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Globalization and Economic Growth

D. Selcen Ozturkcan, Florida Atlantic University, USA & Cankaya University, Turkey

Globalization describes the ongoing global trend Engagement in the global economy provides
toward the freer flow of trade and investment across capital to fuel future growth. Most LDCs are people-
borders and the resulting integration of the rich and capital-poor. In a few countries in Asia, the
international economy. Because it expands economic level of domestic savings has been high enough to
freedom and spurs competition, globalization is finance domestic investment, but typically the
believed to raise the productivity and living domestic pool of savings in an LDC is inadequate.
standards of people in countries that open themselves Global capital markets can fill the gap, allowing poor
to the global marketplace. Globalization has evolved nations to accelerate their pace of growth. A poor
since Columbus and de Gama sailed from Europe country that closes its door or fails to maintain sound
more than 500 years ago. This paper surveys the domestic policies will forfeit the immense benefits
economic growth associated with globalization. this capital can bring. Globalization has become a
Doing so, it investigates the dynamics between magic word these days. Some have been led to
openness, poverty, inequality, and globalization. It believe that by its magic touch a country can become
also explores the methods that could have been rich. Incessant propaganda emanating from interested
utilized by the developing countries. quarters has produced this blinding effect on them.
The belief is that all needed to be done is to throw
For less developed countries, globalization offers any country open and by some mysterious process
access to foreign capital, global export markets, and wealth will flow in. This mystical faith is unaware of
advanced technology while breaking the monopoly of the fact that globalization has always existed since
inefficient and protected domestic producers. The mankind was able to move from shores to shores with
greatest beneficiaries of globalization are the long- the development of navigation and other
suffering consumers in those nations that had been accompanying technical developments that made
"protected" from global competition. Globalization long ocean voyages possible.
expands the range of choice, improves product
quality, and exerts downward pressure on prices. It Contemporary Findings
delivers an immediate gain to workers by raising the
real value of their wages. It transfers wealth from
formerly protected producers to newly liberated Openness of the Economy
consumers, with the gains to consumers exceeding Systematic studies confirm a strong link between
the loss to producers because the deadweight losses openness and economic growth. (One problem with
to the economy are recaptured through efficiency these cross-country studies of growth and trade is that
gains. Faster growth, in turn, promotes poverty trade liberalization is seldom an isolated event. LDCs
reduction, democratization, and higher labor and liberalize in the context of broader economic reforms,
environmental standards. which often include selling state-owned industries;
Third World nations that had tried and failed to reducing government taxation, spending, and
reach prosperity by shunning foreign capital and by borrowing; and deregulating domestic prices and
protecting and subsidizing domestic "infant" production. This poses the challenge of determining
industries. Beginning with Chile in the mid-1970s the source of faster growth. Another methodological
and China later that decade, Low Developed challenge is in measuring openness. There is no
Countries (LDCs) from Mexico and Argentina to standard statistical measure of a nation's openness.
India had opened their markets and welcomed foreign What is clear is a general correlation between
investment. The globalization has not been the result openness, under various definitions, and economic
of a blind faith in markets imposed from above but of performance.) A study of 117 countries by Sachs and
the utter exhaustion of any alternative vision. Beyond Warner (1995) found that open economies grew
all the impressive numbers about the extent of much faster than closed economies. Specifically, the
globalization, what kind of impact is it having on authors found that the developing countries that
national economies? There are at least three maintained open economies throughout the 1970s
fundamental blessings of globalization on nations and '80s grew at an average annual rate of 4.5
that embrace it: faster economic growth, reductions percent, compared with an average growth rate of 0.7
in poverty, and more fertile soil for democracy. percent for closed economies. As a result, the open

