global economic integration argumentative essay

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Let me again welcome you to the New York Fed and to this conference. We are especially pleased to have so many of our European colleagues here today. You have spent the morning discussing some of the important economic and financial issues facing the United States and Europe. But this is essentially a conference on integration. I want to step back and make some broader observations about the process of global economic integration and the package of policies that need to accompany greater openness.

We are, as the IMF noted last week in its latest World Economic Outlook, in an unusually prolonged and widespread global expansion—the strongest in more than three decades. Economic integration and technological change have played a crucial part in driving this expansion and sustaining it in the face of recent shocks and some daunting longer-term economic policy challenges.

Yet there remains substantial ambivalence about the benefits of globalization. To many, the costs seem more compelling than the benefits. The sources of this ambivalence are varied. Some are familiar and some new.

Concerns about the distributional impact of trade have been given new force by the decline in labor’s share of national income; the long-term trend of rising income inequality; the increase in the share of goods and services that are tradable, and therefore of the broader scope of the population affected by the pressure of competition; and the perceived acceleration in the pace of economic change.

The greater mobility of financial flows has increased the sense among policymakers in many countries that their jobs have become harder, that they are less the masters of their own fate than in the past, and that they have a diminished ability to shield their companies and citizens from volatility.

But do these changes in economic circumstances and in perceptions fundamentally change what we know about the broad economic merits of global integration? I do not believe the basic economics of that judgment have changed.

Few would argue that economic integration by itself is sufficient to achieve broad-based gains in income growth both within and across countries. The relative prosperity of nations reflects different choices made by governments about a range of policies and institutions beyond the realm of trade and financial restrictions. But integration is an essential ingredient for achieving sustained growth. Reasonable people can disagree on the magnitude of gains that can be attributed to trade rather than other economic policies. But the evidence in support of the broad consensus that openness and integration contribute significantly to better growth outcomes remains compelling.

Just as compelling is the evidence against the proposition that protection in the form of restrictions on trade increases growth or reduces inequality. The world has a lot of experience with different policies designed to slow the pace of integration or to insulate parts of the economy from its effects, and these policies have generally been associated with worse economic outcomes. The poor do not benefit from protectionism.

Although the balance of economic evidence has not fundamentally changed, the politics around globalization and integration have become more challenging.

The fact that the United States is now in the fifth consecutive year of expansion and that unemployment is now at 4.4 percent doesn’t seem to have made trade any more popular. A recent Pew poll suggested that that nearly two-thirds of Americans feel less secure about their jobs than in earlier generations. And many attribute this increase in anxiety to trade.

This phenomenon of persistent and perhaps rising ambivalence about integration in the face of solid growth in average incomes is not unique to the United States. Here, as in many countries, the political consensus in favor of economic openness seems more fragile than it once was.

The debate about how to respond to this challenge tends to see the economic and political imperatives as in conflict. The most appealing political response—usually some form of selective restriction on trade or investment—is generally the option with the worst economic return. The typical political impulse is to try to address directly the source of the competitive pressure and to relieve it, but these measures cannot offer lasting relief. The economic price of protection, in terms of distorted incentives, reduced flexibility and broader costs on the economy as a whole, seem both more substantial and more enduring than any temporary political benefit.

The policy strategies that offer a better longer-term return do not try directly to relieve the pressures that come from economic and financial integration. Instead, they focus on the broader complement of policies and institutions that improve the capacity of economies to adapt to change and to absorb shocks. Those countries that have experienced the greatest gains as the world has become more integrated have been those with the type of policy and institutional infrastructure that facilitates economic flexibility and resilience in the face of change. The policies that offer the most promise in terms of broad-based income gains are not those that try to provide insulation from volatility, but those that make it easier to live with volatility.

In the realm of macroeconomic policy, this means further progress toward monetary policy credibility and fiscal sustainability, so that central banks and governments have the capacity to react to adverse shocks and mitigate the damage they can cause.

Even with the remarkable improvements in the conduct of monetary policy around the world over the past two decades, central banks in many countries do not have institutional independence, in law or in practice. And many still operate under policy regimes directed at limiting exchange rate changes—objectives that will necessarily conflict with their ability to achieve price stability, as their capital accounts become progressively more open. Economies with flexible exchange rate regimes generally fare better in the face of adverse external shocks. And in countries where central bank credibility is more firmly established, monetary authorities are better able to react to a sharp fall in asset prices or a negative demand shock.

In fiscal policy, the same basic point applies. Where fiscal sustainability is more firmly established, governments have more scope to respond to adverse demand shocks by reducing taxes or increasing expenditures. Where deficits are high and debt to GDP ratios are high and rising, government have less scope for countercyclical fiscal policy. In these cases fiscal stimulus is more likely to be met by a rise in risk premia, reducing, if not fully offsetting, the desired benefits to growth. Even in those emerging markets that have seen the most impressive progress toward fiscal sustainability, few have reached the point where they have built much of a cushion against future shocks. And in the United States and many other economies, the demographic changes now working their way through the economy entail very large future deficits and consequently very limited fiscal room for maneuver.

The right macroeconomic policy framework is crucial. But we have come to recognize that other issues, traditionally the province of microeconomics, have a vital role in contributing to effective macroeconomic policy. A critical factor distinguishing long-term economic performance among countries with relatively good monetary and fiscal policies is the degree of overall flexibility they exhibit in labor, product and financial markets. This is not simply about the presence or absence of regulation. It is a function of the incentives regulation creates and the extent to which it gets in the way of competition, impedes the allocation of labor and capital to industries with a higher return, favors established firms, and creates barriers to new entrants.

As the substantial body of research on structural reforms by the OECD has demonstrated, where regulation is more compatible with flexibility, productive growth has generally been higher, as technological advances have been diffused and adopted more rapidly. The IMF’s latest World Economic Outlook reports that, among the major economies, those with more flexible labor markets have seen smaller declines in labor’s share of income.

Open economies, of course, need strong and resilient financial systems. As financial systems develop and capital markets become more open and integrated, savings should be allocated more efficiently and risks distributed more broadly, both within and across countries. This process, however, is messy and very challenging to manage well. The history of economic crises over the last two decades is a history not just of fiscal profligacy and monetary policy mistakes, but of financial system weakness—often the result of rapid deregulation and capital account liberalization in a context of weak supervision and a broad government guarantee of bank liabilities.

The development of deeper and more resilient financial markets is important for economies to be able to cope better with exchange rate flexibility and capital mobility. And financial strength is an important part of the arsenal of macro policy tools, for monetary policy is less effective in cushioning the effects of asset price and demand shocks in circumstances where the banking sector is impaired.

A final and critical dimension of the policy framework that is important to the successful management of economic integration is the design of the public or social infrastructure. Raising the quality of educational outcomes is vital, as is the design of the network of insurance mechanisms, from unemployment insurance and training support, to health care and pension schemes. As progressively larger shares of the population become more exposed to the pressures of competition, as economies become more flexible, governments have to do a better job of designing programs of assistance that can ease the costs of adjustment.

These policies and institutional reforms are fundamentally the responsibility of national governments. International institutions can help, with technical assistance and financial support, but these challenges are essentially national challenges. The reforms of the international institutions now underway to make them more representative of the changing balance of economic activity in the world are laudable. And we share a common interest in a broad range of informal mechanisms for cooperation on policies in the financial arena. But ultimately it is the quality of the choices national governments make that will determine how their economies fare in a more open global economy.

Global integration is not the primary source of the world’s economic problems, nor can it be the primary solution to them. But economic integration can contribute significantly to sustained growth, rising incomes and declining poverty rates. The most effective policy response to the concerns of those who fear the consequences of further integration is to direct more political capital to the challenge of developing the economic and institutional infrastructure that will enable governments and their citizens to adapt more readily to change.

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RBA Annual Conference – 2002 Global Economic Integration and Global Inequality David Dollar [1]

Gaps between the poorest and the richest people and countries have continued to widen…This continues the trend of two centuries. Some have predicted convergence, but the past decade has shown increasing concentration of income among people, corporations, and countries . UN Human Development Report 1999

…globalization has dramatically increased inequality between and within nations . Jay Mazur, Foreign Affairs

… inequality is soaring through the globalization period, within countries and across countries. And that's expected to continue . Noam Chomsky

…all the main parties support nonstop expansion in world trade and services although we all know it…makes rich people richer and poor people poorer… Walter Schwarz, The Guardian

The evidence strongly suggests that global income inequality has risen in the last twenty years . Robert Wade

We are convinced that globalization is good and it's good when you do your homework…keep your fundamentals in line on the economy, build up high levels of education, respect rule of law…when you do your part, we are convinced that you get the benefit . President Vicente Fox of Mexico

There is no way you can sustain economic growth without accessing a big and sustained market . President Yoweri Museveni of Uganda

We take the challenge of international competition in a level playing field as an incentive to deepen the reform process for the overall sustained development of the economy. WTO membership works like a wrecking ball, smashing whatever is left in the old edifice of the former planned economy . Jin Liqun, Vice Minister of Finance of China

There is an odd disconnect between debates about globalisation in the North and the South. Among intellectuals in the North one often hears the claim that global economic integration is leading to rising global inequality – that is, that it benefits the rich proportionally more than the poor. In the extreme claims, the poor are actually made out to be worse-off absolutely (as in the quote from Walter Schwarz). In the South, on the other hand, intellectuals and policy-makers often view globalisation as providing good opportunities for their countries and their people. To be sure, they are not happy with the current state of globalisation. President Museveni's quote above, for example, comes in the midst of a speech in the US where he blasts the rich countries for their protectionism against poor countries and lobbies for better market access. But the point of such critiques is that integration – through foreign trade, foreign investment, and immigration – is basically a good thing for poor countries and that the rich countries could do a lot more to facilitate this integration – that is, make it freer. The claims from anti-globalisation intellectuals of the North, on the other hand, lead inescapably to the conclusion that integration is bad for poor countries and that therefore trade and other flows should be more restricted.

The main goal of this essay is to link growing economic integration (‘globalisation’) with trends in growth, poverty, and inequality in the developing world. The phrase ‘global inequality’ is used to mean different things in different discussions – distribution among all the citizens of the world, distribution within countries, distribution among countries, distribution among wage earners – and the paper takes up all the different meanings.

The first half of the essay looks at the link between heightened integration and economic growth of developing countries. The opening-up of big developing countries such as China and India is arguably the most distinctive feature of the wave of globalisation that started around 1980. Individual cases, cross-country statistical analysis, and micro evidence from firms all suggest that this opening-up to trade and direct investment has been a good strategy for such developing countries as China, India, Mexico and Uganda.

How have the economic benefits of globalisation been distributed and what has happened as a result to global poverty and inequality? These are the questions addressed in the second half of this essay. In particular, Section 2 presents evidence in support of five trends in inequality and poverty since 1980:

• Trend #1 – Poor country growth rates have accelerated.
• Trend #2 – The number of poor people in the world has declined significantly, the first such decline in history.
• Trend #3 – Global inequality (among citizens of the world) has declined – modestly – reversing a 200-year-old trend toward higher inequality.
• Trend #4 – There is no general trend toward higher inequality within countries; in particular, among developing countries inequality has decreased in about as many cases as it has increased.
• Trend #5 – Wage inequality is rising worldwide (which may seem to contradict Trend #4, but it does not because wages are a small part of household income in developing countries, which make up the bulk of the world in terms of countries and population).

The conclusions for policy from this review of globalisation and global inequality are very much in the spirit of the comments from Presidents Fox and Museveni. Developing countries have a lot of ‘homework’ to do in order to develop in general and to make effective use of integration as part of their development strategy. Rich countries could do a lot more with foreign aid to help with that homework. And, as Museveni indicates, access to rich country markets is important. There remains a lot of protection in OECD markets against the goods and people of the developing world, and globalisation would do more for developing country growth if developing countries and their people had freer access to those rich country markets.

1. Is there a Link from Integration to Growth?

To keep track of the wide range of explanations that are offered for persistent poverty in developing nations, it helps to keep two extreme views in mind. The first is based on an object gap: Nations are poor because they lack valuable objects like factories, roads, and raw materials. The second view invokes an idea gap: Nations are poor because their citizens do not have access to the ideas that are used in industrial nations to generate economic value…

Each gap imparts a distinctive thrust to the analysis of development policy. The notion of an object gap highlights saving and accumulation. The notion of an idea gap directs attention to the patterns of interaction and communication between a developing country and the rest of the world . (Romer 1993, p 544)

Many developing countries have become more integrated with the global economy in the past two decades, and at the same time their growth rates have accelerated (examples would be Bangladesh, China, India, Mexico, Uganda and Vietnam). A natural question to ask is whether there is a link. In other words, could countries such as Bangladesh, China, India, and Vietnam have grown as rapidly as they have, if they had remained as closed to foreign trade and investment as they were in 1980? This is not the kind of question that can be answered with scientific certainty, but there are several different types of evidence that we can bring to bear on it.

