Globalization for Whom?
Time to change the rules—and focus on poor workers
Dani Rodrik
Globalization has brought little but good news to those with
the products, skills, and resources to market worldwide. But does
it also work for the world's poor?
That is the central question around which the debate over globalization—in
essence, free trade and free flows of capital—revolves. Anti-globalization
protesters may have had only limited success in blocking world
trade negotiations or disrupting the meetings of the International
Monetary Fund (IMF), but they have irrevocably altered the terms
of the debate. Poverty is now the defining issue for both
sides. The captains of the world economy have conceded that progress
in international trade and finance has to be measured against
the yardsticks of poverty alleviation and sustainable development.
For most of the world's developing countries, the 1990s were
a decade of frustration and disappointment. The economies of sub-Saharan
Africa, with few exceptions, stubbornly refused to respond to
the medicine meted out by the World Bank and the IMF. Latin American
countries were buffeted by a never-ending series of boom-and-bust
cycles in capital markets and experienced growth rates significantly
below their historical averages. Most of the former socialist
economies ended the decade at lower levels of per-capita
income than they started it—and even in the rare successes, such
as Poland, poverty rates remained higher than under communism.
East Asian economies such as South Korea, Thailand, and Malaysia,
which had been hailed previously as "miracles," were
dealt a humiliating blow in the financial crisis of 1997. That
this was also the decade in which globalization came into full
swing is more than a minor inconvenience for its advocates. If
globalization is such a boon for poor countries, why so many setbacks?
Globalizers deploy two counter-arguments against such complaints.
One is that global poverty has actually decreased. The reason
is simple: while most countries have seen lower income
growth, the world's two largest countries, China and India, have
had the opposite experience. (Economic growth tends to be highly
correlated with poverty reduction.) China's growth since the late
1970s—averaging almost 8 percent per annum per capita—has been
nothing short of spectacular. India's performance has not been
as extraordinary, but the country's growth rate has more than
doubled since the early 1980s—from 1.5 percent per capita to 3.7
percent. These two countries house more than half of the world's
poor, and their experience is perhaps enough to dispel the collective
doom elsewhere.
The second counter-argument is that it is precisely those countries
that have experienced the greatest integration with the world
economy that have managed to grow fastest and reduce poverty the
most. A typical exercise in this vein consists of dividing developing
countries into two groups on the basis of the increase in their
trade—"globalizers" versus "non-globalizers"—and
to show that the first group did much better than the second.
Here too, China, India, and a few other high performers like Vietnam
and Uganda are the key exhibits for the pro-globalization argument.
The intended message from such studies is that countries that
have the best shot at lifting themselves out of poverty are those
that open themselves up to the world economy.
How we read globalization's record in alleviating poverty hinges
critically, therefore, on what we make of the experience of a
small number of countries that have done well in the last decade
or two—China in particular. In 1960, the average Chinese expected
to live only 36 years. By 1999, life expectancy had risen to 70
years, not far below the level of the United States. Literacy
has risen from less than 50 percent to more than 80 percent. Even
though economic development has been uneven, with the coastal
regions doing much better than the interior, there has been a
striking reduction in poverty rates almost everywhere.
What does this impressive experience tell us about what globalization
can do for poor countries? There is little doubt that exports
and foreign investment have played an important role in China's
development. By selling its products on world markets, China has
been able to purchase the capital equipment and inputs needed
for its modernization. And the surge in foreign investment has
brought much-needed managerial and technical expertise. The regions
of China that have grown fastest are those that took the greatest
advantage of foreign trade and investment.
But look closer at the Chinese experience, and you discover that
it is hardly a poster child for globalization. China's economic
policies have violated virtually every rule by which the proselytizers
of globalization would like the game to be played. China did not
liberalize its trade regime to any significant extent, and it
joined the World Trade Organization (WTO) only last year; to this
day, its economy remains among the most protected in the world.
Chinese currency markets were not unified until 1994. China
resolutely refused to open its financial markets to foreigners,
again until very recently. Most striking of all, China achieved
its transformation without adopting private-property rights, let
alone privatizing its state enterprises. China's policymakers
were practical enough to understand the role that private incentives
and markets could play in producing results. But they were also
smart enough to realize that the solution to their problems lay
in institutional innovations suited to the local conditions—the
household responsibility system, township and village enterprises,
special economic zones, partial liberalization in agriculture
and industry—rather than in off-the-shelf blueprints and Western
rules of good behavior.
The remarkable thing about China is that it has achieved integration
with the world economy despite having ignored these rules—and
indeed because it did so. If China were a basket case today, rather
than the stunning success that it is, officials of the WTO and
the World Bank would have fewer difficulties fitting it within
their worldview than they do now.
China's experience may represent an extreme case, but it is by
no means an exception. Earlier successes such as South Korea and
Taiwan tell a similar story. Economic development often requires
unconventional strategies that fit awkwardly with the ideology
of free trade and free capital flows. South Korea and Taiwan made
extensive use of import quotas, local-content requirements, patent
infringements, and export subsidies—all of which are currently
prohibited by the WTO. Both countries heavily regulated capital
flows well into the 1990s. India managed to increase its growth
rate through the adoption of more pro-business policies, despite
having one of the world's most protectionist trade regimes. Its
comparatively mild import liberalization in the 1990s came a decade
after the onset of higher growth in the early 1980s. And
India has yet to open itself up to world financial markets—which
is why it emerged unscathed from the Asian financial crisis of
1997.
