Making Globalization More
Development-Friendly
Dani Rodrik
November 2005
Paradoxes of globalization (I):
Countries that have benefited most from globalization are
those that have not played by the rules …
Trade policies in the World Bank’s star “globalizers” of the 1990s
growth rate
average tariffs
NTBs?
China
Vietnam
India
Uganda
7.1
5.6
3.3
3.0
31.2
30-50
50.5
14.4
yes
yes
yes
WTO
member?
no
no
yes
yes
Note: List of star globalizers taken from World Bank, Globalization, Growth, and Poverty:
Building an Inclusive World Economy, 2001.
Paradoxes of globalization (I):
... while those that have, have performed worse
Economic growth
7.0%
East Asia & Pacific
6.0%
6.4%
South Asia
5.6%
Latin America & Caribbean
5.0%
4.0%
3.3%
3.3%
3.3%
2.8%
3.0%
2.0%
1.2%
1.0%
1.0%
0.0%
1960-1980
-1.0%
1980-90
1990-2003
-0.8%
Paradoxes of globalization (II):
Financial globalization has produced frequent
and painful crises…
Source: Jeanne and Ranciere (2005)
Paradoxes of globalization (II):
… and has forced countries to engage in costly strategies
of self-insurance
Foreign reserves (excluding gold) in months of imports
industrial and non-oil developing countries
9
Industrial Countries
8
Developing Countries (excl. oil-exporting
countries)
7
6
5
4
3
2
1
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
1950
0
Paradoxes of globalization (II):
… and has forced countries to engage in costly strategies
of self-insurance
Social cost of excess reserves (% of GDP)
Emerging market economies
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Paradoxes of globalization (III):
Areas of liberalization with the largest demonstrable gains
barely get any attention
Estimate of the welfare gains for developing countries:
• from a small relaxation in restrictions on temporary labor
mobility:
~$80 bn (Winters)
• From complete elimination of all trade barriers in
agriculture and manufactures:
~$22 bn (World Bank’s latest estimate)
Paradoxes of globalization (IV):
Trade is hardly popular in advanced countries
Reactions to the statement “imports should be restricted”
Paradoxes resolved (I)
Institutional diversity across national settings is a source of
transaction costs blocking deep integration…
• Despite disappearance of formal border barriers, border
effects remain strong
• Missing trade
• Small net capital flows
• Trade: the role of regulatory & jurisdictional
discontinuities
– Borders are estimated to raise costs by around 40%
• Capital flows: problems of sovereign risk, moral hazard,
and absence of ILLR
– Do not exist (or greatly alleviated) within nations
– Result in financial instability internationally
Paradoxes resolved (II)
… moreover, institutional diversity is desirable, making
deep economic integration an unattainable goal
•
Universal institutional functions do not map into unique
institutional designs
– Security of property rights, market-based incentives, outward
orientation, macroeconomic stability … can all be achieved in
diverse institutional settings
•
Institutional diversity is grounded in:
– Differences in social preferences (over equity versus
opportunity, for example)
– Hysteresis and path dependence due to institutional clusters
and complementarities (US versus Japan versus various
European models)
– Context specificity of desirable institutional arrangements to
promote economic development
Paradoxes resolved (III)
Domestic policies trump (nearly) everything else when it
comes to economic growth
•
A parable of two countries
Country A
… has preferential, free access to the US market for its exports
… can send several millions of its citizens to the US as workers
… receives huge volumes of direct investment
… is totally plugged in to US production chains
… for which the US Treasury stands ready to as lender of last resort
… has effective security guarantee from the Us military
Does globalization get better than this?
•
Whereas B is a country for which
… the US maintains a trade embargo, and does not have diplomatic relations
… which receives neither aid nor any other kind of assistance
… and which is kept outside international organizations like the WTO
… which is prevented from borrowing from the IMF and WB.
•
Which country did better?
Paradoxes resolved (IV)
And development strategies require policy space to be
successful
• From the Washington Consensus to a diagnostic
approach
– Different fixes for different countries
• “Binding constraints” differ
– In practice, rapid growth episodes are the product of
idiosyncratic determinants
– Different constraints throw different diagnostic signals
– Task: match policy priorities with diagnostics
• Desirable policy reforms can be heterodox
– Dual-track pricing, TVEs, SEZs in China provided effective
price incentives, security of “property rights, and outward
orientation, but not in the standard way
By way of conclusion:
10 reforms that would make the world more conducive to
development
1. A temporary work permit scheme that allows workers from developing
nations to spend 3-5 years in the advanced countries. (Revolving pool of
workers; low and high skill; return important)
2. A multilateral agreement that bans the subsidization of DFI. (The only
significant form of industrial policy that (a) is not banned; and (b) clearly
transfers resources from developing to developed countries.)
3. A “development box” in the WTO that legitimizes the use of trade and
industrial incentives (including export subsidies) for developmental
purposes (with burden of proof on those that argue the intervention is not
developmental.)
4. Willingness to share information with LDC governments on Northern bank
accounts held by LDC residents.
5. A 0.10% financial transaction tax on foreign currency transactions, with
proceeds spent on global public goods.
By way of conclusion:
10 reforms that would make the world more conducive to
development
6. A recognition by the US, in particular, that prudential restrictions on capital
flows (“capital account management”) in the developing world is an integral
part of a development agenda.
7. Adoption of the “odious debt” notion, whereby debt contracts signed by
oppressive regimes are no longer enforceable in Northern courts.
8. Preparation of a “developmental impact statement” as a necessary
requirement for any international agreement (including the costing out of
the financial implications for LDCs, and laying out the modalities of how
these will be financed).
9. Ending the monopoly of the World Bank in generating and disseminating
policy ideas, particularly in the lowest income countries, by breaking it up
into a number of competing agencies.
10. Moving the IMF’s Policy Development and Review (PDR) Department (and
its staff) to a developing country, and rotating it in, say, among different
African capitals every five years.