It is useful to begin with what one would expect from economic theory. As suggested by the quote from Paul Romer , traditional growth theory focused on accumulation and the ‘object gap’ between poor countries and rich ones. If the important thing is just to increase the number of factories and workplaces, then it does not matter if this is done in a closed environment or a state-dominated environment. That was the model followed in the extreme by China and the Soviet Union, and to a lesser extent by most developing countries, who followed import-substituting industrialisation strategies throughout the 1960s and 1970s. It was the disappointing results from that approach that led to new thinking both from policy-makers in developing countries as well as from economists studying growth. Romer was one of the pioneers of the new growth theory that put more emphasis on how innovation occurs and is spread and the role of technological advance in improving the standard of living. Different aspects of integration – sending students abroad to study, connecting to the internet, allowing foreign firms to open plants, purchasing the latest equipment and components – can help overcome the ‘idea gap’ that separates poor and rich nations.

What is the evidence on integration spurring growth? There are a large number of case studies that show how this process can work in particular countries. Among the countries that were very poor in 1980, China, India, Vietnam and Uganda provide an interesting range of examples.

China's initial reforms in the late 1970s focused on the agricultural sector and emphasised strengthening property rights, liberalising prices, and creating internal markets. As indicated in Figure 1, liberalising foreign trade and investment were also part of the initial reform program. In the 1980s China removed administrative barriers to trade, before turning to major tariff reductions in the 1990s. The role of international linkages is described in this excerpt from a case study by Richard Eckaus:

After the success of the Communist revolution and the founding of the People's Republic of China, the nation's international economic policies were dominated for at least thirty years by the goal of self-reliance. While this was never interpreted as complete autarky, the aspiration for self-reliance profoundly shaped trade policy, especially with the market economies. China's foreign trade began to expand rapidly as the turmoil created by the Cultural Revolution dissipated and new leaders came to power. Though it was not done without controversy, the argument that opening of the economy to foreign trade was necessary to obtain new capital equipment and new technology was made official policy. The creation of an ‘open door’ policy did not mean the end of foreign trade planning. Although Chinese policy became committed to the expansion of its international trade, the decision-making processes and international trade mechanisms of the pre-reform period continued in full force for several years, to a modified degree for several more years, and still continue to be evident in the licensing controls. At the same time, international transactions outside of the state planning system have been growing. Most obviously, enterprises created by foreign investors have been exempt from the foreign trade planning and control mechanisms. In addition, substantial amounts of other types of trade, particularly the trade of the township and village enterprises and private firms, have been relatively free. The expansion of China's participation in international trade since the beginning of the reform movement in 1978, has been one of the most remarkable features of its remarkable transformation. While GNP was growing at 9 percent from 1978 to 1994, exports grew at about 14 percent and imports at an average of 13 percent per year. The successes contradict several customary generalisations about transition economies and large developing countries – for example, that the transition from central planning to market orientation cannot be made without passing through a difficult period of economic disorganization and, perhaps decline; and that the share of international trade in very large economies cannot grow quickly due to the difficulties of penetrating foreign markets on a larger scale. (Eckaus 1997, p 415)

It is well-known that India pursued an inward-oriented strategy into the 1980s and got disappointing results in terms of growth and poverty reduction. Bhagwati crisply states the main problems and failures of the strategy:

I would divide them into three major groups: extensive bureaucratic controls over production, investment and trade; inward-looking trade and foreign investment policies; and a substantial public sector, going well beyond the conventional confines of public utilities and infrastructure. The former two adversely affected the private sector's efficiency. The last, with the inefficient functioning of public sector enterprises, impaired additionally the public sector enterprises' contribution to the economy. Together, the three sets of policy decisions broadly set strict limits to what India could get out of its investment. (Bhagwati 1992, p 48)

Under this policy regime India's growth in the 1960s (1.4 per cent per annum) and 1970s (−0.3 per cent) was disappointing. During the 1980s India's economic performance improved. However, this surge was fuelled by deficit spending and borrowing from abroad that was unsustainable. In fact, the spending spree led to a fiscal and balance of payments crisis that brought a new, reform government to power in 1991. Srinivasan describes the key reform measures and their results as follows:

In July 1991, the government announced a series of far reaching reforms. These included an initial devaluation of the rupee and subsequent market determination of its exchange rate, abolition of import licensing with the important exceptions that the restrictions on imports of manufactured consumer goods and on foreign trade in agriculture remained in place, convertibility (with some notable exceptions) of the rupee on the current account; reduction in the number of tariff lines as well as tariff rates; reduction in excise duties on a number of commodities; some limited reforms of direct taxes; abolition of industrial licensing except for investment in a few industries for locational reasons or for environmental considerations, relaxation of restrictions on large industrial houses under the Monopolies and Restrictive Trade Practices (MRTP) Act; easing of entry requirements (including equity participation) for direct foreign investment; and allowing private investment in some industries hitherto reserved for public sector investment. (Srinivasan 2001, p 245)

In general, India has gotten good results from its reform program, with per capita income growth above 4 per cent per annum in the 1990s. Growth and poverty reduction have been particularly strong in states that have made the most progress liberalising the regulatory framework and providing a good environment for delivery of infrastructure services (Goswami et al 2002).

The same collection that contains Eckaus's study of China also has a case study of Vietnam:

Vietnam has made a remarkable turnaround during the past decade. In the mid-1980s the country suffered from hyperinflation and economic stagnation; it was not able to feed its population; and hundreds of thousands of people were signaling their dissatisfaction by fleeing in unsafe boats. A decade later, the government had restored macroeconomic stability; growth had accelerated to the 8–9 per cent range; the country had become the second largest rice exporter in the world; and overseas Vietnamese were returning with their capital to take advantage of expanding investment opportunities. During this period there has also been a total transformation of Vietnam's foreign trade and investment, with the economy now far more open than ten years ago. That Vietnam was able to grow throughout its adjustment period can be attributed to the fact that the economy was being increasingly opened to the international market. As part of its overall effort to stabilize the economy, the government unified its various controlled exchange rates in 1989 and devalued the unified rate to the level prevailing in the parallel market. This was tantamount to a 73 per cent real devaluation; combined with relaxed administrative procedures for imports and exports, this sharply increased the profitability of exporting. This…policy produced strong incentives for export throughout most of the 1989–94 period. During these years real export growth averaged more than 25 per cent per annum, and exports were a leading sector spurring the expansion of the economy. Rice exports were a major part of this success in 1989; and in 1993–94 there was a wide range of exports on the rise, including processed primary products (e.g., rubber, cashews, and coffee), labour-intensive manufactures, and tourist services. The current account deficit declined from more than 10 per cent of GDP in 1988 to zero in 1992. Normally, the collapse of financing in this way would require a sharp cutback in imports. However, Vietnam's export growth was sufficient to ensure that imports could grow throughout this adjustment period. It is also remarkable that investment increased sharply between 1988 and 1992, while foreign aid [from the Soviet Union] was drying up. In response to stabilization, strengthened property rights, and greater openness to foreign trade, domestic savings increased by twenty percentage points of GDP, from negative levels in the mid 1980s to 16 per cent of GDP in 1992. (Dollar and Ljunggren 1997, p 455)

Uganda has been one of the most successful reformers in Africa during this recent wave of globalisation, and its experience has interesting parallels with Vietnam's. It too was a country that was quite isolated economically and politically in the early 1980s. The role of trade reform in its larger reform is described in Collier and Reinikka:

Trade liberalization has been central to Uganda's structural reform program. During the 1970s, export taxation and quantitative restrictions on imports characterized trade policy in Uganda. Exports were taxed, directly and implicitly at very high rates. All exports except for coffee collapsed under this taxation. For example, tea production fell from a peak of 20,000 tons in the early 1970s to around 2,000 tons by the early 1980s, and cotton production fell from a peak of 87,000 tons, to 2,000 tons. By contrast, coffee exports declined by around one-third. Part of the export taxation was achieved through overvaluation of the exchange rate, which was propelled by intense foreign exchange rationing, but mitigated by an active illegal market. Manufacturing based on import substitution collapsed along with the export sector as a result of shortages, volatility, and rationing of import licenses and foreign exchange. President Amin's policy toward foreign investment was dominated by confiscation without compensation, and he expelled more than 70,000 people from the Asian community. In 1986 the NRM government inherited a trade regime that included extensive nontariff barriers, biased government purchasing, and high export taxes, coupled with considerable smuggling. The nontariff barriers have gradually been removed since the introduction in 1991 of automatic licensing under an import certification scheme. Similarly, central government purchasing was reformed and is now subject to open tendering without a preference for domestic firms over imports. By the mid 1990s, the import tariff schedule had five ad valorem rates between 0 and 60 per cent. For more than 95 per cent of imported items the tariff was between 10 and 30 per cent. During the latter half of the 1990s, the government implemented a major tariff reduction program. As a result, by 1999 the tariff system had been substantially rationalized and liberalized, which gave Uganda one of the lowest tariff structures in Africa. The maximum tariff is now 15 per cent on consumer goods, and there are only two other tariff bands: zero for capital goods and 7 per cent for intermediate imports. The average real GDP growth rate was 6.3 per cent per year during the entire recovery period (1986–99) and 6.9 per cent in the 1990s. The liberalization of trade has had a marked effect on export performance. In the 1990s export volumes grew (at constant prices) at an annualized rate of 15 per cent , and import volumes grew at 13 per cent . The value of noncoffee exports increased fivefold between 1992 and 1999. (Collier and Reinikka 2001)

These cases provide persuasive evidence that openness to foreign trade and investment – coupled with complementary reforms – can lead to faster growth in developing countries. However, individual cases always beg the question, how general are these results? Does the typical developing country that liberalises foreign trade and investment get good results? Cross-country statistical analysis is useful for looking at the general patterns in the data. Cross-country studies generally find a correlation between trade and growth. Among developing countries, some have had large increases in trade integration (measured as the ratio of trade to national income), while others have had small increases or even declines over the past 20 years (Figure 2). In general, the countries that have had large increases in trade, have also had accelerations in growth. This relationship persists after controlling for reverse causality from growth to trade and for changes in other institutions and policies (Dollar and Kraay 2001b). All of the cross-country studies suffer from potential problems of omitted variables and mis-specification, but they are nonetheless useful for summarising patterns in the data.

A final piece of evidence about integration and growth comes from firm-level studies and links us back to the quote from Paul Romer. Developing countries often have large productivity dispersion across firms making similar things: high-productivity and low-productivity firms co-exist and in small markets there is often insufficient competition to spur innovation. A consistent finding of firm-level studies is that openness leads to lower productivity dispersion (Haddad 1993; Haddad and Harrison 1993; Harrison 1994). High-cost producers exit the market as prices fall; if these firms were less productive, or were experiencing falling productivity, then their exits represent productivity improvements for the industry. While the destruction and creation of new firms is a normal part of a well-functioning economy, too often attention is simply paid to the destruction of firms, missing half of the picture. The increase in exits is only part of the adjustment. Granted, it is the first and most painful part of the adjustment. However, if there are not significant barriers to factor mobility or other barriers to entry, the other side is that there are new entrants. The exits are often front-loaded, but the net gains over time can be substantial.

Wacziarg (1998) uses 11 episodes of trade liberalisation in the 1980s to look at the issue of competition and entry. Using data on the number of establishments in each sector, he calculates that entry rates were 20 per cent higher among countries that liberalised compared to ones that did not. This estimate may reflect other policies that accompanied trade liberalisation such as privatisation and deregulation, so this is likely to be an upper bound of the impact of trade liberalisation. However, it is a sizable effect and indicates that there is plenty of potential for new firms to respond to the new incentives. The evidence also indicates that while exit rates may be significant, net turnover rates are usually very low. Thus, entry rates are usually of a comparable magnitude to the exit rates. Using plant-level data from Morocco, Chile and Columbia spanning several years in the 1980s, when these countries initiated trade reforms, indicates that exit rates range from 6 to 11 per cent a year, and entry rates from 6 to 13 per cent. Over time, the cumulative turnover is quite impressive, with a quarter to a third of firms having turned over in four years (Roberts and Tybout 1996, p 6).

