Globalization - Is It Up or Down? Right or Wrong?

   
Many pundits have declared that the technology stock crash and global economic downturn in 2001 spelled the end or at least the decline of globalization. Others disagree. Fortunately, there is an objective guide to the advance of globalization and a definition of its meaning. We do not have to rely on anecdotal evidence to know how fast it is advancing or declining. The A. T. Kearney/Foreign Policy magazine "Globalization Index 2002" has just been published based on 2000 data. The index tracks a number of variables related to globalization in 62 advanced and emerging market countries covering the vast majority of the world (85% of population and 90% of production). It combines data on trade, foreign direct investment (FDI), portfolio capital flows, income payments and receipts to quantify economic integration. Also included are international travel, tourism, international telephone traffic and cross-border transfers to determine personal contact. The index gauges technological connectedness by counting Internet users, Internet hosts and secure servers, and measures international engagement through the number of embassies, participation in UN missions and other factors.

Comparative Globalization
The first version of the index (through 1999) showed some interesting results. One of the most striking was that the most globalized countries had greater income equality, seeming to refute the argument that globalization causes poverty and inequality. Small, open economies tended to be the most global (Singapore was at the top of the list the first year). High-scoring countries tended to have greater political freedom (as measured by the Freedom House Survey) and less public corruption than closed countries (based on Transparency International's survey). And some advanced countries, such as the US, Sweden, Finland and Canada, were far ahead of others in diffusion of information technologies.

The second index (through 2000) adds membership in international organizations, commitments to international peacekeeping missions and number of hosted diplomatic missions, as well as the latest available forecasts to assess a country's international engagement. Global integration expanded in 2000: World exports grew by 12% and services by 6.1%; FDI increased by 17.6% to $1.27 trillion, fueled by mergers; travelers added 50 million trips across national borders, to reach 698.8 million arrivals; international telephone calls grew by 10 billion minutes; and the number of Internet hosts grew by 44%. Even though Internet expansion slowed compared to the explosive growth of previous years, 80 million new subscribers logged on in 2000.

The index also reveals a steady growth in political engagement. The countries included established 344 new embassies and 342 new memberships in international organizations. Sixty-six nations contributed to peacekeeping and nation-building missions.

The smaller, open economies continue to get the highest scores on the index. Singapore, number one in 1999, dropped to third place. Ireland (the Celtic Tiger) placed highest in 2000. Ireland successfully attracted IT investment in the 1990s with low tax and regulation barriers, increasing its FDI to $20.5 billion (three times more per resident than, for example, Finland). Ireland's growing tourist industry and advanced telecommunications industry assure its high personal interconnectedness.

By the end of 2000, 35% of the US population and 41% of the Canadian population was on-line, putting these countries in the top 10 (if slightly below the Scandinavians on a per capita basis). The US has the best IT infrastructure development, with one host for every three residents and 77,000 of the world's 118,000 secure servers. The Scandinavians surpassed their continental neighbors and even the North Americans in certain categories and Australia and New Zealand moved ahead. Probably the relative geographic isolation and sparse population of these regions contribute to Internet use as much as technical considerations.

Potentially shattering long-held stereotypes, the study shows little correlation between tax and spending levels by governments and levels of globalization. The Globalization Index score was compared with the World Values Survey, which measures subjective well-being. Although globalization cannot be said to cause happiness, countries where a large percentage of the population expressed high levels of well-being tended to be ones with higher degrees of globalization (connectedness).

Unfortunately, a large divide persists between those with high integration/Internet access in developed countries and those with low access in developing countries. The OECD countries are home to 95.6% of Internet hosts. Hong Kong, Taiwan and Singapore make up more than half of the remainder. This digital abyss makes it harder for emerging markets to increase their level of integration.

No net de-globalization of any country occurred in 2000, but a few countries dropped in relative terms. Although FDI is high, the relative share to developing countries decreased from 43% in 1997 to 21% in 2000. Africa as a region has seen its relative position of integration with the rest of the world decrease.

Even before September 11, there were signs of world economic slowdown. The IMF predicted global economic growth for 2001 at 2.4%, flat levels of trade and FDI flows down by as much as 40%. Even these predictions now seem optimistic. Portfolio investments, international tourism, IT and other measures of integration are going to drop sharply in 2001 and 2002. However, in developed countries telephone and Internet connections will continue to grow and even substitute for travel. The fight against terrorism should also increase international political and diplomatic engagement.

The mechanisms for global integration continue to strengthen even as the world's economies struggle with economic recession. A new round of trade negotiations in the World Trade Organization was initiated in Doha, China joined the WTO and Russia is expected to become a member this year. Even some forward movement in world economic growth cannot be ruled out for 2002, although recovery is likely to be late in the year and gradual. As the Globalization Index Report 2002 states, "global integration has made us more vulnerable, even as it has made us more prosperous."

Globalization, Poverty and Inequality
The World Bank has done a number of studies on the relationship between globalization and poverty, income disparities and income growth. Its report Globalization, Growth and Poverty: Building an Inclusive World Economy shows that 24 developing countries (three billion people) over the past two decades achieved higher growth in incomes, longer life expectancy and better schooling. They enjoyed 5% growth in per capita income, compared to 2% in less open developed countries, and a decline in poverty. Most showed significant increases in their trade to GDP ratio. Other countries, mainly in sub-Saharan Africa, the Middle East and former Soviet Union (2 billion persons), have neither increased their integration with the world economy nor increased their trade to GDP ratio.