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developing economies tended to converge toward the that they do not have to produce themselves.
slower-growing rich economies, while relatively International trade and investment is simply the
closed economies did not converge. international extension of this division of labor and
specialization, which is one of the key driving forces
Contributions of Free Trade behind economic growth. Recognizing this
The international exchange of goods and services connection between trade and economic growth is the
allows a more efficient use of the world's limited key to the debate.
resources, thereby creating more output to be shared
among the population. Consider this fact: the world Level of Poverty
economy produced more output in the twentieth As shown in Table 1.1, the total number of
century alone than it produced in total over the entire people living on less than a dollar a day in the
preceding years of recorded human history. (In terms developing world has remained roughly constant over
of Figure 1, the area under the GDP line after 1900 the past ten years, at 1.2 billion. Since the population
exceeds the area under the line prior to 1900). in developing countries has been rapidly growing
(DeLong, 1998) over the same period, the proportion of the
developing country population living below the
Figure 1. World Output and Population poverty line has actually fallen, from 28 percent in
1987 to 24 percent in 1998. In other words, more
people have moved out of poverty than were born
into poverty over the past decade. Thus, blanket
claims that globalization increases world poverty
simply do not match the evidence.

Table 1. Total number of people Living on less than


a dollar a day (millions)
%
Years change change

Region 1987 1993 1998 ’87-98 ’87-98

East Asia 418 432 278 -140 -33


& the Pacific
Source: DeLong, Estimating World GDP, One Europe 1 18 24 23 2300
Million BC to Present & Central Asia
Latin America 64 71 78 14 22
& Caribbean
Part of this increase in measured output per M.East 9 5 6 -3 -33
capita reflects the shift away from subsistence & Noth Africa
agriculture and production in the home (both of South Africa 474 505 522 48 10
which are not measured in Gross Domestic Product Sub-Saharan Africa 217 273 291 74 34
(GDP) because they are not sold on a market). Yet, Total (billions) 1.2 1.3 1.2 0 0
one should be able to point out that the rest of this
explosive growth in output comes from technological Source: World Bank Development Indicators 2000
progress: scientific advances, better production,
organization, and management methods, and Yet, while such a reduction in poverty is
improvements in the forms of transportation and laudable, it has not been rapid or deep enough. The
communication. In particular, the specialization of number of people living on the slightly higher
production has occurred as people have increasingly amount of $2 a day is almost 3 billion, approaching
focused on specific economic activities and traded half of the world's population. This suggests that
with others for the goods and services they need. many of those moving out of dire poverty have not
Importantly, that trade could be with the neighboring moved far up the income scale. Moreover, World
town, country, or continent. Indeed, trading with Bank estimates based on a "business as usual"
another country is much the same as trading with the scenario of slow growth; predict that 1.2 billion
local store. The local store never buys anything from people will still be living on less than $1 a day in
its customers (and so runs a huge trade surplus with 2008. The number of people living below that
them) and yet it clearly enhances overall welfare by poverty line in sub-Saharan Africa is predicted to
providing its customers with food and other products increase by nearly 40 million over the same period.
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Clearly, much more needs to be done to accelerate to conclude that there is no simple relationship
poverty reduction in the coming decades. between openness and inequality.
Finally, it is important to note that poverty is a In addition, growth in general (whether caused
multidimensional phenomenon and is not simply the by trade or other factors) does not automatically
same as an insufficient level of monetary income. increase inequality. A comprehensive study of 125
Other determinants of poverty include access to basic countries by the World Bank showed that a 1 percent
sanitation, education, and health services. This increase in GDP is associated with a 1 percent
distinction is important because some developing increase in the incomes of the poor. The study
countries have converged or almost converged with concluded that "there is no apparent tendency for
developed countries in areas such as life expectancy, growth to be biased against poor income households
even though they have much lower income levels. at the early stages of development. Thus, blanket
For example, in Latin America and the Caribbean life claims about globalization or growth increasing
expectancy averages 70 years and average per capita inequality cannot be substantiated by a careful look at
income is only $6,868. In contrast, according to the the evidence. Other factors -- such as domestic social
UN Human Development Report 1999, the average and other policies -- clearly play a role in how
life expectancy in developed countries is 78 years, economic growth and integration in the global
while average per capita income is $23,741. Even economy affect the distribution of income. The same
countries as poor as India have a life expectancy (63 study, which is conducted by Dollar and Kraay
years) that was not possible anywhere in the world a (2001), states a finding of a statistically significant
hundred years ago. This shows that the worldwide and economically meaningful effect of trade on
dissemination of new technologies and knowledge, growth: an increase in trade as a share of GDP of 20
such as medical advances, reduces some aspects of percentage points increases growth by between 0.5
poverty in developing countries even while monetary and 1 percentage point a year.
incomes only slowly increase. (The UN recognizes
that health and other social aspects of poverty are not Figure 2. Real per capita GDP growth (annual rate)
accurately reflected in monetary measures and thus
constructs its own measure of poverty -- the human
development index (HDI). This measure includes life
expectancy, literacy, school enrollment and incomes.
In 1997, more than half of the 174 countries