The higher turnover of firms is an important source of the dynamic benefit of openness. In general, dying firms have falling productivity and new firms tend to increase their productivity over time (Liu and Tybout 1996; Roberts and Tybout 1996; Aw, Chung and Roberts 2000). In Taiwan, Aw et al (2000) find that within a five-year period, the replacement of low-productivity firms with new, higher-productivity entrants accounted for half or more of the technological advance in many Taiwanese industries.

While these studies shed some light on why open economies are more innovative and dynamic, they also remind of us why integration is controversial. There will be more dislocation in an open, dynamic economy – with some firms closing and others starting up. If workers have good social protection and opportunities for developing new skills, then everyone can benefit. But without such policies there can be some big losers.

I want to close this section with a nice point from the economic historians Peter Lindert and Jeffrey Williamson (2001) concerning the different pieces of evidence linking integration to growth: ‘The doubts that one can retain about each individual study threaten to block our view of the overall forest of evidence. Even though no one study can establish that openness to trade has unambiguously helped the representative Third World economy, the preponderance of evidence supports this conclusion’. They go on to note the ‘empty set’ of ‘countries that chose to be less open to trade and factor flows in the 1990s than in the 1960s and rose in the global living-standard ranks at the same time. As far as we can tell, there are no anti-global victories to report for the postwar Third World. We infer that this is because freer trade stimulates growth in Third World economies today, regardless of its effects before 1940.’ (pp 29–30)

2. Accelerated Growth and Poverty Reduction in the New Globalisers

Much of the debate about globalisation concerns its effects on poor countries and poor people. In the introduction I quoted a number of sweeping statements asserting that global economic integration is leading to growing poverty and inequality in the world. The reality of what is happening with poverty and inequality is far more complex, and to some extent runs exactly counter to what is being claimed by anti-globalists. Hence in this section I am going to focus on the trends in global poverty and inequality. Let's get the facts straight, and then we can have a more fruitful debate about what is causing the trends. The trends that I want to highlight in this section are that: (1) growth rates of the poorest countries have accelerated in the past 20 years and are higher than rich-country growth rates; (2) there was a large net decline in the number of poor in the world between 1980 and 2000, the first such decline in history; (3) measures of global inequality (such as the global Gini coefficient) have declined modestly since 1980, reversing a long historical trend toward greater inequality; (4) there is no pattern of rising inequality within countries, though there are some notable cases in which inequality has risen; and (5) there is a general pattern of rising wage inequality (larger wage increases for skilled workers relative to those of unskilled workers). It may seem that Trend #5 runs counter to Trend #4, but I will explain why it does not. Nevertheless, Trend #5 is important and helps explain some of the anxiety about globalisation in the industrial countries.

2.1 Trend #1: Poor country growth rates have accelerated

We have reasonably good data on economic growth going back to 1960 for about 125 countries, which make up the vast majority of world population. If you take the poorest one-fifth of countries in 1980 (that is, about 25 countries), the population-weighted growth rate of this group was 4 per cent per capita from 1980 to 1997, while the richest-fifth of countries grew at 1.7 per cent (Figure 3). This phenomenon of the fastest growth occurring in the poorest countries is new historically; the growth rates of these same countries for the prior two decades (1960–1980) were 1.8 per cent for the poor group and 3.3 per cent for the rich group. Data going back further in time are not as good, but there is evidence that richer locations have been growing faster than poorer locations for a long time.

Now, the adjective ‘population-weighted’ is very important. If you ignore differences in population and just take an average of poor-country growth rates, you will find average growth of about zero for poor countries. Among the poorest quintile of countries in 1980 you have both China and India, and you also have quite a few small countries, particularly in Africa. Ignoring population, the average growth of Chad and China is about zero, and the average growth of Togo and India is about zero. Taking account of differences in population, on the other hand, one would say that the average growth of poor countries has been very good in the past 20 years. China obviously carries a large weight in any such calculation about the growth of countries that were poor in 1980. But it is not the only poor country that did well. India, Bangladesh and Vietnam have also had accelerated growth and grown faster than rich countries in the recent period. A number of African economies, notably Uganda, have also had accelerated growth.

2.2 Trend #2: The number of poor people in the world has declined

The most important point that I want to get across in this section is that poverty reduction in low-income countries is very closely related to the growth rate in these countries. Hence, the accelerated growth of low-income countries has led to unprecedented poverty reduction. By poverty, we mean subsisting below some absolute threshold. Most poverty analysis is carried out with countries' own poverty lines, which are set in country context and naturally differ. In the 1990s we have more and more countries with reasonably good household surveys and their own poverty analysis. Figure 4 shows five poor countries that have benefited from increased integration, and in each case significant poverty reduction has gone hand-in-hand with faster growth. Poverty reduction here is the rate of decline of the poverty rate, based on the country's own poverty line and analysis.

China, for example, uses a poverty line defined in constant Chinese yuan . The poverty line is the amount of Chinese currency that you need to buy the basket of goods that the Chinese authorities deem the minimum necessary to subsist. In practice, estimates of the number of poor in a country such as China come from household surveys carried out by the statistical bureau, surveys that aim to measure households' real income or consumption. Most of the extreme poor in the world are peasants, and they subsist to a large extent on their own agricultural output. To look only at what money income they have would not be very relevant, since the extreme poor have only limited involvement in the money economy. Thus, what Chinese and other poverty analyses do is include imputed values for income in kind (such as own production of rice). So, a poverty line is meant to capture a certain real level of income or consumption.

Estimating the extent of poverty is obviously subject to error, but in many countries the measures are good enough to pick up large trends. In discussing poverty it is important to be clear what poverty line one is talking about. In global discussions one often sees reference to international poverty lines of either US$1 per day or US$2 per day, and I will explain how these relate to national poverty lines.

While Figure 4 shows the close relationship between growth and poverty reduction in five countries in the 1990s, it is not easy to extend the analysis to all countries in the world or back in time to 1980, because good household surveys are lacking for many developing countries. However, discussions of global poverty during this most recent era of globalisation are made easier by the fact that in 1980 a large majority of the world's poor lived in China and India, both of which have reasonably good national data on poverty. Bourguignon and Morrisson (2002) estimate that there were 1.4 billion people in the world subsisting on less than US$1 per day in 1980. Take this as a rough estimate around which there is a lot of uncertainty. Still, it is clear that at least 60 per cent of these poor were in China and India. So, what has happened to global poverty is going to depend to a very considerable extent on these two countries.

The Chinese statistical bureau estimates that the number of people with incomes below their national poverty line has declined from 250 million in 1978 to 34 million in 1999 (Figure 5). [2] Now, this Chinese poverty line is defined in constant Chinese yuan and it is possible to translate this into US dollars for the purpose of comparison with other countries. This conversion is best done with a purchasing power parity (PPP) exchange rate. This is the exchange rate between the Chinese yuan and the US dollar that would lead to the same price in the US and China for a representative basket of consumer goods. It is the normal basis for making international comparisons of living standards. Evaluated at PPP in this way, the Chinese poverty line is equivalent to about 70 US cents per day – quite a low poverty line. Using information on the distribution of income in China, it is possible to make a rough estimate of the number of people with income under a higher poverty line – for example, US$1 per day at PPP. A rough estimate of the number of people in China in 1978 consuming less than US$1 per day would be in the ballpark of 600 million. [3] It may be surprising that the number is so much larger than the estimate of 250 million living on less than 70 US cents per day. But in 1978 a large mass of the population was concentrated in the range between 70 US cents and US$1.

India's official poverty data also show a marked drop in poverty over the past two decades. India's consumption-based poverty line translates to about 85 US cents per day at PPP. By that line, the Indian statistical bureau estimates that there were 330 million poor people in India in 1977, and the number declined to 259 million in 1999. We can make a similar rough estimate of the number of poor living under a higher poverty line of US$1 per day, using information on the distribution of income in Indian surveys.

In Figure 6, I combine rough estimates of US$1 per day poverty in China and India. In 1977–78 there were somewhere around 1 billion people in these two giant countries who were subsisting on less than US$1 per day at PPP; by 1997–98 the estimated number had fallen to about 650 million (according to the estimates of Chen and Ravallion (2001)). This poverty reduction is all the more remarkable, because their combined population increased by nearly 700 million people over this period.

It is easy to quibble about specific numbers, but no amount of quibbling can get around the fact that there has been massive poverty reduction in China and India. These countries' own data and poverty analysis show large poverty reduction, using lines that are below US$1 per day. The poverty reduction using a common international line of US$1 per day would be larger.

While there has clearly been poverty reduction in Asia, it is also clear that poverty has been rising in Africa, where most economies have been growing slowly or not at all for the past 20 years. Chen and Ravallion (2001) estimate that the number of poor (consuming less than US$1 per day) in Sub-Saharan Africa increased from 217 million in 1987 to 301 million in 1998. There is not comparably good data for 1980, but we know that the region was not doing well in the 1980–1987 period. If the rate of increase of poverty was about the same in the 1980–1987 period, as in 1987–1993, then the increased poverty in Africa during the 1980–1998 period would be about 170 million people.

Any careful estimate of worldwide poverty is going to depend primarily on trends in China, India, and Sub-Saharan Africa. Putting together these trends reveals a large net decline in the number of poor since 1980. This is an important historical shift. Bourguignon and Morrisson (2002) estimate that the number of very poor people in the world (US$1 per day line) increased up through 1980 (Figure 7). Between 1960 and 1980 the number of poor grew by about 100 million. Between 1980 and 1992, however, the number of poor fell by about 100 million in their estimate. Chen and Ravallion (2001) use a different methodology to estimate a further decline of about 100 million between 1993 and 1998. The same study found an increase in global poverty between 1987 and 1993, which may seem at odds with the Bourguignon-Morrisson results. However, a look back at Figures 5 and 6 reveals that the poor in China and India combined have done well over the past 20 years, except for the period from 1987 to 1993, when poverty in China and India temporarily rose . During that period India had a macroeconomic crisis and a sharp recession, and in China the growth of rural incomes slowed significantly.

Indian data for 1999/2000 show further declines that have not been incorporated in the global estimates for 1997/98. Based on the well-documented poverty reduction in China and India, and their weight in world poverty, we can be confident that 200 million is a conservative estimate of the poverty reduction since 1980. In many ways, however, adding up the good experiences and the bad experiences conceals more than it reveals. Certainly it is good news that large poor countries in Asia have done well (not just China and India, but Bangladesh and Vietnam as well). But that is no consolation to the growing number of poor in Africa, where economies continue to languish (with the occasional bright spot such as Uganda).

2.3 Trend #3: Global inequality has declined (modestly)

People use the phrase ‘global inequality’ casually to mean a number of different things. But the most sensible definition would be the same one we use for a country: line up all the people in the world from the poorest to the richest and calculate a measure of inequality among their incomes. There are a number of possible measures, of which the Gini coefficient is the best known. Xavier Sala-i-Martin (2002) finds in a new paper that any of the standard measures of inequality show a decline in global inequality since 1980. Subjectively, I would describe this as a modest decline, and one about which we do not have a lot of statistical confidence. But, even if global inequality is flat, it represents an important reverse of a long historical pattern of rising global inequality and contradicts the frequent claims that inequality is rising.

