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 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 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?

Inequities in income: within and across countries 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 yj dj Representative 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 21 Source: WHO, World Bank. * To be conservative, the distribution in Denmark is assumed to be same as in Madagascar.

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

The Great Divergence Source: Maddison (2001), in 1990 international $

Major landmarks in economic growth Industrial revolution in Europe and the onset of “modern economic growth” (c.1750-1820) Source: Maddison (2001)

Major landmarks in economic growth Convergence and catch-up in the U.S. during 19th century Source: Maddison (2001)

Major landmarks in economic growth Absence of economic growth in Asia (except Japan) and Africa before 1950) Source: Maddison (2001)

Major landmarks in economic growth Japanese catchup post-1950 Source: Maddison (2001)

Major landmarks in economic growth A world divided between rich and poor countries Source: Maddison (2001)

How growth matters to poverty: back to poverty incidence (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 1 2 3 4 5 6 7 8 9 1000-1500 1500-1820 1820-1870 1870-1913 1913-1950 1950-73 1973-90 1990-2005 Western Europe United States Other Western offshoots Mexico Norway Japan South Korea China GDP per capita growth rate of fastest growing country/region (annual average, %) World GDP per capita growth rate (annual average, %)

Paradoxes of globalization (I) Countries that have benefited most from globalization are those that have not played by the rules …

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

Paradoxes of globalization (I) Countries that have benefited the most from integration in the world economy are countries with non-standard policies *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-insurance

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 countries Country 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: Foreign borrowing-led growth countries in the periphery of EU in 1990s, LA in 1970s, … Commodity booms 19th century, many African countries in the last decade Growth based on deep integration Goods and factor market integration + institutions + transfers (convergence within EU) 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, China Only 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 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