Despite the risks, many countries have been choosing to globalize their economies to a greater extent. One way to measure the extent of this process is by the ratio of a country's trade (exports plus imports) to its GDP or GNP. By this measure, globalization has roughly doubled on average since 1950. Over the past 30 years exports have grown about twice as fast as GNP (Figure 12.1). As a result, by 1996 the ratio of world trade to world GDP (in purchasing power parity terms) had reached almost 30 percent- on average about 40 percent in developed countries and about 15 percent in developing countries (Map 12.1 and Data Table 3).

Over the past 10 years patterns of international trade have been changing in favor of trade between developed and developing countries. Developed countries still trade mostly among themselves, but the share of their exports going to developing countries grew from 20 percent in 1985 to 22 percent in 1995. At the same time, developing countries have increased trade among themselves. Still, developed countries remain their main trading partners, the best markets for their exports, and the main source of their imports.

Most developing countries' terms of trade deteriorated in the 1980s and 1990s because prices of primary goods- which used to make up the largest share of developing country exports- have fallen relative to prices of manufactured goods. For example, between 1980 and 1995 real prices of oil dropped almost fourfold, prices of cocoa almost threefold, and prices of coffee about twofold. There is still debate about whether this relative decline in commodity prices is permanent or transitory, but developing countries that depend on these exports have already suffered heavy economic losses that have slowed their economic growth and development.

In response to these changes in their terms of trade, many developing countries are increasing the share of manufactured goods in their exports, including exports to developed countries (Figure 12.2). The most dynamic categories of their manufactured exports are labor-intensive, low-knowledge products (clothes, carpets, some manually assembled products) that allow these countries to create more jobs and make better use of their abundant labor resources.

By contrast, developing countries' imports from developed countries are mostly capital- and knowledge- intensive manufactured goods- primarily machinery and transport equipment- in which developed countries retain their comparative advantage¹.

Countries in transition from planned to market economies have recognized the potential benefits of global integration, and most have significantly liberalized their trade regimes. As a result many Central and Eastern European countries saw the share of trade in GDP increase from 10 percent or less in 1990 to 20 percent or more in 1995. In Russia and other countries of the former Soviet Union the ratio of trade to GDP fell during this period, but this was a result of the collapse of trade within the former Soviet Union- trade with the rest of the world actually expanded. As market-determined patterns of trade replace government-determined patterns, a massive reorientation of trade is under way favoring closer links with established market economies.

Trade among transition countries is also recovering following a sharp, politically motivated decline at the start of the transition. A number of regional economic integration initiatives are unfolding- the Baltic Free Trade Area (comprising Estonia, Latvia, and Lithuania), Central Europe Free Trade Area (the Czech Republic, Hungary, Poland, the Slovak Republic, Slovenia, and countries of the Baltic Free Trade Area), and free trade initiatives within the Commonwealth of Independent States. One of these initiatives started in 1995 with negotiations about establishing a customs union for four members of the Commonwealth of Independent States- Russia, Belarus, Kazakhstan, and the Kyrgyz Republic. Russia and Belarus have since signed a treaty on forming an Interstate Commonwealth.

Regional trade blocs can contribute to transition countries' economic stabilization but they also carry risks of diverting trade from potentially more beneficial trade partnerships with other countries. Ten transition countries in Central and Eastern Europe and the Baltics have applied for membership in the European Union, and nearly all transition countries have applied to join the World Trade Organization (WTO). Membership in the WTO would provide these countries with protection from substantial barriers- particularly quotas- which still impede their exporting of so-called sensitive goods to developed countries. Among these goods are agricultural products, iron and steel, textiles, footwear, and others in which transition economies may have comparative advantages. Joining the WTO would not only confer rights on transition economies, it would also require them to meet certain obligations, such as maintaining low or moderate tariffs and abolishing nontariff barriers.

A major challenge for transition economies is finding their place in the worldwide division of labor. In many cases that implies diversifying the structure of exports, particularly to developed countries. Some former Soviet Union countries are narrowly specialized in the production and export of a small number of commodities, such as cotton in Turkmenistan and Uzbekistan and food products in Moldova. For others, such as Russia and Belarus, the biggest problems are the quality and international competitiveness of their manufactured goods.