Globalization: Threat or Opportunity?

Issues Briefs for 2002 2001 2000 The Challenge of Globalization in Africa Remarks by Stanley Fischer Acting Managing Director International Monetary Fund Given at the France-Africa Summit Yaoundé, Cameroon January 19, 2001 Factors Driving Global Economic Integration by Michael Mussa Economic Counselor and Director of Research IMF August 25, 2000 E-Mail NotificationSubscribeorModifyyour subscription00/01 Globalization: Threat or Opportunity? By IMF Staff April 12, 2000 (Corrected January 2002)Français Deutsch Russian EspañolI Introduction II What is Globalization? III Unparalleled Growth, Increased Inequality: 20th Century Income Trends IV Developing Countries: How Deeply Integrated? V Does Globalization Increase Poverty and Inequality? VI How Can the Poorest Countries Catch Up More Quickly? VII An Advanced Country Perspective: Does Globalization Harm Workers’ Interests? VIII Are Periodic Crises an Inevitable Consequence of Globalization? IX The Role of Institutions and Organizations X Conclusion I. Introduction The term "globalization" has acquired considerable emotive force. Some view it as a process that is beneficial—a key to future world economic development—and also inevitable and irreversible. Others regard it with hostility, even fear, believing that it increases inequality within and between nations, threatens employment and living standards and thwarts social progress. This brief offers an overview of some aspects of globalization and aims to identify ways in which countries can tap the gains of this process, while remaining realistic about its potential and its risks. Globalization offers extensive opportunities for truly worldwide development but it is not progressing evenly. Some countries are becoming integrated into the global economy more quickly than others. Countries that have been able to integrate are seeing faster growth and reduced poverty. Outward-oriented policies brought dynamism and greater prosperity to much of East Asia, transforming it from one of the poorest areas of the world 40 years ago. And as living standards rose, it became possible to make progress on democracy and economic issues such as the environment and work standards. By contrast, in the 1970s and 1980s when many countries in Latin America and Africa pursued inward-oriented policies, their economies stagnated or declined, poverty increased and high inflation became the norm. In many cases, especially Africa, adverse external developments made the problems worse. As these regions changed their policies, their incomes have begun to rise. An important transformation is underway. Encouraging this trend, not reversing it, is the best course for promoting growth, development and poverty reduction. The crises in the emerging markets in the 1990s have made it quite evident that the opportunities of globalization do not come without risks—risks arising from volatile capital movements and the risks of social, economic, and environmental degradation created by poverty. This is not a reason to reverse direction, but for all concerned—in developing countries, in the advanced countries, and of course investors—to embrace policy changes to build strong economies and a stronger world financial system that will produce more rapid growth and ensure that poverty is reduced. How can the developing countries, especially the poorest, be helped to catch up? Does globalization exacerbate inequality or can it help to reduce poverty? And are countries that integrate with the global economy inevitably vulnerable to instability? These are some of the questions covered in the following sections. II. What is Globalization? Economic "globalization" is a historical process, the result of human innovation and technological progress. It refers to the increasing integration of economies around the world, particularly through trade and financial flows. The term sometimes also refers to the movement of people (labor) and knowledge (technology) across international borders. There are also broader cultural, political and environmental dimensions of globalization that are not covered here. At its most basic, there is nothing mysterious about globalization. The term has come into common usage since the 1980s, reflecting technological advances that have made it easier and quicker to complete international transactions—both trade and financial flows. It refers to an extension beyond national borders of the same market forces that have operated for centuries at all levels of human economic activity—village markets, urban industries, or financial centers. Markets promote efficiency through competition and the division of labor—the specialization that allows people and economies to focus on what they do best. Global markets offer greater opportunity for people to tap into more and larger markets around the world. It means that they can have access to more capital flows, technology, cheaper imports, and larger export markets. But markets do not necessarily ensure that the benefits of increased efficiency are shared by all. Countries must be prepared to embrace the policies needed, and in the case of the poorest countries may need the support of the international community as they do so. III. Unparalleled Growth, Increased Inequality: 20th Century Income Trends Globalization is not just a recent phenomenon. Some analysts have argued that the world economy was just as globalized 100 years ago as it is today. But today commerce and financial services are far more developed and deeply integrated than they were at that time. The most striking aspect of this has been the integration of financial markets made possible by modern electronic communication. The 20th century saw unparalleled economic growth, with global per capita C.G.A.. increasing almost five-fold. But this growth was not steady—the strongest expansion came during the second half of the century, a period of rapid trade expansion accompanied by trade—and typically somewhat later, financial—liberalization. Figure 1a breaks the century into four periods.1 In the inter-war era, the world turned its back on internationalism—or globalization as we now call it—and countries retreated into closed economies, protectionism and pervasive capital controls. This

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