Bourguignon and Morrisson (2002) calculate the global Gini measure of inequality going back to 1820. Obviously we do not have a lot of confidence in these early estimates, but they illustrate a point that is not seriously questioned: global inequality has been on the rise throughout modern economic history. The Bourguignon-Morrisson estimates of the global Gini have it rising from 0.50 in 1820 to about 0.65 around 1980 (Figure 8). Sala-i-Martin estimates that the global Gini has since declined to 0.61. Other measures of inequality such as the Theil index or the mean log deviation show a similar decline. The latter measures have the advantage that they can be decomposed into inequality among countries (differences in per capita income across countries) and inequality within countries. What this decomposition shows is that most of the inequality in the world can be attributed to inequality among countries (Figure 9). Global inequality rose from 1820 to 1980 primarily because regions already relatively rich in 1820 (Europe, North America) subsequently grew faster than poor locations. As noted above (Trend #1), that pattern of growth was reversed starting around 1980, and the faster growth in poor locations such as China, India, Bangladesh and Vietnam accounts for the modest decline in global inequality since then. (Slow growth in Africa tended to increase inequality, faster growth in low-income Asia tended to reduce it, and the latter outweighed the former, modestly.) [4]

Thinking about the different experiences of Asia and Africa, as in the last section, helps give a clearer picture of what is likely to happen in the future. Rapid growth in Asia has been a force for greater global equality because that is where the majority of the world's extreme poor lived in 1980 and they benefited from the growth. However, if the same growth trends persist, they will not continue to be a force for equality. Sala-i-Martin projects future global inequality if the growth rates of 1980–1998 persist: global inequality will continue to decline until the year 2015 or 2020 (depending on the measure of inequality), after which global inequality will rise sharply (Figure 10). A large share of the world's poor still live in India and other Asian countries, so that continued rapid growth there will be equalising for another decade or so. But more and more, poverty will be concentrated in Africa, so that if its slow growth persists, global inequality will eventually rise again.

2.4 Trend #4: There is no general trend toward higher inequality within countries; in particular, among developing countries inequality has decreased in about as many cases as it has increased

The analysis immediately above shows that inequality within countries plays a relatively small role in measures of global income inequality. Nevertheless, people care about trends in inequality in their own societies (arguably more than they care about global inequality and poverty). So, a different issue is, what is happening to income inequality within countries? One of the common claims about globalisation (see the quotes in the introduction) is that it is leading to greater inequality within countries and hence fostering social and political polarisation.

To assess this claim Aart Kraay and I (Dollar and Kraay 2001a) collected income distribution data from over 100 countries, in some cases going back decades. We found first of all that there is no general trend toward higher or lower inequality within countries. One way to show this is to look at the growth rate of income of the poorest 20 per cent of the population, relative to the growth rate of the whole economy. In general, growth rate of income of the poorest quintile is the same as the per capita growth rate (Figure 11). This is equivalent to showing that the bottom quintile share (another common measure of inequality) does not vary with per capita income. We found that this relationship has not changed over time (it is the same for the 1990s as for earlier decades). In other words, some countries in the 1990s had increases in inequality (China and the US are two important examples), while other countries had decreases. We also divided the sample between rich and poor countries to explore a Kuznets-type relationship (or, equivalently, included a quadratic term) and found that income of the poor tends to rise proportionately to per capita income in developing countries, as well as in rich ones.

Most important for the debate about globalisation, we tried to use measures of integration to explain the changes in inequality that have occurred. But changes in inequality are not related to any of these measures of integration. For example, countries in which trade integration has increased show rises in inequality in some cases and declines in inequality in others (Figure 12). So too for other measures such as tariff rates or capital controls. Figure 4 showed five good examples of poor countries that have integrated actively with the world economy: in two of these (Uganda and Vietnam) income distribution has shifted in favour of the poor during integration, which is why poverty reduction has been so strong in these cases. In low-income countries in particular much of the import protection was benefiting relatively rich and powerful groups, so that integration with the global market can go hand-in-hand with declines in income inequality.

While it is true that there is no general trend toward higher inequality within countries when looking at all the countries of the world, the picture is not so favourable if one looks only at rich countries and only at the last decade. The Luxembourg Income Study (LIS) has produced comparable, high-quality income distribution data for most of the rich countries. This work finds no obvious trends in inequality up through the mid to late 1980s. Over the past decade, on the other hand, there have been increases in inequality in most of the rich countries. Because low-skilled workers in these countries are now competing more with workers in the developing world, it is certainly plausible that global economic integration creates pressures for higher inequality in rich countries, while having effects in poor countries that often go the other way. The good news from the LIS studies is that ‘[g]lobalisation does not force any single outcome on any country. Domestic policies and institutions still have large effects on the level and trend of inequality within rich and middle-income nations, even in a globalising world…’ (Smeeding, this volume, p 179). In other words, among rich countries some have managed to maintain stable income distributions in this era of globalisation through their social and economic policies (on taxes, education, welfare).

2.5 Trend #5: Wage inequality is rising worldwide

Much of the concern about globalisation in rich countries relates to workers and what is happening to wages and other labour issues. The most comprehensive examination of globalisation and wages used International Labour Organisation data on very detailed occupational wages going back two decades (Freeman, Oostendorp and Rama 2001). These data look across countries at what is happening to wages for very specific occupations (bricklayer, primary school teacher, nurse, auto worker). What the study found is that wages have generally been rising faster in globalising developing countries than in rich ones, and faster in rich ones than in non-globalising developing countries (Figure 13). [5] However, their detailed findings are far more complex. First, there is a timing issue. Trade liberalisation is often associated with reduced wages initially, followed by increases past the initial level. Second, foreign direct investment (FDI) is very strongly related to wage increases, while trade has a weaker relationship. Locations that are able to attract FDI are the ones that have had the clearest gains for workers (examples would be northern Mexico, China, Vietnam), whereas countries that liberalise trade and get little foreign investment see weaker benefits. Finally, the gains are relatively larger for skilled workers. This finding is consistent with other work showing that there has been a worldwide trend toward greater wage inequality – that is, a larger gap between pay for educated workers and pay for less educated/skilled workers.

If wage inequality is going up worldwide, how can it be that income inequality is not rising in most countries? There are several reasons why these two trends are not inconsistent. Most important, in the typical developing country wage earners are a tiny fraction of the population. Even unskilled wage workers are a relatively elite group. Take Vietnam as an example, a low-income country where we have a survey of the same representative sample of households early in liberalisation (1993) and five years later. The majority of households in the sample and in the country are peasants. What we see in the household data is that the price of the main agricultural output (rice) went up dramatically while the price of the main purchased input (fertiliser) actually went down. These price movements are directly related to globalisation, because over this period Vietnam became a major exporter of rice (supporting its price) and a major importer of fertiliser from cheaper producers (lowering its price). The typical poor family got a much bigger ‘wedge’ between its input price and output price, and their real income went up dramatically (Benjamin and Brandt 2002). So, one of the most important forces acting on income distribution in this low-income country has nothing to do with wages.

Quite a few rural households also sent a family member to a nearby city to work in a factory for the first time. I worked on Vietnam for the World Bank from 1989 to 1995, and one of the issues that I covered was the manufacturing sector. When I first started visiting factories in the summer of 1989, the typical wage in local currency was the equivalent of US$9 per month. Now, factory workers making contract shoes for US brands often make US$50 per month or more. So, the wage for a relatively unskilled worker has gone up something like five-fold. But wages for some of the skilled occupations – say, computer programmer or English interpreter – may have gone up 10 times or even more. Thus, a careful study of wage inequality is likely to show rising inequality. However, how wage inequality translates into household inequality is very complex. For a surplus worker from a large rural household who gets one of the newly created jobs in a shoe factory, earnings go from zero to US$50 per month. Thus, if a large number of new wage jobs are created and if these typically pay a lot more than people earn in the rural or informal sector, then a country can have rising wage inequality but stable or even declining income inequality (in Vietnam the Gini coefficient for household income inequality actually declined between 1993 and 1998). In rich countries, on the other hand, where most people are wage earners, the higher wage inequality is likely to translate into higher household income inequality, which is what we have seen over the past decade.

A third point about wage inequality and household income inequality that is relevant for rich countries is that measures of wage inequality are often made pre-tax. If the country has a strongly progressive income tax, then inequality measures from household data (which are often post-tax) do not have to follow wage inequality, pre-tax. Tax policy can offset some of the trends in the labour market.

Finally, there is the important issue that households can respond to increased wage inequality by investing more in the education of their children. A higher economic return to education is not a bad thing, provided that there is fair access to education for all. In Vietnam, there has been a tremendous increase in the secondary school enrolment rate in the 1990s (from 32 to 56 per cent). This increase partly reflects the society's and the government's investment in schools (supported by aid donors), but more children going to school also reflects households' decisions. If there is little or no perceived return to education, it is much harder to get families in poor countries to send their children to school. Where children have decent access to education, a higher skill premium stimulates a shift of the labour force from low-skill to higher-skill occupations.

From this discussion it is easy to see why some labour unions in rich countries are concerned about integration with the developing world. It is difficult to prove that the integration is leading to this greater wage inequality, but it seems likely that integration is one factor. Concerning the immigration side of integration, Borjas, Freeman and Katz (1997) estimate that flows of unskilled labour into the US have reduced wages for such labour by 5 per cent from where they would be otherwise. The immigrants who find new jobs earn a lot more than they did before (10 times as much in one study), but their competition reduces wages of the US workers who were already doing such jobs. Similarly, imports of garments and footwear from countries such as Vietnam and Bangladesh create jobs for workers there that pay far more than other opportunities in those countries, but put pressure on unskilled wages in the rich countries.

Thus, overall the era of globalisation has seen unprecedented poverty reduction and probably a modest decline in global inequality. However, it has put real pressure on less-skilled workers in rich countries, and this competitive pressure is a key reason why the growing integration is controversial in the industrial countries and why there is a significant political movement to restrict the opportunities of poor countries. More generally, the integration causes disruption in both rich countries and poor ones. Some people are thrown out of work, some capitalists lose their investments; in the short run there are clearly winners and losers. To some extent the extreme claims of anti-globalists that integration is leading to higher inequality across and within countries – claims that are not borne out by the evidence – distract attention from the real issues. Globalisation is disruptive, it produces relative winners and losers, and there are public policies that can mitigate these bad effects (social protection, investment in education). The key policy issue is whether to try to mitigate the bad effects of integration or to roll back integration.

3. Making Globalisation Work Better for the Poor

What are the implications of these findings – for developing countries, for rich countries, and for non-government organisations that care about global poverty? So far, the most recent wave of globalisation starting around 1980 has been a powerful force for equality and poverty reduction. But it would be naïve to think that this will inevitably continue.

Whether global economic integration continues to be an equalising force will depend on the extent to which poor locations participate in this integration, and that in turn will depend on both their own policies and the policies of the rich world. True integration requires not just trade liberalisation, but also wide-ranging reforms of institutions and policies. If we look at some of the countries that are not participating very strongly in globalisation, many of them have serious problems with the overall investment climate: Kenya, Pakistan, Burma and Nigeria would all be examples. Some of these countries also have restrictive policies toward trade, but even if they liberalise trade not much is likely to happen without other measures. It is not easy to predict the reform paths of these countries. (If you think about some of the relative successes that I have cited – China, India, Uganda, Vietnam – in each case their reform was a startling surprise.) As long as there are locations with weak institutions and policies, people living there are going to fall further and further behind the rest of the world in terms of living standards.

Building a coalition for reform in these locations is not easy, and what outsiders can do to help is limited. But one thing that the rich countries can do is to make it easy for developing countries that do choose to open up, to join the club. Unfortunately, in recent years the rich countries have been making it harder for countries to join the club of trading nations. The GATT was originally built around agreements concerning trade practices. Now, however, a certain degree of institutional harmonisation is required to join the World Trade Organisation (WTO) (for examples, on policies toward intellectual property rights). The proposal to regulate labour standards and environmental standards through WTO sanctions would take this requirement for institutional harmonisation much farther. Power in the WTO is inherently unbalanced: size matters in the important area of dispute settlement where only larger countries can effectively threaten to retaliate against illegal measures. If the US wins an unfair trade practices case against Bangladesh it is allowed to impose punitive duties on Bangladeshi products. Owing to the asymmetry in the size of these economies the penalties are likely to impose a small cost on US consumers and a large one on Bangladeshi producers. Now, suppose the situation is reversed and Bangladesh wins a judgment against the US. For Bangladesh to impose punitive duties on US products is likely to hurt its own economy much more than the US. Thus, developing countries see the proposal to regulate their labour and environmental standards through WTO sanctions as inherently unfair and as a new protectionist tool that rich countries can wield against them.

So, globalisation will proceed more smoothly if the rich countries make it easy for developing countries to benefit from trade and investment. Reciprocal trade liberalisations have worked well throughout the post-war period. There still are serious protections in OECD countries against agricultural and labour-intensive products that are important to developing nations. It would help substantially to reduce these protections. At the same time, developing countries would benefit from further openings of their own markets. They have a lot to gain from more trade in services. Also, 70 per cent of the tariff barriers that developing countries face are from other developing countries. So, there is a lot of potential to expand trade among developing countries, if trade restrictions were further eased. However, the trend to use trade agreements to try to impose an institutional model from the OECD countries on Third World countries makes it more difficult to reach trade agreements that benefit poor countries.

