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Forum for Discussion--Revisiting
"Good" and "Bad" Globalizers What lessons have we learned from globalization to date? We see economic growth occurring as a result of opening up, of liberalization of trade, but perhaps a reverse causality is at work, whereby a country that is undergoing a certain level of growth can afford to cut tariffs and expose itself to foreign goods and capital. The antiglobalists of the left regard globalization as a malignant force that leads to child labor in the South and takes away middle-class jobs in the North. In their interpretation, globalization is pursued by triumphant, and often unbridled, capitalism that destroys the environment, obliterates indigenous cultures, and exploits the weak. Meanwhile the conservative, and often xenophobic, antiglobalists on the right, especially in Europe, agree that globalization is a malignant force that endangers job security in the industrial world and undermines the cultural values of the European nations. The mainstream view is that globalization is a benign force that will ultimately lead to an era of converging world incomes as poor countries like China open up to the world and see their incomes rise, converging institutions as democracy becomes a universal norm, and cultural richness as people of different backgrounds interact more frequently. They see globalization as the ointment for curing the ills besetting the developing world, such as poverty, illiteracy, and inequality, as if a country can simply open up its borders, reduce tariffs, attract foreign capital, and in a few generations, if not more rapidly, the poor will become rich, the illiterate will learn how to read and write, and the unequal will become equal. Thus this group views globalization as a benign and automatic force that, once certain preconditions are set in place—including sound macroeconomic policies and protection of property rights—will inexorably lead countries and individuals to a state of economic bliss. But the previous globalization episode from around the mid-1850s to 1914 witnessed both tremendous economic and technological achievements and absolute as well as the relative economic decline of many developing countries (table 1). Inquiries from Martian Visitors Let us endow a group of Martian visitors with elementary arithmetic skills, the knowledge that more growth (higher income) is better than lower growth (and lower income), and the understanding that we would ideally like to see poor regions catch up with the group of rich nations. Then we would ask the Martians which period was better: the period between 1960 and 1978, which was characterized by import substitution in Africa, Asia, and Latin America; various forms of centrally planned economies in Eastern Europe, the Soviet Union, China, and Vietnam; and emergence of the welfare state in the rich countries, or the period between 1978 and 1998, when African and Latin American countries undertook structural adjustment, Eastern Europe and the countries of the former Soviet Union switched to market economies, and the industrial countries cut back the welfare state (see table 2 and 3). Their choice should not be too difficult. They would first observe that the growth rate of world GDP per capita (even calculated as population-weighted world GDP per capita), was two to three times higher during the first period. They would also notice that whatever region they select and whatever concept of growth they use, the growth rate is always higher during the first period than the second. Our Martian visitors would then announce that they have definitely concluded that the first period was better, because most countries grew faster then and most of the poorer regions were catching up with the rich countries. They would have thought that the test was rather easy and that they had done pretty well. Unfortunately, our Martians are not good economists. Our mainstream economist will have to convince them that the second period—that of structural adjustment and globalization—was actually better. This will be a hard sell. Our economist will concede that countries’ performance has diverged since the end of the 1970s and that poor countries have tended to grow more slowly than the rich countries, or even to decline. The Gini coefficient measuring income inequality, after being roughly stable between 1960 and 1978, has risen inexorably since 1978, from a Gini of about 46 to a Gini of 54 today, a huge increase of almost 20 percent. The economist will claim, however, that the divergence in incomes is due to countries that, unwilling to globalize, have chosen the wrong policies. Thus the economist would like to expunge the world of these countries and show that indeed, a convergence in incomes did occur among those countries that adopted the right policies and globalized. The economist will select countries that are globalizers, and by using the ratio of exports and imports over GDP (that is, trade openness) will show how such countries’ GDP per capita has either tended to catch up with the rich countries’ GDP per capita or how their growth rates have gradually accelerated from decade to decade as openness ostensibly progressed. As the catch-up is defined in terms of the mean population-weighted income of the globalizers, and as China is among these and has had such a remarkable growth record over the last two decades, our economist should not even have bothered to include other countries. All that is needed to obtain the desired conclusions is to show that China’s growth rate is accelerating. China as Good Globalizer One may find it rather