What is Globalization?

Globalization is one of the most charged issues of the day. It is everywhere in public discourse in TV sound bites and slogans on placards, in web-sites and learned journals, in parliaments, corporate boardrooms and labor meeting halls. Extreme opponents charge it with impoverishing the world's poor, enriching the rich and devastating the environment, while fervent supporters see it as a high-speed elevator to universal peace and prosperity. What is one to think?

Amazingly for so widely used a term, there does not appear to be any precise, widely-agreed definition. Indeed the breadth of meanings attached to it seems to be increasing rather than narrowing over time, taking on cultural, political and other connotations in addition to the economic. However, the most common or core sense of economic globalization the aspect this paper concentrates on - surely refers to the observation that in recent years a quickly rising share of economic activity in the world seems to be taking place between people who live in different countries (rather than in the same country). This growth in cross-border economic activities takes various forms:

International Trade: A growing share of spending on goods and services is devoted to imports from other countries. And a growing share of what countries produce is sold to foreigners as exports. Among rich or developed countries the share of international trade in total output (exports plus imports of goods relative to GDP) rose from 27 to 39 percent between 1987 and 1997. For developing countries it rose from 10 to 17 percent. (The source for many of these data is the World Bank's World Development Indicators 2000.)

Foreign Direct Investment (FDI). Firms based in one country increasingly make investments to establish and run business operations in other countries. US firms invested US$133 billion abroad in 1998, while foreign firms invested US$193 billion in the US. Overall world FDI flows more than tripled between 1988 and 1998, from US$192 billion to US$610 billion, and the share of FDI to GDP is generally rising in both developed and developing countries. Developing countries received about a quarter of world FDI inflows in 1988-98 on average, though the share fluctuated quite a bit from year to year. This is now the largest form of private capital inflow to developing countries.

Capital Market Flows. In many countries (especially in the developed world) savers increasingly diversify their portfolios to include foreign financial assets (foreign bonds, equities, loans), while borrowers increasingly turn to foreign sources of funds, along with domestic ones. While flows of this kind to developing countries also rose sharply in the 1990s, they have been much more volatile than either trade or FDI flows, and have also been restricted to a narrower range of 'emerging market' countries.

Overall observations about globalization. First, it is crucial in discussing globalization to carefully distinguish between its different forms. International trade, foreign direct investment (FDI), and capital market flows raise distinct issues and have distinct consequences: potential benefits on the one hand, and costs or risks on the other, calling for different assessments and policy responses. The World Bank generally favors greater openness to trade and FDI because the evidence suggests that the payoffs for economic development and poverty reduction tend to be large relative to potential costs or risks (while also paying attention to specific policies to mitigate or alleviate these costs and risks).

It is more cautious about liberalization of other financial or capital market flows, whose high volatility can sometimes foster boom-and-bust cycles and financial crises with large economic costs, as in the emerging-market crises in East Asia and elsewhere in 1997-98. Here the emphasis needs to be more on building up supportive domestic institutions and policies that reduce the risks of financial crisis before undertaking an orderly and carefully sequenced capital account opening.

Second, the extent to which different countries participate in globalization is also far from uniform. For many of the poorest least-developed countries the problem is not that they are being impoverished by globalization, but that they are in danger of being largely excluded from it. The miniscule 0.4 percent share of these countries in world trade in 1997 was down by half from 1980. Their access to foreign private investment remains negligible. Far from condemning these countries to continued isolation and poverty, the urgent task of the international community is to help them become better integrated in the world economy, providing assistance to help them build up needed supporting institutions and policies, as well as by continuing to enhance their access to world markets.

Third, it is important to recognize that economic globalization is not a wholly new trend. Indeed, at a basic level, it has been an aspect of the human story from earliest times, as widely scattered populations gradually became involved in more extensive and complicated economic relations. In the modern era, globalization saw an earlier flowering towards the end of the 19th century, mainly among the countries that are today developed or rich. For many of these countries trade and capital market flows relative to GDP were close to or higher than in recent years. That earlier peak of globalization was reversed in the first half of the 20th century, a time of growing protectionism, in a context of bitter national and great-power strife, world wars, revolutions, rising authoritarian ideologies, and massive economic and political instability.