Another reason to be pessimistic concerns geography. There is no inherent reason why coastal China should be poor – or southern India, or Vietnam, or northern Mexico. These locations historically were held back by misguided policies, and with policy reform they can grow very rapidly and take their natural place in the world income distribution. However, the same reforms are not going to have the same effect in Mali or Chad. Some countries have poor geography in the sense that they are far from markets and have inherently high transport costs. Other locations face challenging health and agricultural problems. So, it would be naïve to think that trade and investment can alleviate poverty in all locations. Much more could be done with foreign aid targeted to developing medicines for malaria, AIDS, and other health problems of poor areas and to building infrastructure and institutions in these locations. The promises for greater aid from the US and Europe at the Monterrey Conference were encouraging, but it remains to be seen if these promises are fulfilled.

The importance of geography also raises the issue of migration – the missing flow in today's globalisation. Migration from locations that are poor because of either weak institutions and/or difficult physical geography could make a large contribution to reducing poverty in the lagging regions. Most migration from South to North is economically motivated. This migration raises the living standard of the migrant and benefits the sending country in three ways – reducing the labour force raises wages for those who remain behind, migrants typically send a large volume of remittances back home, and their presence in the OECD economy can support the development of trade and investment networks. These benefits are strongest if the migrant is relatively unskilled, since this is the part of the labour force that is in over-supply in much of the developing world.

Each year 83 million people are added to world population, 82 million of these in the developing world. Furthermore, populations in Europe and Japan are ageing and the labour forces there will begin to shrink without more migration. So, there are clear economic benefits to more migration of unskilled workers from the South to the North, and yet this flow remains highly restricted and very controversial because of its impact on society and culture. Because the economic pressures are so strong, however, growing volumes of illegal immigration are taking place – and some of the worst abuses of ‘globalisation’ occur because we are not globalised when it comes to labour flows.

Realistically, none of the OECD countries is going to adopt open migration. But there is a good case to be made to revisit migration policies. Some of the OECD countries have a strong bias in their immigration policies toward highly skilled workers, spurring ‘brain drain’ from the developing world. This policy pushes much of the unskilled flow into the illegal category. If OECD countries would accept – legally – more unskilled workers, it should help with their own looming labour shortages, improve living standards in sending countries, and reduce the growing illegal human trade with all of its abuses.

So, integration of poor economies with richer ones has provided many opportunities for poor people to improve their lives. Examples of the beneficiaries of globalisation will be found among Mexican migrants, Chinese factory workers, Vietnamese peasants and Ugandan farmers. Lots of non-poor in developing and rich countries alike also benefit, of course. But much of the current debate about globalisation seems to ignore the fact that it has provided many poor people in the developing world unprecedented opportunities. After all of the rhetoric about globalisation is stripped away, many of the practical policy questions come down to whether we are going to make it easy for poor communities that want to integrate with the world economy to do so, or whether we are going to make it difficult. The world's poor have a large stake in how the rich countries answer these questions.

Development Research Group, World Bank. Views expressed are those of the author and do not necessarily reflect official views of the World Bank, its Executive Directors, or its member countries. [1]

This estimate is only for the rural population of China. However, the available survey data show that there were almost no urban families living under this poverty line, either in 1980 or today. So, the estimate can be taken as a reasonable approximation of overall extreme poverty in China. [2]

The mean income in the rural household survey in China, converted into 1993 US dollars with the Summers and Heston PPP exchange rate, is about US$200 per year in 1978. Using the information on the distribution of income in the 1981 sample, the earliest available, the estimated number of people in China with income less than US$1 per day would be as high as 750 million. The number consuming less than US$1 per day would be smaller, since even the very poor have some savings in China. Also, the early surveys may not have done a good job with imputed consumption from housing and other durables. For these reasons I take 600 million as a rough but conservative estimate of the number of poor (consuming less than US$1 per day) at the beginning of China's economic reform. [3]

Milanovic (2002) estimates an increase in the global Gini coefficient for the short period between 1988 and 1993. How can this be reconciled with the Sala-i-Martin findings? Global inequality has declined over the past two decades primarily because poor people in China and India have seen increases in their incomes relative to incomes of rich people (that is, OECD populations). If you refer back to Figure 6, you will see that the period from 1988 to 1993 was the one period in the past 20 years that was not good for poor people in China and India. [4]

Dollar and Kraay (2001b) divide developing countries into more globalised and less globalised; the more globalised are the top one-third of developing countries in terms of increases in trade to GDP between the late 1970s and the late 1990s. The Freeman, Oostendorp and Rama study uses this classification. [5]

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Economic Integration and Growth

• Published: 25 August 2021
• Volume 69 , pages 467–469, ( 2021 )

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• Shawn Cole 1 &
• Silvana Tenreyo 2  

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1 Challenges and opportunities…

Global economic growth and economic integration suffered major setbacks in 2020–21 owing to the Coronavirus crisis and the huge strains it put on people, companies and governments all around the world. Trade restrictions and global supply*-chain disruptions in particular became recurrent challenges during the pandemic. But even before the crisis, trade tensions and constraints to economic integration threatened to limit many countries’ abilities to reap the benefits of globalization. Against this background, the IMF Economic Review (IMFER) commissioned a special issue focused on the theme of “Economic Integration and Growth.” While the accompanying conference, which was to have taken place in Rabat, Morocco, with the cooperation of Bank Al-Maghrib, could not be held, we are delighted to introduce the articles in this volume, summarized below.

The first paper, “Infrastructure Investment and Labor Monopsony Power” by Wyatt J Brooks (Arizona State University), Joseph P Kaboski (University of Notre Dame and NBER), Illenin Kondo (Federal Reserve Bank of Minneapolis), Yao Amber Li (Hong Kong University of Science and Technology), and Wei Qian (Shanghai University of Finance and Economics), examines how transportation integration affects local labor markets. Exploiting variation induced by the construction of the “Golden Quadrilateral” road system in India, they demonstrate manufacturing employers in markets closer to the highway system that have reduced market power relative to employers in markets that are less connected. Importantly, they can separately identify changes in both monopsony power and output markups, and find highway construction is pro-competitive in both input and output markets. The net effect is to increase the labor share of income by approximately 2 percentage points.

The second paper, “Trade Integration, Global Value Chains, and Capital Accumulation” by Michael Sposi (Southern Methodist University), Kei-Mu Yi (University of Houston), and Jing Zhang (Federal Reserve Bank of Chicago), presents a framework to study the dynamic impact of global trade and fragmentation of production that had been accompanied by significant income convergence in many emerging economies. The paper builds a dynamic two-country model featuring sequential, multi-stage production, and capital accumulation. As trade costs decline over time, global-value-chain (GVC) trade expands across countries, particularly more in the faster growing country, consistent with the empirical pattern. Via Heckscher-Ohlin forces, GVC trade can generate back-and-forth feedback between comparative advantage and capital accumulation (growth). Moreover, GVC trade increases both steady-state and dynamic gains from trade. At the current juncture, the model can help us assess the consequences that reversing those globalization trends might have on income and welfare.

The third paper in the volume, “Entry and exit of informal firms and development” by Brian McCaig (Wilfrid Laurier University) and Nina Pavcnik (Dartmouth College), provides new insights into the economics of non-farm informal businesses in developing countries. Non-farm informal businesses comprise the majority of the firm distribution in developing countries. The paper documents a number of novel stylized facts about entry and exit of informal, non-farm firms using a nationally representative panel dataset over 15 years and across regions with varying levels of local economic development in Vietnam. First, informal businesses exhibit annual rates of entry and exit of around 15-19%. Entry and exit rates are similar and highly correlated at a point in time, within industries, and within regions, and they both decline over time and across space with economic development. Second, although market selection influences which firms survive, entry and exit has little net effect on aggregate (revenue) productivity or hiring of workers outside the household. Third, the large overlap in revenue of entering and exiting informal businesses and the high correlation between entry and exit rates are related to the education of owners and their economic activities before and after operating an informal business. Informal business owners are less educated on average than wage workers in the formal sector, but more educated than agricultural workers. The transitions in and out of operating an informal business reflect the underlying structure of economic activities of the working age population, with education gaps also playing a role. The most common transition into non-farm businesses is to and from self-employment in agriculture. The likelihood of this transition declines with economic development, highlighting the role of net entry from agriculture into informal non-farm businesses in structural change.

Greater integration of women into the labor force is perhaps one of the most powerful levers of growth in many emerging markets. This issue concludes with a Policy Corner article, titled “Social Norms as a Barrier to Women's Employment in Developing Countries” by Seema Jayachandran (Northwestern University). The article starts with a discussion of the relationship between economic growth and female employment, pointing out that a significant amount of variation is unexplained by economic factors, leaving an important role for norms in determining labor force participation. The article examines evidence of the role of several gender-related social norms, and discusses evaluations of interventions designed to overcome such barriers, both by helping women work around a norm, as well as by changing norms. Jayachandran concludes that both approaches can be successful, and that implementing supportive policies could substantially narrow gender gaps in the labor market.

We hope that you will enjoy reading this issue. The topics covered are of fundamental importance to the functioning of the global economics system, and speak particularly to the challenges and opportunities present in many emerging markets. Taken together, these papers present novel empirical evidence on labor market integration, the creation and destruction of informal firms, as well as new insights on the causes and consequences of the increasing dispersion of global value chains, and sound policy guidance on increasing female labor force participation.

We thank all the authors for their valuable contributions, and the referees for making the papers even better. Finally, we thank Tracey Lookadoo for ensuring a smooth process during challenging times, and Emine Boz, Andrei Levchenko, Prachi Mishra, and Linda Tesar, along with the IMFER for giving us the opportunity to create this issue.

Shawn Cole and Silvana Tenreyo

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Cole, S., Tenreyo, S. Economic Integration and Growth. IMF Econ Rev 69 , 467–469 (2021). https://doi.org/10.1057/s41308-021-00145-5

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• Practice Exam Questions

Impact of Globalisation (Revision Essay Plan)

Last updated 11 Jan 2022

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Here is a suggested answer to a question on the impact of globalisation on developed and developing countries.

Introductory Context

An estimated 9 percent of the global population still lives below the international poverty line of US$1.90 PPP a day.Success in reducing poverty in East Asia is clear with 7 percent of the population in the region living below the US$3.20 PPP line and 25 percent living below the US$5.50 PPP poverty line in 2018. However, almost 70 percent of Sub-Saharan Africa’s population lives on less than US$3.20 per day. Progress in cutting extreme poverty has been halted by the pandemic. The World Bank estimated that the pandemic pushed between 119 and 124 million people into extreme poverty around the globe in 2020. Many developing countries have limited resilience to the impact of economic shocks and threats from climate change.”.

Source: Adapted from the World Bank Poverty Report, 2021

To what extent have the economic benefits of globalisation favoured developed over developing countries? (25 marks)

KAA Point 1

Globalisation involves deeper integration between countries through networks of trade, capital flows, ideas, technologies and movement of people. One argument that globalisation has favoured high-income countries lies in the growing dominance of TNCs from advanced nations. TNCs base their manufacturing, assembly, research and retail operations across several countries, and many have become synonymous with globalisation namely Nike, Apple, Amazon, Google (Alphabet) and Samsung. Some have annual revenues many times higher than the GDP of smaller low-income countries and there has been fierce criticism of numerous TNCs for following tax avoidance strategies such as transfer pricing. This has reduced tax revenues for governments in developing nations which then hampers their ability to use fiscal policy to fund public services such as education and basic health care. The effect is to limit progress in reducing extreme poverty and improving human development outcomes.

Evaluation Point 1

A counter argument is that globalisation is associated with a steady reduction in import tariffs around the world which has then improved access to high-income markets for businesses from emerging countries. Many nations in east Asia have achieved reductions in extreme poverty driven by export-led growth. The extract says that only 7 percent of this region’s population now live below the US$3.20 PPP poverty line and continued high growth – as economies recover from the effects of the pandemic - will lead to improvements in per capita incomes and living standards. Indeed, sixty percent of the value of world GDP now comes from emerging market and developing economies and several countries have their own TNCs operating on a global scale. The recent success of countries such as South Korea, India and Vietnam is testimony to the opportunities that globalisation has offered developing nations who have developed competitive advantage across a range of industries.

