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Aykac, D.S.Ozturkcan, "Globalization and Economic Growth,” 11th Annual IMDA Conference, July 20-24, 2002, Antalya, Turkey.

Aykac, D.S.Ozturkcan, "Globalization and Economic Growth,” 11th Annual IMDA Conference, July 20-24, 2002, Antalya, Turkey.

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Published by: Dr. D. Selcen O. Aykac on Jun 18, 2009
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Globalization and Economic Growth
D. Selcen Ozturkcan, Florida Atlantic University, USA & Cankaya University, Turkey
Globalization describes the ongoing global trend toward the freer flow of trade and investment acrossborders and the resulting integration of theinternational economy. Because it expands economic freedom and spurs competition, globalization isbelieved to raise the productivity and living  standards of people in countries that open themselvesto the global marketplace. Globalization has evolved  since Columbus and de Gama sailed from Europemore than 500 years ago. This paper surveys theeconomic growth associated with globalization. Doing so, it investigates the dynamics betweenopenness, poverty, inequality, and globalization. It also explores the methods that could have beenutilized by the developing countries.
For less developed countries, globalization offersaccess to foreign capital, global export markets, andadvanced technology while breaking the monopoly of inefficient and protected domestic producers. Thegreatest beneficiaries of globalization are the long-suffering consumers in those nations that had been"protected" from global competition. Globalizationexpands the range of choice, improves productquality, and exerts downward pressure on prices. Itdelivers an immediate gain to workers by raising thereal value of their wages. It transfers wealth fromformerly protected producers to newly liberatedconsumers, with the gains to consumers exceedingthe loss to producers because the deadweight lossesto the economy are recaptured through efficiencygains. Faster growth, in turn, promotes povertyreduction, democratization, and higher labor andenvironmental standards.Third World nations that had tried and failed toreach prosperity by shunning foreign capital and by protecting and subsidizing domestic "infant"industries. Beginning with Chile in the mid-1970sand China later that decade, Low DevelopedCountries (LDCs) from Mexico and Argentina toIndia had opened their markets and welcomed foreigninvestment. The globalization has not been the resultof a blind faith in markets imposed from above but of the utter exhaustion of any alternative vision. Beyondall the impressive numbers about the extent of globalization, what kind of impact is it having onnational economies? There are at least threefundamental blessings of globalization on nationsthat embrace it: faster economic growth, reductionsin poverty, and more fertile soil for democracy.Engagement in the global economy providescapital to fuel future growth. Most LDCs are people-rich and capital-poor. In a few countries in Asia, thelevel of domestic savings has been high enough tofinance domestic investment, but typically thedomestic pool of savings in an LDC is inadequate.Global capital markets can fill the gap, allowing poor nations to accelerate their pace of growth. A poor country that closes its door or fails to maintain sounddomestic policies will forfeit the immense benefitsthis capital can bring. Globalization has become amagic word these days. Some have been led to believe that by its magic touch a country can becomerich. Incessant propaganda emanating from interestedquarters has produced this blinding effect on them.The belief is that all needed to be done is to throwany country open and by some mysterious processwealth will flow in. This mystical faith is unaware of the fact that globalization has always existed sincemankind was able to move from shores to shores withthe development of navigation and other accompanying technical developments that madelong ocean voyages possible.
Contemporary Findings
Openness of the Economy
Systematic studies confirm a strong link betweenopenness and economic growth. (One problem withthese cross-country studies of growth and trade is thattrade liberalization is seldom an isolated event. LDCsliberalize in the context of broader economic reforms,which often include selling state-owned industries;reducing government taxation, spending, and borrowing; and deregulating domestic prices and production. This poses the challenge of determiningthe source of faster growth. Another methodologicalchallenge is in measuring openness. There is nostandard statistical measure of a nation's openness.What is clear is a general correlation betweenopenness, under various definitions, and economic performance.) A study of 117 countries by Sachs andWarner (1995) found that open economies grewmuch faster than closed economies. Specifically, theauthors found that the developing countries thatmaintained open economies throughout the 1970sand '80s grew at an average annual rate of 4.5 percent, compared with an average growth rate of 0.7 percent for closed economies. As a result, the open
 
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developing economies tended to converge toward theslower-growing rich economies, while relativelyclosed economies did not converge.
Contributions of Free Trade
The international exchange of goods and servicesallows a more efficient use of the world's limitedresources, thereby creating more output to be sharedamong the population. Consider this fact: the worldeconomy produced more output in the twentiethcentury alone than it produced in total over the entire preceding years of recorded human history. (In termsof Figure 1, the area under the GDP line after 1900exceeds the area under the line prior to 1900).(DeLong, 1998)Figure 1. World Output and PopulationSource: DeLong,
 Estimating World GDP, OneMillion BC to Present 
Part of this increase in measured output per capita reflects the shift away from subsistenceagriculture and production in the home (both of which are not measured in Gross Domestic Product(GDP) because they are not sold on a market). Yet,one should be able to point out that the rest of thisexplosive growth in output comes from technological progress: scientific advances, better production,organization, and management methods, andimprovements in the forms of transportation andcommunication. In particular, the specialization of  production has occurred as people have increasinglyfocused on specific economic activities and tradedwith others for the goods and services they need.Importantly, that trade could be with the neighboringtown, country, or continent. Indeed, trading withanother country is much the same as trading with thelocal store. The local store never buys anything fromits customers (and so runs a huge trade surplus withthem) and yet it clearly enhances overall welfare by providing its customers with food and other productsthat they do not have to produce themselves
.
International trade and investment is simply theinternational extension of this division of labor andspecialization, which is one of the key driving forces behind economic growth. Recognizing thisconnection between trade and economic growth is thekey to the debate.
 Level of Poverty
As shown in Table 1.1, the total number of  people living on less than a dollar a day in thedeveloping world has remained roughly constant over the past ten years, at 1.2 billion. Since the populationin developing countries has been rapidly growingover the same period, the proportion of thedeveloping country population living below the poverty line has actually fallen, from 28 percent in1987 to 24 percent in 1998.
 
