globalization certainly forces a lot of adjustment. So I view this as a choice that developing countries are making. Countries have to make their own decisions and at the moment integration is popular in developing countries because they are seeing a lot of tangible benefits from it. But integration is also going to force certain types of adjustments. It's inevitable that some factories are going to go out of business, some people are going to be thrown out of work.
Q: How dramatic can this process of adjustment be in a developing country?
A: Integration will produce adjustment costs. It will cause disruptions. So when we say that in many cases the overall income distribution measures do not change in the typical country that opens up its economy, that could be the net effect of lots of change. But often the winners include a lot of poor people and, in many cases, some of the losers are relatively powerful, wealthy people.
Q: Why do a clear majority of people in developing countries support integration when it causes disruption?
A: In countries where most people are poor, it is natural to focus on the material benefits of integration and to be in favor of it. The evidence about trade and poverty from Vietnam is very powerful, and this was found to be one of the most pro-globalization populations in the Pew Survey. The idea that one's life can be much better materially, to a poor person, has a large impact. Poor people are used to having a lot of disruption in their lives from typhoons, volatile economies, job insecurity, and so on. Integration in many ways helps stabilize things and helps raise living standards. This is probably why there is more enthusiasm for it in the poor countries than in the countries where people are already rich. French farmers mostly see trouble from integration. American steel workers see trade as a big problem. But people in the developing world are more likely to see it more as an opportunity.
Q: One criticism leveled at the World Bank and International Monetary Fund (IMF) is that they forced countries to adopt particular policies when they integrated into the world economy. Was this the case?
A: In the early 1980s, there were many countries in which the World Bank and the IMF were trying to impose a policy package. So it is a fair criticism of the World Bank that this institution was trying to push a similar set of policies in many countries. They might have been the right policies, but I think we've learned that this was not an effective way to promote the changes needed to seize the opportunities of trade and integration. People just react instinctively against having something imposed from the outside. So we've shifted much more to a learning model. We've been wrong about some things, no question. We have to learn from experience.
Q: How is the Bank working with developing countries today in the light of its experiences in the 1980s?
A: We're not forcing policies or a model on to countries. We're respectful of countries making their own choices. I see lots of countries choosing, on their own, to integrate into the international economy and we are supportive of that. Where you have a country that is struggling to improve the investment climate, deliver basic services, integrate with the world economy, we can help them learn how to do that. That is the new vision at the World Bank. It is helping countries learn what policies and institutions are going to work for them.
Q: Are there any policy generalizations that can still be applied to developing countries?
A: I still believe that some generalizations are valid. No country wants inflation of 100 percent. I don't think any country will conclude that closing itself off completely from the world market is going to work for it. There are basic principles when looking at integration and making it work for a country. These include macroeconomic stability and a sound investment climate, among others. But how you work in each country is different. Countries have to figure out what is economically wise for them and what's politically acceptable for them. I think the World Bank has become more savvy in how we help countries adopt the policies that are going to work for them. They cannot be imposed from outside. It has to be a learning experience.
Q: Can a country choose to internationally integrate some sectors of its economy while maintaining strict controls on other areas?
A: An important lesson of the 1990s is that developing countries can pick and choose among the various types of integration. You can liberalize trade, you can allow direct foreign investment, you can allow it in some sectors and not others, you can control the portfolio capital flows. Everybody controls migration. The World Bank sees integration as a process in which developing countries review different aspects and choose those parts they can manage and that offer benefits for them. The evidence is pretty clear that you can make that kind of distinction.
Q: One frequent concern about globalization is that it is contributing to a loss of cultural diversity. Are you concerned about the homogenization of culture and institutions in developing countries as a result of international integration?