KAA Point 2

A second argument supporting the question is that nations succeeding in a globalizing world have diversified economies, a workforce with flexible skills and governments with fiscal resources to overcome external shocks such as the pandemic. In contrast, poorer low-income countries rely heavily on the production and export of primary commodities or incomes from tourism, both of which have been hit by the global recession in 2020-21. Many poorer nations also haveinadequate infrastructure which increases the costs of trade and their direct tax revenues as a share of GDP are low because of sizeable informal economies and persistently low per capita incomes. This means that national governments rely heavily on external debt, and many have low currency reserves. They are therefore more exposed to economic, financial and public health shocks. This is evidenced by the differences in vaccination rates between rich and low-income countries. As of January 2022, only 9% of people in low-income countries have received at least one dose and per capita incomes may take years to reach pre-2020 levels.

Evaluation Point 2

In evaluation, the globalisation process has been a catalyst for economic reforms in low and middle-income countries. Consider the example of Vietnam which has transitioned to a socialist oriented market economy and successfully attracted inward FDI from companies such as LG and Samsung. FDIhas flowed in helped by low unit labour costs costs, improving infrastructure and human capital and a deregulated business environment whilst the Vietnamesegovernment has moved to a managed floating exchange rateto help reduce some of the risks from regional and global economic shocks. Vietnam is a good example of a country that has successfully progressed from a low income to a low-middle income nation over the last two decades. The valueof their external trade accounts for roughly 180% of national output, more than any other country at its level of per-person GDP. And their educational scores on standardized tests are on a par with Germany and Austria.

Final Reasoned Comment

Overall, it is hard to reach a firm view on this question because globalisation as a process is uneven and not inevitable. Before and during the pandemic, there was evidence of a switch towards “regionalisation” rather than full-throttled globalisation. For example, most sub-Saharan African countries have joined the African Continental Free Trade Area which seeks to boost intra-regional trade and investment and encourage economies of scale among African businesses so that they can better compete against the dominance of Western TNCs. Developing nations often struggle to compete with developed countries, therefore it is argued free trade benefits high-income economies more. Gains from globalisation will never be equitably distributed.And this sense of deepening inequality and opportunity risks a further shift to tariff and non-tariff barriers to trade and moves towards economic nationalism.

• Globalisation
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• Hyper-globalisation
• Transnational Businesses
• Developing countries

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Research Article

Globalization and Economic Growth: Empirical Evidence on the Role of Complementarities

* E-mail: [email protected]

Affiliations Faculty of Management, Universiti Teknologi Malaysia (UTM), Johor, Malaysia, Department of Management, Mobarakeh Branch, Islamic Azad University, Isfahan, Iran

Affiliation Applied Statistics Department, Economics and Administration Faculty, University of Malaya, Kuala Lumpur, Malaysia

• Parisa Samimi, 
• Hashem Salarzadeh Jenatabadi

• Published: April 10, 2014
• https://doi.org/10.1371/journal.pone.0087824
• Reader Comments

This study was carried out to investigate the effect of economic globalization on economic growth in OIC countries. Furthermore, the study examined the effect of complementary policies on the growth effect of globalization. It also investigated whether the growth effect of globalization depends on the income level of countries. Utilizing the generalized method of moments (GMM) estimator within the framework of a dynamic panel data approach, we provide evidence which suggests that economic globalization has statistically significant impact on economic growth in OIC countries. The results indicate that this positive effect is increased in the countries with better-educated workers and well-developed financial systems. Our finding shows that the effect of economic globalization also depends on the country’s level of income. High and middle-income countries benefit from globalization whereas low-income countries do not gain from it. In fact, the countries should receive the appropriate income level to be benefited from globalization. Economic globalization not only directly promotes growth but also indirectly does so via complementary reforms.

Citation: Samimi P, Jenatabadi HS (2014) Globalization and Economic Growth: Empirical Evidence on the Role of Complementarities. PLoS ONE 9(4): e87824. https://doi.org/10.1371/journal.pone.0087824

Editor: Rodrigo Huerta-Quintanilla, Cinvestav-Merida, Mexico

Received: November 5, 2013; Accepted: January 2, 2014; Published: April 10, 2014

Copyright: © 2014 Samimi, Jenatabadi. This is an open-access article distributed under the terms of the Creative Commons Attribution License , which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

Funding: The study is supported by the Ministry of Higher Education of Malaysia, Malaysian International Scholarship (MIS). The funders had no role in study design, data collection and analysis, decision to publish, or preparation of the manuscript.

Competing interests: The authors have declared that no competing interests exist.

Introduction

Globalization, as a complicated process, is not a new phenomenon and our world has experienced its effects on different aspects of lives such as economical, social, environmental and political from many years ago [1] – [4] . Economic globalization includes flows of goods and services across borders, international capital flows, reduction in tariffs and trade barriers, immigration, and the spread of technology, and knowledge beyond borders. It is source of much debate and conflict like any source of great power.

The broad effects of globalization on different aspects of life grab a great deal of attention over the past three decades. As countries, especially developing countries are speeding up their openness in recent years the concern about globalization and its different effects on economic growth, poverty, inequality, environment and cultural dominance are increased. As a significant subset of the developing world, Organization of Islamic Cooperation (OIC) countries are also faced by opportunities and costs of globalization. Figure 1 shows the upward trend of economic globalization among different income group of OIC countries.

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https://doi.org/10.1371/journal.pone.0087824.g001

Although OICs are rich in natural resources, these resources were not being used efficiently. It seems that finding new ways to use the OICs economic capacity more efficiently are important and necessary for them to improve their economic situation in the world. Among the areas where globalization is thought, the link between economic growth and globalization has been become focus of attention by many researchers. Improving economic growth is the aim of policy makers as it shows the success of nations. Due to the increasing trend of globalization, finding the effect of globalization on economic growth is prominent.

The net effect of globalization on economic growth remains puzzling since previous empirical analysis did not support the existent of a systematic positive or negative impact of globalization on growth. Most of these studies suffer from econometrics shortcoming, narrow definition of globalization and small number of countries. The effect of economic globalization on the economic growth in OICs is also ambiguous. Existing empirical studies have not indicated the positive or negative impact of globalization in OICs. The relationship between economic globalization and economic growth is important especially for economic policies.

Recently, researchers have claimed that the growth effects of globalization depend on the economic structure of the countries during the process of globalization. The impact of globalization on economic growth of countries also could be changed by the set of complementary policies such as improvement in human capital and financial system. In fact, globalization by itself does not increase or decrease economic growth. The effect of complementary policies is very important as it helps countries to be successful in globalization process.

In this paper, we examine the relationship between economic globalization and growth in panel of selected OIC countries over the period 1980–2008. Furthermore, we would explore whether the growth effects of economic globalization depend on the set of complementary policies and income level of OIC countries.

The paper is organized as follows. The next section consists of a review of relevant studies on the impact of globalization on growth. Afterward the model specification is described. It is followed by the methodology of this study as well as the data sets that are utilized in the estimation of the model and the empirical strategy. Then, the econometric results are reported and discussed. The last section summarizes and concludes the paper with important issues on policy implications.

Literature Review

The relationship between globalization and growth is a heated and highly debated topic on the growth and development literature. Yet, this issue is far from being resolved. Theoretical growth studies report at best a contradictory and inconclusive discussion on the relationship between globalization and growth. Some of the studies found positive the effect of globalization on growth through effective allocation of domestic resources, diffusion of technology, improvement in factor productivity and augmentation of capital [5] , [6] . In contrast, others argued that globalization has harmful effect on growth in countries with weak institutions and political instability and in countries, which specialized in ineffective activities in the process of globalization [5] , [7] , [8] .

Given the conflicting theoretical views, many studies have been empirically examined the impact of the globalization on economic growth in developed and developing countries. Generally, the literature on the globalization-economic growth nexus provides at least three schools of thought. First, many studies support the idea that globalization accentuates economic growth [9] – [19] . Pioneering early studies include Dollar [9] , Sachs et al. [15] and Edwards [11] , who examined the impact of trade openness by using different index on economic growth. The findings of these studies implied that openness is associated with more rapid growth.

In 2006, Dreher introduced a new comprehensive index of globalization, KOF, to examine the impact of globalization on growth in an unbalanced dynamic panel of 123 countries between 1970 and 2000. The overall result showed that globalization promotes economic growth. The economic and social dimensions have positive impact on growth whereas political dimension has no effect on growth. The robustness of the results of Dreher [19] is approved by Rao and Vadlamannati [20] which use KOF and examine its impact on growth rate of 21 African countries during 1970–2005. The positive effect of globalization on economic growth is also confirmed by the extreme bounds analysis. The result indicated that the positive effect of globalization on growth is larger than the effect of investment on growth.

The second school of thought, which supported by some scholars such as Alesina et al. [21] , Rodrik [22] and Rodriguez and Rodrik [23] , has been more reserve in supporting the globalization-led growth nexus. Rodriguez and Rodrik [23] challenged the robustness of Dollar (1992), Sachs, Warner et al. (1995) and Edwards [11] studies. They believed that weak evidence support the idea of positive relationship between openness and growth. They mentioned the lack of control for some prominent growth indicators as well as using incomprehensive trade openness index as shortcomings of these works. Warner [24] refuted the results of Rodriguez and Rodrik (2000). He mentioned that Rodriguez and Rodrik (2000) used an uncommon index to measure trade restriction (tariffs revenues divided by imports). Warner (2003) explained that they ignored all other barriers on trade and suggested using only the tariffs and quotas of textbook trade policy to measure trade restriction in countries.

Krugman [25] strongly disagreed with the argument that international financial integration is a major engine of economic development. This is because capital is not an important factor to increase economic development and the large flows of capital from rich to poor countries have never occurred. Therefore, developing countries are unlikely to increase economic growth through financial openness. Levine [26] was more optimistic about the impact of financial liberalization than Krugman. He concluded, based on theory and empirical evidences, that the domestic financial system has a prominent effect on economic growth through boosting total factor productivity. The factors that improve the functioning of domestic financial markets and banks like financial integration can stimulate improvements in resource allocation and boost economic growth.

The third school of thoughts covers the studies that found nonlinear relationship between globalization and growth with emphasis on the effect of complementary policies. Borensztein, De Gregorio et al. (1998) investigated the impact of FDI on economic growth in a cross-country framework by developing a model of endogenous growth to examine the role of FDI in the economic growth in developing countries. They found that FDI, which is measured by the fraction of products produced by foreign firms in the total number of products, reduces the costs of introducing new varieties of capital goods, thus increasing the rate at which new capital goods are introduced. The results showed a strong complementary effect between stock of human capital and FDI to enhance economic growth. They interpreted this finding with the observation that the advanced technology, brought by FDI, increases the growth rate of host economy when the country has sufficient level of human capital. In this situation, the FDI is more productive than domestic investment.

Calderón and Poggio [27] examined the structural factors that may have impact on growth effect of trade openness. The growth benefits of rising trade openness are conditional on the level of progress in structural areas including education, innovation, infrastructure, institutions, the regulatory framework, and financial development. Indeed, they found that the lack of progress in these areas could restrict the potential benefits of trade openness. Chang et al. [28] found that the growth effects of openness may be significantly improved when the investment in human capital is stronger, financial markets are deeper, price inflation is lower, and public infrastructure is more readily available. Gu and Dong [29] emphasized that the harmful or useful growth effect of financial globalization heavily depends on the level of financial development of economies. In fact, if financial openness happens without any improvement in the financial system of countries, growth will replace by volatility.

However, the review of the empirical literature indicates that the impact of the economic globalization on economic growth is influenced by sample, econometric techniques, period specifications, observed and unobserved country-specific effects. Most of the literature in the field of globalization, concentrates on the effect of trade or foreign capital volume (de facto indices) on economic growth. The problem is that de facto indices do not proportionally capture trade and financial globalization policies. The rate of protections and tariff need to be accounted since they are policy based variables, capturing the severity of trade restrictions in a country. Therefore, globalization index should contain trade and capital restrictions as well as trade and capital volume. Thus, this paper avoids this problem by using a comprehensive index which called KOF [30] . The economic dimension of this index captures the volume and restriction of trade and capital flow of countries.

