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New wave of globalisation and its economic effects

In the new wave of globalisation, some developing countries have succeeded for the first time in harnessing their labour abundance to give them a competitive advantage in labour-intensive manufactures and services, according to a new World Bank report `Globalisation, Growth and Poverty'.

THE MOST recent wave of globalisation — starting around 1980 and continuing today — has been spurred by technological advance in transport and communication technologies and by the choice of large developing countries to improve their investment climates and to open up to foreign trade and investment. For the first time, poor countries have been able to harness the potential of their abundant labour to break into global markets for manufactured goods and services. Manufactures rose from less than a quarter of developing country exports in 1980 to more than 80 per cent by 1998. Countries that strongly increased their participation in global trade and investment include Brazil, China, Hungary, India, and Mexico.

Some 24 developing countries — with three billion people — have doubled their ratio of trade to income over the past two decades. The rest of the developing world actually trades less today than it did 20 years ago. The more globalised developing countries have increased their per capita growth rate from 1 per cent in the 1960s, to 3 per cent in the 1970s, 4 per cent in the 1980s, and 5 per cent in the 1990s. Their growth rates now substantially exceed those of the rich countries: they are catching up just as during earlier waves of globalisation there was convergence among OECD countries. While the new globalisers are beginning to catch up, much of the rest of the developing world — with about 2 billion people — is becoming marginalised. Their aggregate growth rate was actually negative in the 1990s.

The accelerated growth of recent globalisers is consistent with other cross-country statistical analyses that find that trade goes hand-in-hand with faster growth. The most that these studies can establish is that more trade is correlated with higher growth, and one must be careful about drawing conclusions on causality. Lindert and Williamson suggest that: ``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.''

A widespread anxiety is that growing integration is leading to heightened inequalities within countries. Usually, this is not the case. Most globalising developing countries have seen only small changes in household inequality, and inequality has declined in such countries as the Philippines and Malaysia. However, there are some important examples that go the other way. In Latin America, due to prior extreme inequalities in educational attainment, global integration has further widened wage inequalities.

In China, inequality has also risen, but the rise in Chinese inequality is far less problematic. Initially, China was extremely equal and extremely poor. Domestic liberalisation first unleashed rapid growth in rural areas. Since the mid-1980s there has also been rapid growth in urban agglomerations; this has increased inequality as the gap between rural and urban areas has widened. If this increase in inequality in China has been the price of growth, it has paid off in terms of a massive reduction in poverty. The number of rural poor in the country declined from 250 million in 1978 to just 34 million in 1999.

The potential for global integration to reduce poverty is well illustrated by the cases of China, India, Uganda, and Vietnam. As Vietnam has integrated it has had a large increase in per capita income and no significant change in inequality. Thus, the income of the poor has risen dramatically and the level of absolute poverty has been cut to half in ten years. Among the very poorest households, survey evidence shows that 98 per cent became better off during the 1990s. This improved well-being is not just a matter of income. Child labour has declined and school enrollment has increased. Vietnam's exports directly provided income-earning opportunities for poor people: exports included labour-intensive products such as footwear and rice, which is produced by most low-income farmers.

India and Uganda also had rapid poverty reduction as they integrated with the global economy. While some aspects of the data are controversial, the evidence for substantial poverty reduction in India in the 1990s is strong. In Uganda, poverty fell by about 40 per cent during the 1990s and school enrolments doubled. Globalisation clearly can be a powerful force for poverty reduction.

About two billion people live in countries that are not participating strongly in globalisation, many of them in Africa and the Former Soviet Union (FSU). Their exports are usually confined to a narrow range of primary commodities. Such a concentration has made them highly prone to terms of trade shocks. There is also evidence that dependence on primary commodity exports increases the risk of civil war. Hence, it is important for these countries to diversify their exports by breaking into global markets for manufactured goods and services where possible.

Three schools of thought provide credible accounts of why this has not happened. One argues that countries have become marginalised as a result of poor policies and infrastructure, weak institutions, and corrupt governance. The implication is that integration requires not merely openness to trade and investment, but also complementary actions in a wide range of areas. A second school argues that the marginalised countries suffer from intrinsic disadvantages of adverse geography and climate. For example, landlocked countries may simply find it impossible to compete in the markets for global manufactures and services. One implication is that global programmes are needed to assist these countries — for example, to counter malaria and to irrigate drought-prone agricultural areas. A third school combines the analysis of the first school with the conclusion of the second. It argues that as a result of a temporary phase of poor policies, some countries have permanently missed the opportunity to industrialise because agglomerations have been located elsewhere in the developing world. All three arguments are probably correct for parts of the marginalised world. However, policy does not have to decide among them. A successful and prudent strategy would combine opening up with the necessary complementary actions, while building the global coalitions needed to address the deep-seated structural problems that face many countries.

The striking divergence between the more globalised and less globalised developing countries since 1980 makes the aggregate performance of developing countries less meaningful. However, since 1980 the overall number of poor people has at last stopped increasing, and has indeed fallen by an estimated 200 million. It is falling rapidly in the new globalises and rising in the rest of the developing world. Non-income dimensions of poverty are also diverging. Life expectancy and schooling are rising in the new globalises — to levels close to those prevailing in rich countries around 1960. They are falling in parts of Africa and the FSU.

Since 1980 world inequality has also stopped increasing, and may have started to fall. Participation in the world's industrial economy raises incomes, but for about a century only a minority of people participated and so global industrialisation led to greater inequality. This third wave of globalisation may mark the turning point at which participation has widened sufficiently for it to reduce poverty and inequality.

(Extracts from the overview of the report.)

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