A: There is not much hard evidence of that integration is leading to homogenization. Cultural interaction as part of globalization has been going on for a long time. A lot of the things that people traditionally associate with a culture are actually relatively modern imports. For example, Indian curry is a relatively recent import, within the last four or five hundred years. You think of Italian cuisine with tomato sauce and garlic, well, Italy got tomatoes from the New World and garlic from China. It probably got pasta from China as well. So a lot of things that we associate with culture are actually the result of one community interacting with the larger world. But having said that, I'm sympathetic with this concern in many communities that we're in a new phase where there may be homogenization. But to me it's an issue of freedom. What do people want? They have to make their choices. There are ways that communities can preserve certain aspects of their culture. There is lots of scope within the world system to subsidize your films, to control television. So I don't see that communities lack the freedom to protect their culture and their institutions if that's what they want to do.
Q: Are there lessons to be learned from the financial crises of the 1990s and from the role of speculative capital flows in Asia and Latin America?
A: One thing we've learned is that opening up a country's capital account is a tricky business. Certainly one of the important lessons of the 90s is that many of the developing countries that opened up to portfolio (foreign speculative capital) flows have had poor results. Some have had serious crises and instability. When multinational corporations come in and invest, that is a type of foreign investment that seems to be powerfully linked to growth. I don't see any developing countries complaining about that. China is getting a lot of direct foreign investment, which seems to have contributed to the its success. On the other hand, the portfolio capital, especially short-term flows or "hot money," can be quite disruptive. Having robust financial institutions able to manage such flows is crucial. Many developing countries don't have such robust financial institutions.
Q: Some critics of the Bank say China rejected key World Bank advice to open up its capital markets. How do you respond to that?
A: That's an unfair criticism. Certainly, the World Bank and China have had some disagreements on policy, but we've had many more areas of agreement. The Bank never encouraged China to open up its capital account, for example, and we never urged radical liberalization along the lines of "remove every import tariff tomorrow." This is a red herring. I run into this increasingly in debates. Anti-globalization intellectuals used to say "trade is bad for developing countries." Now, it seems that nobody has the nerve to say that any more. Now they say "the kind of managed trade liberalization that China's had is good, but what the World Bank advocated is bad." These debates got me thinking, so I went back and looked at what the Bank had recommended in China and Vietnam in the late 1980s and early 1990s. In Vietnam, for example, Bank reports recommend that the government consider a fairly uniform tariff in the 30% range and reduce its extremely high tariffs to a maximum of 60% as a first step – not a particularly draconian recommendation. Interestingly, I see that much of the anti-globalization movement has moved into the middle ground that the Bank was occupying.
Q: But has the World Bank made mistakes in its advice to countries on opening up their economies?
A: The World Bank has certainly made mistakes. It would be remarkable if we didn't make mistakes.
Q: Among the concerns that have been expressed about integration into the world economy is that multinational corporations are exploiting workers in developing countries. Are abuses occurring?
A: Labor abuses are a risk everywhere, with or without globalization. Part of the job of the World Bank is to try to work with governments to address issues of labor regulation and social protection. 175 countries have signed on to the ILO's "fundamental principles and rights at work." The issue is to help developing countries, especially the poorest ones, develop the capacity to ensure these principles and rights.
Q: What is the evidence in relation to the effect on labor practices of foreign investment in developing countries?
A: The evidence is that the process of integration raises income, which in turn is one factor that is supportive of better regulations and better standards. There is even some evidence – although I would not exaggerate it -- that the process of integration itself also encourages better standards. Multinational corporations often bring to the countries in which they invest the kind of standards and labor practices they have elsewhere. We usually find in our surveys of firms that foreign firms pay higher wages. There is evidence that they often have better labor practices. But that said, lots of abuses exist in this world.
Q: What sort of enforcement action should be taken against countries where labor abuses are occurring?
A: Obviously the Bank is against abusive child labor and other abusive labor practices. Families in the developing world don't want these practices either. The issue is how to help communities improve their standards. A practical issue is, do we want to use the international trade regime to sanction countries? The big danger here is that this becomes a form of protectionism that shuts these poor countries out of the market. We ought to be able to find positive ways to help developing countries improve living conditions, labor standards and environmental standards, and not use sanctions within the World Trade Organization framework. That's the real issue. Some of this language sounds very nice. But then the practical issue becomes, "are we going to do this by closing poor countries out of the world trade system"? I don't think that is going to lead to sustainable improvements in living standards.