By contrast, many of the countries that have opened themselves
up to trade and capital flows with abandon have been rewarded
with financial crises and disappointing performance. Latin America,
the region that adopted the globalization agenda with the greatest
enthusiasm in the 1990s, has suffered rising inequality, enormous
volatility, and economic growth rates significantly below those
of the post-World War II decades. Argentina represents a particularly
tragic case. It tried harder in the 1990s than virtually any country
to endear itself to international capital markets, only to be
the victim of an abrupt reversal in "market sentiment"
by the end of the decade. The Argentine strategy may have had
elements of a gamble, but it was solidly grounded in the theories
expounded by U.S.-based economists and multilateral agencies such
as the World Bank and the IMF. When Argentina's economy took off
in the early 1990s after decades of stagnation, the reaction from
these quarters was not that this was puzzling— it was that reform
pays off.
What these countries' experience tells us, therefore, is that
while global markets are good for poor countries, the rules according
to which they are being asked to play the game are often not.
Caught between WTO agreements, World Bank strictures, IMF conditions,
and the need to maintain the confidence of financial markets,
developing countries are increasingly deprived of the room they
need to devise their own paths out of poverty. They are being
asked to implement an agenda of institutional reform that took
today's advanced countries generations to accomplish. The United
States, to take a particularly telling example, was hardly a paragon
of free-trade virtue while catching up with and surpassing Britain.
In fact, U.S. import tariffs during the latter half of the nineteenth
century were higher than in all but a few developing countries
today. Today's rules are not only impractical, they divert attention
and resources from more urgent developmental priorities. Turning
away from world markets is surely not a good way to alleviate
domestic poverty—but countries that have scored the most impressive
gains are those that have developed their own version of
the rulebook while taking advantage of world markets.
The regulations that developing nations confront in those markets
are highly asymmetric. Import barriers tend to be highest for
manufactured products of greatest interest to poor countries,
such as garments. The global intellectual-property-rights regime
tends to raise prices of essential medicines in poor countries.
But the disconnect between trade rules and development needs
is nowhere greater than in the area of international labor mobility.
Thanks to the efforts of the United States and other rich countries,
barriers to trade in goods, financial services, and investment
flows have now been brought down to historic lows. But the one
market where poor nations have something in abundance to sell—the
market for labor services—has remained untouched by this liberalizing
trend. Rules on cross-border labor flows are determined almost
always unilaterally (rather than multilaterally as in other areas
of economic exchange) and remain highly restrictive. Even a small
relaxation of these rules would produce huge gains for the world
economy, and for poor nations in particular.
Consider, for example, instituting a system that would allot
temporary work permits to skilled and unskilled workers from poorer
nations, amounting to, say, 3 percent of the rich countries' labor
force. Under the scheme, these workers would be allowed to obtain
employment in the rich countries for a period of three to five
years, after which they would be expected to return to their home
countries and be replaced by new workers. (While many workers,
no doubt, will want to remain in the host countries permanently,
it would be possible to achieve acceptable rates of return by
building specific incentives into the scheme. For example, a portion
of workers' earnings could be witheld until repatriation takes
place. Or there could be penalties for home governments whose
nationals failed to comply with return requirements: sending countries'
quotas could be reduced in proportion to the numbers who fail
to return.) A back-of-the-envelope calculation indicates that
such a system would easily yield $200 billion of income annually
for the citizens of developing nations—vastly more than what the
existing WTO trade agenda is expected to produce. The positive
spillovers that the returnees would generate for their home countries—the
experience, entrepreneurship, investment, and work ethic they
would bring back with them—would add considerably to these gains.
What is equally important, the economic benefits would accrue
directly to workers from developing nations. There would be no
need for "trickle down."
If the political leaders of the advanced countries have chosen
to champion trade liberalization but not international labor mobility,
the reason is not that the former is popular with voters at home
while the latter is not. They are both unpopular. When
asked their views on trade policy, fewer than one in five Americans
reject import restrictions. In most advanced countries, including
the United States, the proportion of respondents who want to expand
imports tends to be about the same or lower than the proportion
who believe immigration is good for the economy. The main difference
seems to be that the beneficiaries of trade and investment liberalization
have managed to become politically effective. Multinational firms
and financial enterprises have been successful in setting the
agenda of multilateral trade negotiations because they have been
quick to see the link between enhanced market access abroad and
increased profits at home. Cross-border labor flows, by contrast,
usually have not had a well-defined constituency in the advanced
countries. Rules on foreign workers have been relaxed only in
those rare instances where there has been intense lobbying from
special interests. When Silicon Valley firms became concerned
about labor costs, for example, they pushed Congress hard to be
allowed to import software engineers from India and other developing
nations.
It will take a lot of work to make globalization's rules friendlier
to poor nations. Leaders of the advanced countries will have to
stop dressing up policies championed by special interests at home
as responses to the needs of the poor in the developing world.
Remembering their own history, they will have to provide room
for poor nations to develop their own strategies of institution-building
and economic catch-up. For their part, developing nations will
have to stop looking to financial markets and multilateral agencies
for the recipes of economic growth. Perhaps most difficult of
all, economists will have to learn to be more humble!
Dani Rodrik '79 is Hariri professor of international political
economy at the Kennedy School of Government and author of The
New Global Economy and Developing Countries: Making Openness Work.
A version of this work was simultaneously published in the
July 2002issue of Harvard Magazine. We gratefully acknowledge
the generosity of Prof. Rodrik and the Harvard Magazine in allowing
us to publish his work in Lines.
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