In the last 50 years the tide has flown towards greater globalization once more. International relations have been more tranquil (at least compared to the previous half century), supported by the creation and consolidation of the United Nations system as a means of peacefully resolving political differences between states, and of institutions like the GATT (today the WTO), which provide a framework of rules for countries to manage their commercial policies. The end of colonialism brought scores of independent new actors onto the world scene, while also removing a shameful stain associated with the earlier 19th century episode of globalization. The 1994 Uruguay Round of the GATT saw developing countries become engaged on a wide range of multilateral international trade issues for the first time.

The pace of international economic integration accelerated in the 1980s and 1990s, as governments everywhere reduced policy barriers that hampered international trade and investment. Opening to the outside world has been part of a more general shift towards greater reliance on markets and private enterprise, especially as many developing and communist countries came to see that high levels of government planning and intervention were failing to deliver the desired development outcomes.

China's sweeping economic reforms since the end of the 1970s, the peaceful dissolution of communism in the Soviet bloc at the end of the 1980s, and the taking root and steady growth of market based reforms in democratic India in the 1990s are among the most striking examples of this trend. Globalization has also been fostered by technological progress, which is reducing the costs of transportation and communications between countries. Dramatic falls in the cost of telecommunications, of processing, storing and transmitting information, make it much easier to track down and close on business opportunities around the world, to coordinate operations in far-flung locations, or to trade online services that previously were not internationally tradable at all.

Finally, given this backdrop, it may not be surprising (though it is not very helpful) that 'globalization' is sometimes used in a much broader economic sense, as another name for capitalism or the market economy. When used in this sense the concerns expressed are really about key features of the market economy, such as production by privately-owned and profit-motivated corporations, frequent reshuffling of resources according to changes in supply and demand, and unpredictable and rapid technological change. It is certainly important to analyze the strengths and weaknesses of the market economy as such, and to better understand the institutions and policies needed to make it work most effectively. And societies need to think hard about how to best manage the implications of rapid technological change. But there is little to be gained by confusing these distinct (though related) issues with economic globalization in its core sense, that is the expansion of cross-border economic ties.

Conclusion. The best way to deal with the changes being brought about by the international integration of markets for goods, services and capital is to be open and honest about them. As this series of Briefs note, globalization brings opportunities, but it also brings risks. While exploiting the opportunities for higher economic growth and better living standards that more openness brings, policymakers - international, national and local also face the challenge of mitigating the risks for the poor, vulnerable and marginalized, and of increasing equity and inclusion.

Even when poverty is falling overall, there can be regional or sectoral increases about which society needs to be concerned. Over the last century the forces of globalization have been among those that have contributed to a huge improvement in human welfare, including raising countless millions out of poverty. Going forward, these forces have the potential to continue bringing great benefits to the poor, but how strongly they do so will also continue to depend crucially on factors such as the quality of overall macroeconomic policies, the workings of institutions, both formal and informal, the existing structure of assets, and the available resources, among many others. In order to arrive at fair and workable approaches to these very real human needs, government must listen to the voices of all its citizens.

Dollar, David and Aart Kraay. (2000). Growth is Good for the Poor. World Bank. (Processed.)
Edwards, Sebastian. (1998) Openness, Productivity and Growth: What Do We Really Know? The Economic Journal. March 1998.
Rodrik, Dani. (1999) The New Global Economy and Developing Countries: Making Openness Work.
World Bank. (1997). Global Economic Prospects and the Developing Countries 1997.
World Bank. (2000). Global Economic Prospects and the Developing Countries 2000.

April 2000, PREM Economic Policy Group and Development Economics Group

Source: World Bank


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