Despite the numerous studies, the effect of economic globalization on economic growth in OIC is still scarce. The results of recent studies on the effect of globalization in OICs are not significant, as they have not examined the impact of globalization by empirical model such as Zeinelabdin [31] and Dabour [32] . Those that used empirical model, investigated the effect of globalization for one country such as Ates [33] and Oyvat [34] , or did it for some OIC members in different groups such as East Asia by Guillaumin [35] or as group of developing countries by Haddad et al. [36] and Warner [24] . Therefore, the aim of this study is filling the gap in research devoted solely to investigate the effects of economic globalization on growth in selected OICs. In addition, the study will consider the impact of complimentary polices on the growth effects of globalization in selected OIC countries.

Model Specification

Methodology and Data

This paper applies the generalized method of moments (GMM) panel estimator first suggested by Anderson and Hsiao [38] and later developed further by Arellano and Bond [39] . This flexible method requires only weak assumption that makes it one of the most widely used econometric techniques especially in growth studies. The dynamic GMM procedure is as follow: first, to eliminate the individual effect form dynamic growth model, the method takes differences. Then, it instruments the right hand side variables by using their lagged values. The last step is to eliminate the inconsistency arising from the endogeneity of the explanatory variables.

The consistency of the GMM estimator depends on two specification tests. The first is a Sargan test of over-identifying restrictions, which tests the overall validity of the instruments. Failure to reject the null hypothesis gives support to the model. The second test examines the null hypothesis that the error term is not serially correlated.

The GMM can be applied in one- or two-step variants. The one-step estimators use weighting matrices that are independent of estimated parameters, whereas the two-step GMM estimator uses the so-called optimal weighting matrices in which the moment conditions are weighted by a consistent estimate of their covariance matrix. However, the use of the two-step estimator in small samples, as in our study, has problem derived from proliferation of instruments. Furthermore, the estimated standard errors of the two-step GMM estimator tend to be small. Consequently, this paper employs the one-step GMM estimator.

In the specification, year dummies are used as instrument variable because other regressors are not strictly exogenous. The maximum lags length of independent variable which used as instrument is 2 to select the optimal lag, the AR(1) and AR(2) statistics are employed. There is convincing evidence that too many moment conditions introduce bias while increasing efficiency. It is, therefore, suggested that a subset of these moment conditions can be used to take advantage of the trade-off between the reduction in bias and the loss in efficiency. We restrict the moment conditions to a maximum of two lags on the dependent variable.

Data and Empirical Strategy

We estimated Eq. (1) using the GMM estimator based on a panel of 33 OIC countries. Table S1 in File S1 lists the countries and their income groups in the sample. The choice of countries selected for this study is primarily dictated by availability of reliable data over the sample period among all OIC countries. The panel covers the period 1980–2008 and is unbalanced. Following [40] , we use annual data in order to maximize sample size and to identify the parameters of interest more precisely. In fact, averaging out data removes useful variation from the data, which could help to identify the parameters of interest with more precision.

The dependent variable in our sample is logged per capita real GDP, using the purchasing power parity (PPP) exchange rates and is obtained from the Penn World Table (PWT 7.0). The economic dimension of KOF index is derived from Dreher et al. [41] . We use some other variables, along with economic globalization to control other factors influenced economic growth. Table S2 in File S2 shows the variables, their proxies and source that they obtain.

We relied on the three main approaches to capture the effects of economic globalization on economic growth in OIC countries. The first one is the baseline specification (Eq. (1)) which estimates the effect of economic globalization on economic growth.

The second approach is to examine whether the effect of globalization on growth depends on the complementary policies in the form of level of human capital and financial development. To test, the interactions of economic globalization and financial development (KOF*FD) and economic globalization and human capital (KOF*HCS) are included as additional explanatory variables, apart from the standard variables used in the growth equation. The KOF, HCS and FD are included in the model individually as well for two reasons. First, the significance of the interaction term may be the result of the omission of these variables by themselves. Thus, in that way, it can be tested jointly whether these variables affect growth by themselves or through the interaction term. Second, to ensure that the interaction term did not proxy for KOF, HCS or FD, these variables were included in the regression independently.

In the third approach, in order to study the role of income level of countries on the growth effect of globalization, the countries are split based on income level. Accordingly, countries were classified into three groups: high-income countries (3), middle-income (21) and low-income (9) countries. Next, dummy variables were created for high-income (Dum 3), middle-income (Dum 2) and low-income (Dum 1) groups. Then interaction terms were created for dummy variables and KOF. These interactions will be added to the baseline specification.

Findings and Discussion

This section presents the empirical results of three approaches, based on the GMM -dynamic panel data; in Tables 1 – 3 . Table 1 presents a preliminary analysis on the effects of economic globalization on growth. Table 2 displays coefficient estimates obtained from the baseline specification, which used added two interaction terms of economic globalization and financial development and economic globalization and human capital. Table 3 reports the coefficients estimate from a specification that uses dummies to capture the impact of income level of OIC countries on the growth effect of globalization.

https://doi.org/10.1371/journal.pone.0087824.t001

https://doi.org/10.1371/journal.pone.0087824.t002

https://doi.org/10.1371/journal.pone.0087824.t003

The results in Table 1 indicate that economic globalization has positive impact on growth and the coefficient is significant at 1 percent level. The positive effect is consistent with the bulk of the existing empirical literature that support beneficial effect of globalization on economic growth [9] , [11] , [13] , [19] , [42] , [43] .

According to the theoretical literature, globalization enhances economic growth by allocating resources more efficiently as OIC countries that can be specialized in activities with comparative advantages. By increasing the size of markets through globalization, these countries can be benefited from economic of scale, lower cost of research and knowledge spillovers. It also augments capital in OICs as they provide a higher return to capital. It has raised productivity and innovation, supported the spread of knowledge and new technologies as the important factors in the process of development. The results also indicate that growth is enhanced by lower level of government expenditure, lower level of inflation, higher level of human capital, deeper financial development, more domestic investment and better institutions.

Table 2 represents that the coefficients on the interaction between the KOF, HCS and FD are statistically significant at 1% level and with the positive sign. The findings indicate that economic globalization not only directly promotes growth but also indirectly does via complementary reforms. On the other hand, the positive effect of economic globalization can be significantly enhanced if some complementary reforms in terms of human capital and financial development are undertaken.

In fact, the implementation of new technologies transferred from advanced economies requires skilled workers. The results of this study confirm the importance of increasing educated workers as a complementary policy in progressing globalization. However, countries with higher level of human capital can be better and faster to imitate and implement the transferred technologies. Besides, the financial openness brings along the knowledge and managerial for implementing the new technology. It can be helpful in improving the level of human capital in host countries. Moreover, the strong and well-functioned financial systems can lead the flow of foreign capital to the productive and compatible sectors in developing countries. Overall, with higher level of human capital and stronger financial systems, the globalized countries benefit from the growth effect of globalization. The obtained results supported by previous studies in relative to financial and trade globalization such as [5] , [27] , [44] , [45] .

Table (3 ) shows that the estimated coefficients on KOF*dum3 and KOF*dum2 are statistically significant at the 5% level with positive sign. The KOF*dum1 is statistically significant with negative sign. It means that increase in economic globalization in high and middle-income countries boost economic growth but this effect is diverse for low-income countries. The reason might be related to economic structure of these countries that are not received to the initial condition necessary to be benefited from globalization. In fact, countries should be received to the appropriate income level to be benefited by globalization.

The diagnostic tests in tables 1 – 3 show that the estimated equation is free from simultaneity bias and second-order correlation. The results of Sargan test accept the null hypothesis that supports the validity of the instrument use in dynamic GMM.

Conclusions and Implications

Numerous researchers have investigated the impact of economic globalization on economic growth. Unfortunately, theoretical and the empirical literature have produced conflicting conclusions that need more investigation. The current study shed light on the growth effect of globalization by using a comprehensive index for globalization and applying a robust econometrics technique. Specifically, this paper assesses whether the growth effects of globalization depend on the complementary polices as well as income level of OIC countries.

Using a panel data of OIC countries over the 1980–2008 period, we draw three important conclusions from the empirical analysis. First, the coefficient measuring the effect of the economic globalization on growth was positive and significant, indicating that economic globalization affects economic growth of OIC countries in a positive way. Second, the positive effect of globalization on growth is increased in countries with higher level of human capital and deeper financial development. Finally, economic globalization does affect growth, whether the effect is beneficial depends on the level of income of each group. It means that economies should have some initial condition to be benefited from the positive effects of globalization. The results explain why some countries have been successful in globalizing world and others not.

The findings of our study suggest that public policies designed to integrate to the world might are not optimal for economic growth by itself. Economic globalization not only directly promotes growth but also indirectly does so via complementary reforms.

The policy implications of this study are relatively straightforward. Integrating to the global economy is only one part of the story. The other is how to benefits more from globalization. In this respect, the responsibility of policymakers is to improve the level of educated workers and strength of financial systems to get more opportunities from globalization. These economic policies are important not only in their own right, but also in helping developing countries to derive the benefits of globalization.

However, implementation of new technologies transferred from advanced economies requires skilled workers. The results of this study confirm the importance of increasing educated workers as a complementary policy in progressing globalization. In fact, countries with higher level of human capital can better and faster imitate and implement the transferred technologies. The higher level of human capital and certain skill of human capital determine whether technology is successfully absorbed across countries. This shows the importance of human capital in the success of countries in the globalizing world.

Financial openness in the form of FDI brings along the knowledge and managerial for implementing the new technology. It can be helpful in upgrading the level of human capital in host countries. Moreover, strong and well-functioned financial systems can lead the flow of foreign capital to the productive and compatible sectors in OICs.

In addition, the results show that economic globalization does affect growth, whether the effect is beneficial depends on the level of income of countries. High and middle income countries benefit from globalization whereas low-income countries do not gain from it. As Birdsall [46] mentioned globalization is fundamentally asymmetric for poor countries, because their economic structure and markets are asymmetric. So, the risks of globalization hurt the poor more. The structure of the export of low-income countries heavily depends on primary commodity and natural resource which make them vulnerable to the global shocks.

The major research limitation of this study was the failure to collect data for all OIC countries. Therefore future research for all OIC countries would shed light on the relationship between economic globalization and economic growth.

Supporting Information

Sample of Countries.

https://doi.org/10.1371/journal.pone.0087824.s001

The Name and Definition of Indicators.

https://doi.org/10.1371/journal.pone.0087824.s002

Author Contributions

Conceived and designed the experiments: PS. Performed the experiments: PS. Analyzed the data: PS. Contributed reagents/materials/analysis tools: PS HSJ. Wrote the paper: PS HSJ.

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The effects of globalization on economic development

Globalization represents an ongoing phenomenon characterized by the growing connectedness and interdependence among nations, individuals, and businesses worldwide. This process involves the integration of economic, political, social, and cultural systems across borders, resulting in increased flows of goods, services, capital, people, and ideas.   

The rate of globalization has increased in recent years and is being shaped by rapid advancements in communication and transportation technologies, as well as the liberalization of trade and investment policies. Our World Data attributes the rapid increase in international trade and investment as being the main drivers behind this increased rate. Facilitated by the reduction of trade barriers and the emergence of new technologies that allow for the rapid movement of goods, services, and capital across borders, the rapid increase in international trade and investment is the key driver behind the increased rate in globalization we see today. However, other drivers are also responsible for shaping globalization today, these drivers include advances in transportation and communication technologies, the rise of multinational corporations, the growth of global financial markets, and the spread of cultural and social norms. The combination of these drivers has led to increasingly integrated economies and societies around the world, and thus we are seeing the emergence of a globalized world. But what exactly does this mean for economic development?  

What are the impacts of globalization on economic development?

The effects of globalization on economic development have been both positive and negative. Globalization has paved the way for new markets, enhanced trade and investment, and fostered cross-border technology and knowledge transfers. These developments have contributed to greater economic growth, improved productivity, and job creation in numerous areas worldwide. However, globalization has also given rise to intensified competition, income disparity, and environmental damage in certain regions.  

This article will not only analyze the positive and negative impacts of globalization on different regions and industries, but we will also discuss the strategies that governments and businesses can use to adapt to and take advantage of a globalized economy.  

Positive impacts of globalization on economic development

As mentioned above, the effects of globalization on economic development include a variety of positive impacts on economic development, including increased trade and investment opportunities, access to new markets and customers, greater efficiency and productivity, the spread of new technologies and knowledge, increased competition, and the potential for economic growth and development.  

Increased trade and investment opportunities:    

Globalization has created new opportunities for countries to trade and invest across borders. This has led to increased economic activity and higher levels of economic growth.   

Access to new markets and customers:    

Globalization has allowed businesses to expand their customer base and access new markets, which has helped to boost sales and profits.   