Q: Anti-globalization protests emerged again recently at Cancun. What is your view on their criticism that the World Trade Organization is dominated by rich countries and is not protecting the interests of developing countries?
A: What's interesting is that there is a certain inconsistency in some of the arguments coming from the anti-globalization movement. On the one hand it seems that some members of the anti-globalization movement have picked up the argument made by the World Bank to the effect that there are a lot of distortions of trade in rich countries and it would help if the rich countries would reduce agricultural subsidies or open up their markets in garments and textiles. But some of the anti-globalization elements are saying that this process of integration isn't helpful to poor countries. So if trade is not important for poor countries, then it is inconsistent to turn around and say the United States should reduce cotton subsidies. If it is true that trade is not important for poor countries, then who cares what the US is doing with agricultural subsidies?
I think that trade is important for poor countries and that it's important for the United States to reduce its cotton subsidies, for Europe to reduce its agricultural subsidies, Japan its protection of rice. One of the most powerful things that rich countries can do is create better access for developing countries to their markets. But that only makes sense as a political position if you think analytically that this process of integration has created a lot of opportunities in the developing world, and that easier access to integration will create more opportunities.
Q: Is the current World Trade Organization framework beneficial to small countries or would they be better off just doing direct deals with individual rich countries?
A: Size matters in the global economy. At some level, trade negotiation between a country like the United States and, say, Bangladesh is inherently unfair. Whatever the international regime is, the way you settle a trade dispute is by penalizing each other. If the United States says Bangladesh can't have access to the US market, that is a big problem for Bangladesh. If Bangladesh says the US can't have access to the Bangladeshi market, that is rather irrelevant to the US. So there is an inherent imbalance.
The practical question for a developing country is whether it is better or worse if there is a multilateral framework called the World Trade Organization. I would argue that it is better for Bangladesh if there is a multilateral framework. It still doesn't equalize things perfectly. Even within the WTO framework, the US has a lot more weight. But I would argue Bangladesh is better off if there is a multilateral framework where there is some potential for the developing countries to coordinate and bring about the rule of law in international trade. Otherwise, without the rule of law in international trade, any big economy – and there you are talking about the large rich countries – would have a tremendous amount of negotiating weight.
We are seeing that in these bilateral deals being negotiated. In the absence of a new WTO agreement, a lot of developing countries see that access to the US market is a powerful factor in their development, so they want some kind of free trade deal with the US. In that framework, the US or any other large economy has a lot of negotiating power, can add a lot of things to the agenda that may not benefit the developing country. Within the WTO there is much more potential for the developing countries to level the playing field and broker a deal that has a lot of advantages and relatively few disadvantages.
Q: Are the rules working as claimed against developing countries?
A: A lot of the benefits of the multilateral trade framework really accrue to developing countries. This whole game is very important for developing countries. From a purely economic standpoint, it is, relatively speaking, less important to the rich countries.
Q: But isn't it true that many rich countries find ways to restrict access of developing country goods to their markets?
A: A common criticism is that, if developing countries buy into the program and are successful, there will be some sleight of hand to trip them up. I suppose all one can say is that there are always risks. It would be nice if the WTO system were strong enough that such issues would always be resolved fairly. In the short run, each developing country has to decide whether it is worse off integrating in the existing regime or isolating itself. Most developing countries have decided, on balance, that they are better off integrating and opening up, even if the rich countries might play a certain number of these games. In the longer run, the rapid growth of developing countries is increasing their weight in the world economy and in the global economic institutions.
Q: What conclusions have you formed about the globalization debate?
A: Globalization is a messy process that requires adjustment and creates significant challenges and problems. But the evidence is pretty clear: integration offers powerful net benefits for developing countries. Countries just have to decide how they weigh those benefits against other concerns. Also, integration is not simply an "either-or" choice. Countries can open up to trade and direct investment while managing other aspects of their relationship with the larger world economy.
*David Dollar is the the World Bank's director of Development Policy
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