strange that the key proof of the beneficence of global capitalism is provided by one of the few remaining countries ruled by the Communist Party. Of course the partisans of globalization argue that China is a communist country in name only, and that it is its integration with the world economy and de facto introduction of markets that matters for China’s growth. Yet the fact that a communist country’s record is wheeled out to defend capitalism is not merely a caprice. First, almost one-third of China’s industrial output is still produced by state-owned enterprises, as is almost 20 percent of total GDP, a proportion higher than in any country in the world except for Cuba, North Korea, and a few former Soviet republics, a level of state involvement that mainstream economists are unlikely to endorse. Second, China achieved its growth in an environment that is anathema to today’s mainstream view, including impediments to the free flow of labor that kept people from migrating into cities. Finally, the most dynamic sector of the Chinese economy during the 1980s and 1990s was the township and village enterprises (TVEs), whose property rights are a prime example of nontransparency. TVEs are legally owned by a "community," village, or township; are run by managers or capitalists; and seek private capital but pay no dividends. In effect, TVEs are all that an efficient enterprise should not be, yet it is this sector that shows the most significant progress. Thus on these grounds alone China can hardly be adduced as an example of the success of current mainstream economic policy prescriptions. However, the very process of selecting the "good" globalizers based on trade ratios is also flawed: globalizers are selected based on a combination of an outcome indicator (trade related to GDP) over which policymakers have no control and another that they do control, namely, tariff rates. In China, high growth began in the early 1980s, while trade liberalization followed more than a decade later. Throughout the 1980s and until 1995 the average weighted tariff rate in China was about 40 percent, a rate twice as high as the average for developing countries and more than four times the average of industrial countries. It was only in 1996 that the average tariff decreased to 26 percent, and it has since decreased further to a level of about 16 percent. This selection criterion also involves another problem. Most nonglobalizers were unwilling nonglobalizers, in the sense that their trade to GDP ratios had declined because their exports were heavily dependent on natural resources and primary commodities whose terms of trade declined in the 1980s. Consequently, countries’ export revenues dropped, and they in turn had to curtail imports, reducing trade to GDP ratios on both accounts. As they ran into balance of payments problems that required cutting back on growth, the positive correlation between openness and growth is not surprising. Uncomfortable Questions Thus we have to conclude that in terms of overall growth and income convergence between poor and rich countries, the last two decades, which witnessed the expansion of globalization, have been vastly less successful than the preceding two decades. The attempt to explain the divergence of incomes by eliminating the countries with "bad" policies from consideration and focusing solely on those with "good" policies is flawed, because the successful countries, and China in particular, did not follow orthodox economic advice. We must thus address some uncomfortable issues, including the following three: • How do we explain that after sustained involvement, many structural adjustment loans, and as many standby credits, African GDP per capita has not budged from its level of 20 years ago? Moreover, in 24 African countries GDP per capita is less than in 1975, and in 12 countries is even below its 1960s’ level. • How do we explain the recurrence of crises in Latin American countries like Argentina, which months prior to the outbreak of a crisis are being praised as model reformers? • How do we explain that the best "pupils" among the transition countries—Armenia, Georgia, the Kyrgyz Republic, and Moldova—after setting out in 1991 with no debt at all, and following all the prescriptions of the international finance institutes, find themselves 10 years later with their GDPs halved and in need of debt forgiveness? Something is clearly wrong. Maintaining that globalization as we know it is the way to go and that, if the Washington Consensus policies have not borne fruit so far, they will surely do so in the future, is to replace empiricism with ideology. This has been done before, but unfortunately the consequences were less than positive. The author is a lead economist at the World Bank; tel.: 202-473-6968, fax: 202-522-1153, email: bmilanovic@worldbank.org. Table 1. Level of Industrialization, Selected Country Groups and Countries, Selected Years (manufacturing output per capita, United Kingdom 1900 = 100)
Table 2. Unweighted GDP Per Capita, Selected Regions and Country Groups, 1960-98
Note: Each country is one observation. a. The industrial countries include Australia and the countries of North America and Western Europe. Source: Author’s calculations using data from the World Bank’s Statistical Information Management and Analysis Database, countries’ statistical yearbooks, and Penn World Tables. Table 3. Population Weighted and Country Groups GDP Per Capita, Selected Regions, 1960-98
Note: Each country is one observation, but each observation is weighted by the country’s population. Source: See table 2.
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