Greater efficiency and productivity:    

Globalization has increased competition among businesses, which has driven innovation and efficiency, leading to increased productivity.       

Spread of new technologies and knowledge:    

Globalization has facilitated the spread of new technologies and knowledge across borders, allowing countries to learn from one another and adopt best practices.   

Increased competition:    

Globalization has increased competition among businesses, which has led to lower prices and higher quality products for consumers.   

Potential for economic growth and development:    

Globalization has the potential to drive economic growth and development, particularly for developing countries that have been able to attract foreign investment and benefit from increased trade opportunities.  

Negative impacts of globalization on economic development   

The effects of globalization on economic development include both positive and negative impacts. Alongside the positive impacts of globalization on economic development, globalization has also brought about a range of negative impacts on economic development, including job losses and industry declines in some regions, widening income inequality, cultural homogenization, environmental degradation, dependence on foreign markets and investors, and vulnerability to global economic downturns.  

Loss of jobs and industries in some regions:    

Globalization has led to the relocation of industries and jobs to countries with lower labor costs, which has led to job losses and industry declines in some regions.  

Widening income inequality:    

Globalization has increased income inequality between and within countries, with some countries and individuals benefiting more than others.  

Cultural homogenization:    

Globalization has led to the spread of Western culture and values, which has resulted in the homogenization of cultures and the loss of traditional cultures.  

Environmental degradation:    

Globalization has contributed to environmental degradation, with increased trade and economic activity leading to higher levels of pollution, deforestation, and climate change.  

Dependence on foreign markets and investors:    

Globalization has led to increased dependence on foreign markets and investors, which can leave countries vulnerable to economic shocks and downturns.  

Vulnerability to global economic downturns:    

Globalization has increased the interconnectedness of economies, making them more vulnerable to global economic downturns and crises.   

Strategies for governments and businesses to adapt to and take advantage of a globalized economy  

Undoubtedly, globalization has generated both favorable and adverse effects on economic development. To capitalize on these outcomes, governments must adjust and seize the opportunities presented by a globalized economy.  

There are several strategies that governments and businesses can implement to adapt to and take advantage of a globalized economy, such as investing in education and training, diversifying industries, developing infrastructure, supporting Small and Medium-sized Enterprises (SMEs), implementing environmental and social standards, promoting foreign investment, and finally promoting networking and collaboration.   

  Investment in Education and Training:    

Governments and businesses can invest in education and training to improve the skills of their workforce and increase their competitiveness in a globalized economy. This can include providing training programs for employees, supporting vocational and technical education, and investing in research and development.   

Diversification of Industries:    

Governments and businesses can diversify their economies and industries to reduce their reliance on a single industry or market. This can help to reduce the impact of economic shocks and increase resilience to global economic trends.   

Infrastructure Development:    

Governments can invest in infrastructure such as roads, ports, and airports to facilitate trade and attract foreign investment. This can help to improve the efficiency and competitiveness of local businesses, increase trade flows, and create employment opportunities.   

Support for Small and Medium-sized Enterprises (SMEs):    

Governments can provide support for SMEs to help them compete with larger firms in a globalized economy. This can include providing access to finance, facilitating market access, and providing training and advisory services.   

Implementation of Environmental and Social Standards:    

Governments and businesses can implement environmental and social standards to ensure sustainable economic development. This can include implementing environmental regulations to reduce pollution and waste, promoting sustainable resource use, and protecting workers’ rights.   

Promotion of Foreign Investment:    

Governments can promote foreign investment by offering incentives such as tax breaks, low-interest loans, and simplified regulations. This can help to attract foreign investment and create new employment opportunities. Learn more about promoting foreign investment to your region here.  

Collaboration and Networking:    

Governments and businesses can collaborate and network with other countries and industries to share knowledge, expertise, and best practices. This can help to improve competitiveness, access new markets, and create new business opportunities.  

How to balance the opportunities and challenges of globalization for economic development?

Overall, globalization has brought about a range of both positive and negative impacts on economic development in a variety of regions and industries. Governments and businesses need to adapt to and take advantage of a globalized economy while also ensuring that they can balance the opportunities and challenges of globalization for economic development.   

Balancing the opportunities and challenges of globalization for economic development is essential for taking advantage of the opportunities of globalization while also mitigating its negative impacts on society and the environment. This balance will require a comprehensive approach that addresses the various aspects of the globalized economy.   

Governments and businesses must utilize a comprehensive approach that prioritizes inclusive economic growth, fosters innovation and technological advancements, promotes sustainable development, focuses on international cooperation, invests in education and skills development, and implements effective regulatory frameworks.

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Essay on Economic Integration | Macroeconomics

Here is an essay on ‘Economic Integration’ for class 11 and 12. Find paragraphs, long and short essays on ‘Economic Integration’ especially written for school and college students.

Essay # 1. Meaning of Economic Integration:

The modern industrial system rests upon such techniques that can be employed economically only if the production takes place on a very large scale. This requires expanding markets on the one hand and increasing purchasing power with the people on the other.

For the fullest exploitation of the production potential of the modern techniques, certain countries having small internal geographical markets, have attempted to organise themselves into regional groupings. The economic integration, in the broadest sense, means the unification of distinct economies into a single larger economy.

The tariffs and other restrictions upon trade are applied in a discriminatory manner. Such discrimination is of two forms—country- discrimination and commodity-discrimination. The economic integration, according to Salvatore, is the “commercial policy of discriminatively reducing or eliminating trade barriers only among the nations joining together.”

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Thus the economic integration refers to an arrangement whereby two or more countries combine into a larger economic region through the removal of discontinuities and discriminations existing along national frontiers, while following a common tariff and trade policies against the countries outside the group.

Tinbergen has defined economic integration as “the creation of the most desirable structure of international economy, removing artificial hindrances to the optimum operation and introducing deliberately all desirable elements of co-ordination and unification.” Tinbergen has distinguished-between the negative and positive aspects of integration.

The negative aspects of integration involve the removal of discrimination and restrictions on the movement of goods among the member countries. The positive aspects of integration involve the adoption of such policy measures and institutional arrangements as facilitate the removal of market distortions within the given economic region.

The economic integration can be understood both as a process and as a state of affairs. As a process, it is concerned with the measures which aim at abolition of discrimination between economic units belonging to different nation states. As a state of affairs, it can be treated as an area comprised of different nation states among which there is an absence of various forms of discrimination.

There are two essential features of economic integration:

(i) Re-introduction of free trade among the member nations.

(ii) Imposition of a common external tariff policy against the non-member countries.

From these two features, it follows that economic integration is a synthesis between free trade and tariff protection.

Essay # 2. Benefits of Economic Integration:

The economic integration between two or more countries brings the following main benefits:

(i) Economies of Scale:

The individual countries, having small internal market, have limited capacity to expand production. The economic integration provides an unrestricted access of the products produced by any member country. This gives strong inducement to expand production and exploit fully the economies of scale.

(ii) International Specialisation:

The economic integration enables the member countries to attain a greater degree of specialisation in both products and processes. Specialisation based on comparative cost advantage by a specific geographical region can cause considerably large expansion in production.

(iii) Qualitative Improvement in Output:

The regional economic co-operation among a number of countries leads to rapid technological changes and larger and easier capital movements. The member countries, in such favourable conditions, can bring about qualitative improvement in production.

(iv) Expansion of Employment:

As some countries organise themselves into regional economic groups and allow unrestricted flow of labour within the region, there can be maximisation of employment and income.

(v) Improvement in Terms of Trade:

The economic integration greatly increases the bargaining power of the member countries vis-a-vis the rest of the world. That brings about a significant improvement in their terms of trade.

(vi) Increase in Economic Efficiency:

The economic integration results in increased competition within the region. That helps in maintaining a higher level of economic efficiency of the group as a whole.

(vii) Improvement in Living Standard:

As some countries organise themselves into regional groups, there is easier availability of superior varieties of goods at competitive prices. The increase in employment opportunities and the purchasing power too contributes in improving the living standards of the people.

(viii) Increase in Factor Mobility:

The economic integration leads to dismantling of barriers upon the movement of labour and other factors among the member countries. Increased factor mobility enlarges employment; lowers factor costs; and promotes productive activity in all the member countries.

Essay # 3. Forms of Economic Integration :

The essence of economic integration is the economic co-operation among the participating countries.

On the basis of the degree of co­operation, the economic integration can be of the following main forms:

(i) Preferential Trade Area or Association:

The preferential trade area or association is the most-loose form of economic integration. In this arrangement, the member countries lower tariffs on imports from each other. It means they offer preferential treatment to the member countries.

As regards the outside world, they continue to maintain their individual tariffs. The best instance of preferential trade area or association is the Commonwealth System of Preferences, established in 1932. It is headed by Britain and includes all the Commonwealth countries.

(ii) Free Trade Area:

In this form of economic integration, the member countries abolish completely both tariff and quantitative trade restrictions among themselves. However, each member country is free to maintain its own trade barriers against the non- member countries. An important example of free trade area is the European Free Trade Association (EFTA).

This association was formed in November, 1959. It included such countries as United Kingdom, Austria, Denmark, Norway, Sweden, Portugal, Switzerland and Finland as associate members. Another such association is Latin American Free Trade Association (LAFTA). It was formed in June 1961 by 10 Latin American countries.

(iii) Customs Union:

A more formal type of integration among two or more countries is the customs union. In this form of integration, the member countries abolish all tariffs and other barriers on trade among themselves. As regards the rest of the world, they adopt a common external tariff and commercial policy.

The customs unions and free trade area are similar in respect of abolition of all trade barriers for the member countries. But the customs union is distinct from the free trade area in respect of the common external tariff against the non-member countries.

In case of free trade area, the member countries retain their own tariff and other trade barriers against the non-member countries. Thus customs union is a more closely- knit form of integration than the free trade area. In a customs union, all the member countries act as a single economic unit against the non-member countries.

The customs union has been defined by GATT as the Substitution of a single customs territory for two or more customs territories, so that:

(i) Duties and other regulations of commerce…….. are eliminated with respect to substantially all trade between the constituent territories of the Union or at least with respect to substantially all the trade in products originating in such territories, and

(ii) The same, duties and other regulations of commerce are applied by each of the members of the union to the trade of territories not included in the union. J.E. Meade explained that a customs union is characterised by “complete freedom of movement of goods and services within the territories of the member countries or a common tariff applicable to all the member countries of the customs union and a common tariff adopted by all the member countries of the customs union with respect to the rest of the world.”

The most important instance of a customs union is the European Economic Community formed by West Germany, France, Italy, Belgium, the Netherlands and Luxembourg in 1957.

The theory of customs union was first of all given by Jacob, Viner in 1950. According to him, customs union ensures, on the one hand, increased competition among the members and, on the other, an increased measure of protection against trade and competition from the rest of the world. Viner clearly stated that the synthesis of elements of competition and protection might or might not increase the welfare of the member nations.

Jacob Viner’s pioneering work in this field was followed by the contribution made by the writers like J.E. Meade (1955), R. G. Lipsey (1957), H.G. Johnson (1962), J. Vanek (1965), Cooper and Masell (1965), Murry Kemp (1969), J. Bhagwati (1971), P.J. Lloyd (1982) and many others.

(iv) Common Market:

The common market signifies a more unified arrangement among a group of countries than the customs union. The common market involves the abolition of tariff and trade restrictions among the member countries and adoption of a common external tariff. It goes even beyond that and allows free movement of labour and capital among the member nations.

Thus in case of a common market, there is a free and integrated movement of goods and factors among the member countries. The European Common Market (ECM) called also as the European Economic Community (EEC) is the best example of the common market.

(v) Economic Union:

The most advanced form of economic integration involving the greatest degree of co-operation is the economic union. In case of an economic union, two or more countries form a common market. In addition, they proceed to harmonise and unify their fiscal, monetary, exchange rate, industrial and other socio-economic policies. The member countries attempt to have a common currency and banking system.

An example of economic union is BENELUX (including Belgium, Netherlands and Luxembourg) which was formed in 1948 initially as a customs union bat later got converted into an economic union in 1960. These countries have now joined the EU. The European Economic Community (EEC) has transformed itself into an economic union called as European Union (EU) in 1991.

An interesting recent development, based on the principles of integration, has been the duty-­free zones or economic zones. Such areas have been set up in different countries or regions with the object of attracting foreign investment through duty-free imports of raw materials and intermediate products.

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