measured 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 the
antiglobalization movement is that globalization is Source: Dollar and Kraay (2001b)
widening 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 Global economic integration has complex
Jay Mazur put it, "globalization has dramatically effects on income, culture, society, and the
increased inequality between and within nations". environment. But in the debate over globalization's
The problem with this new conventional wisdom is merits, its impact on poverty is particularly
that the best evidence available shows the exact important. If international trade and investment
opposite to be true. So far, the current wave of primarily benefit the rich, many people will feel that
globalization, which started around 1980, has restricting trade to protect jobs, culture, or the
actually promoted economic equality and reduced environment is worth the costs. But if restricting
poverty. trade imposes further hardship on poor people in the
Evidence that rising inequality in some countries developing world, many of the same people will
occurs at the same time as rapid globalization does think otherwise.
not prove causation. In fact, the evidence on the The fact is; developing world can be divided into
causal relationship between globalization and internal a "globalizing" group of countries that have seen
inequality is mixed. One thing seems clear: there is rapid increases in trade and foreign investment over
no systematic relationship between openness to trade the last two decades -- well above the rates for rich
and inequality. For example, while both Thailand and countries -- and a "nonglobalizing" group that trades
Taiwan have witnessed rapid economic growth and even less of its income today than it did 20 years ago.
integration into the global economy over the past One need to be cautious about drawing conclusions
thirty years, inequality increased in Thailand but not concerning causality, but no one can disagree that
in Taiwan. This and similar examples may lead one openness to foreign trade and investment (along with
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complementary reforms) explains the faster growth or direct investment related to natural resources.
of the globalizers. Today, in contrast, the bulk of capital flows to
Contrary to popular perception, globalization has developing countries is direct investments tied to
not resulted in higher inequality within economies. manufacturing and services.
Inequality has indeed had gone up in some countries One good measure of inequality among
(such as China) and down in others (such as the individuals worldwide is the mean log deviation -- a
Philippines). But those changes are not systematically measure of the gap between the income of any
linked to globalization measures such as trade and randomly selected person and a general average. It
investment flows, tariff rates, and the presence of takes into account the fact that income distributions
capital controls. Instead, shifts in inequality stem everywhere are skewed in favor of the rich, so that
more from domestic education, taxes, and social the typical person is poorer than the group average;
policies. In general, higher growth rates in the more skewed the distribution, the larger the gap.
globalizing developing countries have translated into Figure 3 shows the findings of Dollar and Kraay’s
higher incomes for the poor. Even with its increased (2001) studies with the use of this technique.
inequality, for example, China has seen the most Most worldwide interpersonal income inequality
spectacular reduction of poverty in world history -- can be attributed to the large differences in average
which was supported by opening its economy to incomes between countries, rather than to inequities
foreign trade and investment. in the distribution of income within countries. And
Apart form the above-mentioned causes of since many of the globalizers were initially poor,
inequality, the more recent rise in inequality is also their rapid growth over the past twenty years has
explained by emerging trends, such as the contributed to reducing income inequality between
dissemination of technologies that generate demand countries. Much of the decline in the between-
for skilled labor and therefore increase their country component of inequality can be seen to be
remuneration and reduce both the demand and the due to the rapid growth of the globalizers, most
compensation of unskilled workers. In many notably China and India, whose economies' vast size
developing countries and transition economies, has given them substantial weight in these
privatization and a distribution of industrial assets calculations. (Dollar & Kraay, 2001a & 2001b).
that increased asset concentration reinforced this
trend. In some developing countries, labor market Figure 3. The globalizers and worldwide inequality
deregulation eroded real wages, and the traditional
redistributive function of government was severely
limited due to reduced tax collection and elimination
of transfer systems induced by liberalization
initiatives. (United Nations Report on the World
Social Situation, 2001)
Although globalization can be a powerful force
for poverty reduction, its beneficial results are not
inevitable. If policymakers hope to tap the full
potential of economic integration and sustain its
benefits, they must address three critical challenges.
A growing protectionist movement in rich countries
that aims to limit integration with poor ones must be
stopped in its tracks. Developing countries need to
acquire the kinds of institutions and policies that will
allow them to prosper under globalization, both of
which may be different from place to place. And
more migration, both domestic and international,
must be permitted when geography limits the
potential for development.
International capital flows, measured as foreign
ownership of assets relative to world income, grew Source: Dollar and Kraay (2001b)
during the first wave of globalization and declined
during the Great Depression and World War II; they
did not return to 1914 levels until 1980. But since Another way of looking at global inequality is to
then, such flows have increased markedly and examine what is happening to the extreme poor --
changed their nature as well. One hundred years ago, those people living on less than $1 per day. During
foreign capital typically financed public the Great Depression and World War II, the number
infrastructure projects (such as canals and railroads) of poor increased particularly sharply, and it declined