In other words, more people have moved out of poverty than were borninto poverty over the past decade. Thus, blanketclaims that globalization increases world povertysimply do not match the evidence.Table 1. Total number of people Living on less thana dollar a day (millions)%Years changechangeRegion198719931998’87-9887-98East Asia 418432278-140-33& the PacificEurope118 24232300& Central AsiaLatin America6471781422& CaribbeanM.East956-3-33& Noth AfricaSouth Africa4745055224810Sub-Saharan Africa2172732917434Total (billions)1.21.31.200Source: World Bank Development Indicators 2000Yet, while such a reduction in poverty islaudable, it has not been rapid or deep enough. Thenumber of people living on the slightly higher amount of $2 a day is almost 3 billion, approachinghalf of the world's population. This suggests thatmany of those moving out of dire poverty have notmoved far up the income scale. Moreover, WorldBank estimates based on a "business as usual"scenario of slow growth; predict that 1.2 billion people will still be living on less than $1 a day in2008. The number of people living below that poverty line in sub-Saharan Africa is predicted toincrease by nearly 40 million over the same period.
 
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Clearly, much more needs to be done to accelerate poverty reduction in the coming decades.Finally, it is important to note that poverty is amultidimensional phenomenon and is not simply thesame as an insufficient level of monetary income.Other determinants of poverty include access to basicsanitation, education, and health services. Thisdistinction is important because some developingcountries have converged or almost converged withdeveloped countries in areas such as life expectancy,even though they have much lower income levels.For example, in Latin America and the Caribbean lifeexpectancy averages 70 years and average per capitaincome is only $6,868. In contrast, according to theUN Human Development Report 1999, the averagelife expectancy in developed countries is 78 years,while average per capita income is $23,741.
 
Evencountries as poor as India have a life expectancy (63years) that was not possible anywhere in the world ahundred years ago.
 
This shows that the worldwidedissemination of new technologies and knowledge,such as medical advances, reduces some aspects of  poverty in developing countries even while monetaryincomes only slowly increase. (The UN recognizesthat health and other social aspects of poverty are notaccurately reflected in monetary measures and thusconstructs its own measure of poverty -- the humandevelopment index (HDI). This measure includes lifeexpectancy, literacy, school enrollment and incomes.In 1997, more than half of the 174 countriesmeasured by the UN had an HDI rank that was higher than their per capita income would predict).
The Inequality Gap
On the other hand, one of the main claims of theantiglobalization movement is that globalization iswidening the gap between the haves and the have-nots. It benefits the rich and does little for the poor, perhaps even making their lot harder. As union leader Jay Mazur put it, "globalization has dramaticallyincreased inequality between and within nations".The problem with this new conventional wisdom isthat the best evidence available shows the exactopposite to be true. So far, the current wave of globalization, which started around 1980, hasactually promoted economic equality and reduced poverty.Evidence that rising inequality in some countriesoccurs at the same time as rapid globalization doesnot prove causation. In fact, the evidence on thecausal relationship between globalization and internalinequality is mixed. One thing seems clear: there isno systematic relationship between openness to tradeand inequality. For example, while both Thailand andTaiwan have witnessed rapid economic growth andintegration into the global economy over the pastthirty years, inequality increased in Thailand but notin Taiwan. This and similar examples may lead oneto conclude that there is no simple relationship between openness and inequality.In addition, growth in general (whether caused by trade or other factors) does not automaticallyincrease inequality. A comprehensive study of 125countries by the World Bank showed that a 1 percentincrease in GDP is associated with a 1 percentincrease in the incomes of the poor. The studyconcluded that "there is no apparent tendency for growth to be biased against poor income householdsat the early stages of development. Thus, blanketclaims about globalization or growth increasinginequality cannot be substantiated by a careful look atthe evidence. Other factors -- such as domestic socialand other policies -- clearly play a role in howeconomic growth and integration in the globaleconomy affect the distribution of income. The samestudy, which is conducted by Dollar and Kraay(2001), states a finding of a statistically significantand economically meaningful effect of trade ongrowth: an increase in trade as a share of GDP of 20 percentage points increases growth by between 0.5and 1 percentage point a year.Figure 2. Real per capita GDP growth (annual rate)Source: Dollar and Kraay (2001b)
Global economic integration
has complexeffects on income, culture, society, and theenvironment. But in the debate over globalization'smerits, its impact on poverty is particularlyimportant. If international trade and investment primarily benefit the rich, many people will feel thatrestricting trade to protect jobs, culture, or theenvironment is worth the costs. But if restrictingtrade imposes further hardship on poor people in thedeveloping world, many of the same people willthink otherwise.The fact is; developing world can be divided intoa "globalizing" group of countries that have seenrapid increases in trade and foreign investment over the last two decades -- well above the rates for richcountries -- and a "nonglobalizing" group that tradeseven less of its income today than it did 20 years ago.One need to be cautious about drawing conclusionsconcerning causality, but no one can disagree thatopenness to foreign trade and investment (along with

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