Does globalization always help poorer countries?

…the reality of globalization, many say, is that the game of global competition is not among equals. It is dominated by giant firms, backed by their governments, who have in effect set the rules for their own benefit… the protesters may have a valid point to make…

The short answer is no, globalization doesn’t always and necessarily help poorer or emerging market countries.

Many of the developments impacting the world economy are manifestations of what is usually called “globalization”. There are three aspects of this process that may be distinguished, each with its specific implications.

First, there are the actual economic processes that are being “globalized”: finance, production, trade and communications. These are driven by the global activities of transnational corporations (TNCs), by the global integration of money and capital markets, and by the convergence of computer and telecommunications technologies. So far many emerging economies have participated in these processes mainly through the growth of tourism, assembly manufacturing, and modern telecommunications. But this participation has been highly uneven as between countries, industries, and socio-economic groups. To this extent, it exacerbates tendencies to regional and social fragmentation. One objective should be to ensure that this participation is more equitable and its benefits are more widely spread.

Second, there is the policy component of globalization: trade, financial, and investment liberalization. This is effected through the obligations of the World Trade Organization (WTO) Treaty, the construction of hemispheric trading areas such as NAFTA and the EU, and the conditionalities of multilateral and bilateral funding agencies in their lending programmes. Most emerging economies have liberalized their economic environment in one way or another in the past 10 years. In some cases investment inflows and economic growth have increased; in others, the initial effects have been negative or disappointing. Thus there is a pressing need to strengthen bargaining power and negotiating skills in external trade and economic negotiations, in order to improve the possibilities of more favourable outcomes.

The third aspect of globalization is its legitimizing ideology. Key elements are the presumptions of the superiority of the “market” over government intervention in the economy, of the universal need for and applicability of “market-friendly” policies, and of the automatic benefits that will follow for countries that open up their economies to the forces of global competition. It is not always clear how far countries, especially developing countries, liberalize because they genuinely believe these precepts and how far they do so because of the pressures of aid, lending, and trade conditionalities. In any case there is the risk that policies that are premised on what is essentially a distorted view of reality will not necessarily be in the best interests of a country.

For the reality of globalization is that the game of global competition is not among equals. It is dominated by giant firms, backed by their governments, who have in effect set the rules for their own benefit. Expansion of the coverage of the WTO Treaty to trade in services, international investment flows, and Intellectual Property, erosion of non-reciprocal preferences for developing countries, and international freedom of movement for capital but not for labour are visible manifestations of this reality.

And so there are notable downsides to globalization. One prominent aspect is the marginalization of whole countries and socio-economic groups due to the operations of the “market”. Associated with this is the globalization of inequality – within and between nations – of poverty, and of unemployment. Global communications and financial liberalization have facilitated the international spread of drug trafficking and drug abuse–the emergence of a globalized crime industry. In many countries interpersonal and inter-ethnic violence has grown to alarming proportions, social safety nets are withdrawn and state systems are weakened with the spread of market relations. These phenomena are already present in many countries.

Without doubt, the next ten years and beyond present important challenges for policy makers worldwide.

The issue for most countries is not whether to participate in globalization, but how. Here, it may be useful to distinguish between an approach of active as opposed to passive participation. We characterize as a “passive” approach the policy package of across-the-board trade and financial liberalization, deregulation of goods, services, and factor markets, privatization, and the downsizing of the state. We suggest that an “active” approach would emphasize the exercise of selectivity in the areas and sequencing of liberalization policies, maximizing bargaining power in external negotiations, and the selective development of competitive competencies in the economy. The objective of the active approach is to achieve competitiveness in ways that permit a steady rise in real wages and living standards for the population; and, more generally, to participate in the world economy on terms consistent.