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somewhat immediately thereafter. The world and not destroy the incentives for its citizens to
economy grew strongly between 1960 and 1980, but acquire ideas from the rest of the world, it can rapidly
the number of poor rose because growth did not take advantage of the publicly available part of the
occur in the places where the worst-off live. But worldwide stock of knowledge. If, in addition, it
since then, the most rapid growth has occurred in offers incentives for privately held ideas to be put to
poor locations. Consequently the number of poor has use within its borders (for example, by protecting
declined by 200 million since 1980. Again, this trend foreign patterns, copyrights, and licenses, and by
is explained primarily by the rapid income growth in permitting direct investment by foreign firms), its
China and India, which together in 1980 accounted citizens can soon work in state-of-the-art productive
for about one-third of the world's population and activities.
more than 60 percent of the world's extreme poor.
While globalization has raised living standards Conclusion
for many, it has made life more difficult for those
dislocated by change and it threatens to leave part of
the world behind. It is no coincidence that the Globalization, which is understood with
disappointing economic performance in much of reference to a country’s foreign trade to GDP ratio or
Sub-Saharan Africa reflects a failure to integrate into by composite criteria of ratios of foreign trade and
the world economy and, thus, to trade successfully foreign direct investments to GDP ratios, is said to
and attract investment. Another challenge of have certain benefits to the globalizing country. Here
globalization is to address the concern in wealthier is a confusion of cause and effect. An analysis of the
nations that international competition will harm forces at work does not reveal benefits flowing from
living standards. There is ample evidence that the single source of globalization. As a matter of fact,
stagnant wages in the United States and globalization appears more an effect rather than the
unemployment in Europe have other causes- cause of economic growth. At any rate it has to wait
technological change, poor education, Europe's upon the development of those domestic forces,
inflexible labor markets, high taxes and an aging which create the favorable climate for economic
workforce. growth. It has an accelerating effect on growth at an
advanced stage of development. These are well-
known forces of good governance, favorable
Policies to Implement for Benefiting investment climate, development of financial
from the Globalization institutions, and the development of physical and
social infrastructures. In other words, the country
To enjoy the benefits of globalization at the desirous of globalizing to a higher level has to
maximum possible extend, “the Golden Straitjacket”, develop its own domestic economy to benefit from
the so called “progrowth policies”, a country must globalization. The economic benefits to a country
either adopt, or be seen as moving toward, consists of from globalization may rightly be viewed as
the following golden rules: making the private sector economic benefits generated by economic growth
the primary engine of its economic growth, primarily with own steam. It has to be self-generating
maintaining a low rate of inflation and price stability, process that links up for global benefits.
shrinking the size of its state bureaucracy, The evidence today still suggests that increased
maintaining as close to a balanced budget as possible, global integration of the 1990s will be seen
if not a surplus; eliminating and lowering tariffs on eventually as one of the brightest events for millions
imported goods, removing restrictions on foreign of the world's poor. New jobs in international