The bank recommends seven actions to help these countries increase growth and reduce poverty: 1) support the 'Development Round' of trade negotiations in the WTO; 2) improve the investment climate in developing countries; 3) improve delivery of education and health services; 4) provide social protection to a changing labor market; 5) increase foreign aid from developed nations; 6) support debt relief for governments that enact reforms; and 7) engage in more effective international cooperation to reduce greenhouse gases and lower the risk of global warming.

According to the World Bank, the number of people living on US$1 per day or less fell to 1.2 billion in 1998 from 1.3 billion in 1990. As population grew over this period the poverty rate fell from 29% to 24%. About the same trend was true of those earning US$2 per day or less (2.7 to 2.8 billion persons, 62% to 56%).

Poverty reduction was uneven; the poverty rate was halved in East Asia and a modest 4% reduction was achieved in South Asia, but rates were essentially flat in Latin America, sub-Saharan and North Africa, and the Middle East. The poverty rate actually increased in Eastern Europe and Central Asia. Economic growth is closely associated with poverty reduction. East Asia was the fastest growing area and had the largest reduction in poverty, while Russia, with the largest increase in poverty, had a decrease in per capita income.

Poverty and inequality may go hand in hand, but this dynamic depends on policies and there is no reason to believe it would systematically occur. In contrast, there is clear evidence that openness to trade increases income. It is estimated that a one percent increase in the ratio of trade to GDP raises income by one to two percent. Trade liberalization leads to higher incomes-which are associated one-to-one with income growth among the poor-and seems to increase employment. However, lags and transitional unemployment from displaced workers require political management. These costs are immediate, while the benefits are spread out over future time.

Some argue that inequality within countries is increased by globalization. Certainly, inequality has increased in Latin American countries that liberalized trade, as it has in China, even though poverty there was greatly reduced. Yet there are many cases of inequality decreasing with trade liberalization. This outcome is consistent with trade theory. Moreover, other causes may account for growing inequality in incomes, most importantly technology. Decreasing trade or FDI would be quite costly to developing countries. Alternatives such as training workers in new skills, R&D, or more efficient venture capital markets would be more effective at raising worker income and equality.

The same World Bank study concluded that inequality between countries has also grown. The per capita GDP of the 20 richest countries compared to the poorest 20 has gone from 15 times in 1960 to 30 times in 1998. This is due mostly to higher growth in the richest countries. Developing countries that have opened to trade have grown even faster than the rich countries.

Another WB paper, Globalization and Inequality: Are they Linked and How? (Lundberg and Milanovic) reaches somewhat different conclusions. The authors argue for greater conceptual and terminological clarity when discussing poverty and globalization. Whether inequality goes up or down while globalization proceeds, they say, is no proof of causality. They point out the need for a plausible explanation of the ways that globalization affects inequality with empirical cases. There are three measures of inequality in income: international, intranational and world cross-border comparisons. Greater openness to trade is correlated negatively with income growth for the poorest 40% of the population and positively correlated with increased income for the remaining percentage. This points to a growing trend of world inequality and an uneven distribution of benefits.

Globalization and the Environment
Some environmental groups have asserted that trade causes increased income and consumption and, therefore, more pollution. These critics argue that economic growth, especially in its early stages, is inevitably accompanied by severe environmental degradation. However, World Bank studies found that water pollution falls by 90% as income rises from $500 to $20,000 and that most of the improvement comes before a country reaches middle-income status. For example, China's air quality has improved since the 1980s in spite of rapid growth. In the steel sector, open economies were found to be 17% less pollution intensive than closed economies.

Trade can provide the incentive, the means and the technology to adopt cleaner technologies. Of course, the environmental policies that countries pursue make a difference. High economic growth and environmental performance are often linked, but higher levels of output may increase the total volumes of various kinds of pollutants. Ultimately, each society must decide the value that it places on growth and the environment. Some have feared that competition among developing countries for FDI would lead to poor countries becoming pollution havens, but there is no evidence that the cost of environmental protection has ever been the determining factor in FDI decisions. A World Bank study of 145 countries identified a strong positive correlation between income levels and strictness of environmental regulation.

Observations
The evidence shows that globalization in the economic sense has slowed with the world recession, but in general does not show signs of being reversed. Globalization, primarily trade and technology, assists economic growth and development. Poverty is reduced in the more open countries. Income inequality in itself is no reason to oppose globalization or trade. Instead, societies must implement policies to address this problem. Such policies (and cultural values) are quite often the cause of poverty and inequality in the first place. Pollution is not directly worsened by globalization or trade, but obviously the more growth, production and consumption there is, the more pollution of at least some kind will result. Again, policy makers and the societies they represent, rich and poor, must decide the proper balance and stimulate research and development to devise new and cleaner technologies.

www.imf.org - www.worldbank.org  A. T. Kearney/Foreign Policy Magazine Globalization Index 2002