investment, getting rid of quotas and domestic companies and export sectors have raised incomes of
monopolies, increasing exports, privatizing state- millions in the past two decades, and most of these
owned industries and utilities, deregulating capital have been for people with below-average incomes –
markets, making its currency convertible, opening its certainly below average by global standards if not
industries, stock, and bond markets to direct foreign also by the standards within the countries themselves.
ownership and investment, deregulating its economy Furthermore, many of the countries that have
to promote as much domestic competition as achieved rapid growth via global integration were
possible, eliminating government corruption, relatively poorer countries in East Asia such as
subsidies and kickbacks as much as possible, opening China, Malaysia, Thailand, Indonesia, Korea, and
its banking and telecommunications systems to Taiwan; or were relatively poorer countries in Europe
private ownership and competition, and allowing its such as Ireland and Poland. Globalization alone is
citizens to choose from an array of competing unlikely to solve the problems of much of the world's
pension options and foreign-run pension and mutual poor, yet a reaction against globalization is even less
funds. (Friedman, 1999, p.86-87). It is also very of an answer.
critical that for a poor nation to invest in education Globalization has become a lightening rod for
many legitimate concerns about modern society
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including poverty, inequality, unemployment, and Independent.
environmental degradation. Yet, there is no clear Mazur, J. (2000). Labor's New Internationalism.
evidence that globalization per se is to blame for Journal of Foreign Affairs, Jan/Feb.
rising global poverty or inequality. Indeed, higher Nye, J. S. (Apr 13, 2000). Look Again,
levels of trade and investment tend to increase Globalization isn’t Bad for the Poor. International
economic growth and bring other positive spillover Herald Tribune.
effects (such as access to new, better technologies). Pollin, R. (2000). Globalization, Inequality and
Rather than blanket claims against globalization, Financial Instability: Confronting the Marx, Keynes
there emerges a pattern in which some countries and Polanyi Problems in Advanced Capitalist
successfully reap the benefits of the global economy Economies. Political Economy Research Institute
while others are being left behind. Those that fall Working Paper Series Number 8.
behind fail on a range of indicators. The causes of Romer, P.M. Economic Growth. The Fortune
their marginalization are more deep-seated and Encylopedia of Economics. Available on the web at
complex than simply globalization and include http://www.stanford.edu/~promer/Econgro.htm
factors such as a lack of investment, poor education, Sirico, R. A. (1998). Free Trade and Human
weak infrastructure and institutions, and civil and Rights: The Moral Case for Engagement. Trade
political unrest. Focusing on globalization as a cause Policy Briefing Paper No. 2.
of poverty and inequality distracts policymakers from Sachs, J. & Warner, A. (1995). Economic
the real challenges of development. Yet, removing Reform and the Process of Global Integration.
the blame from globalization does not justify a purely Brookings Papers on Economic Activity 1.
laissez-faire approach to the global economy.
Countries need active policies to spread the burdens
of adjustment and expand the winners circle if they
are to maintain political support for globalization and
reap the significant benefits it can bring.
To conclude, I am convinced that globalization is
good and it's especially good when you do your
homework, ... keep your fundamentals in line on the
economy, build up high levels of education, respect
the rule of law. ... When you do your part, I am
convinced that you will get the benefit.

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