F O R U M

GlobalizationGlobalization forfor Whom?Whom?

Globalization has brought little than under . East Asian but good news to those with the products, such as South , Thai- skills, and resources to worldwide. land, and Malaysia, which had been But does it also work for the ’s poor? hailed previously as “miracles,” were dealt a That is the central question around which humiliating blow in the financial crisis of the debate over —in essence, Time to change 1997. That this was also the decade in which free and free flows of —revolves. globalization came into full swing is more Antiglobalization protesters may have had the rules—and focus than a minor inconvenience for its advo- only limited success in blocking world trade cates. If globalization is such a boon for negotiations or disrupting the meetings of on poor workers poor countries, why so many setbacks? the International Monetary Fund (IMF), but Globalizers deploy two counter-argu- they have irrevocably altered the terms of ments against such complaints. One is that the debate. Poverty is now the defining issue by global poverty has actually decreased. The for both sides. The captains of the world reason is simple: while most countries have have conceded that progress in in- seen lower growth, the world’s ternational trade and finance has to be measured against the yard- two largest countries, and India, have had the opposite ex- sticks of poverty alleviation and sustainable development. perience. ( tends to be highly correlated with For most of the world’s developing countries, the 1990s were a poverty reduction.) China’s growth since the late 1970s—averag- decade of frustration and disappointment. The economies of sub- ing almost 8 percent per annum per capita—has been nothing Saharan Africa, with few exceptions, stubbornly refused to re- short of spectacular. India’s performance has not been as extra- spond to the medicine meted out by the and the ordinary, but the country’s growth rate has more than doubled IMF. Latin American countries were bu≠eted by a never-ending since the early 1980s—from 1.5 percent per capita to 3.7 percent. series of boom-and-bust cycles in capital markets and experi- These two countries house more than half of the world’s poor, enced growth rates significantly below their historical averages. and their experience is perhaps enough to dispel the collective Most of the former socialist economies ended the decade at lower doom elsewhere. levels of per-capita income than they started it—and even in the The second counter-argument is that it is precisely those coun- rare successes, such as Poland, poverty rates remained higher tries that have experienced the greatest integration with the

Amid Argentina’s banking crisis, a demonstrator defaced a foreign bank branch in Buenos Aires in February.

Photograph by Eduardo Di Baia/Associated Press. Illustration ©Orion Press/Corbis Harvard Magazine 29

Reprinted from Harvard Magazine. For copyright and reprint information, contact Harvard Magazine, Inc. at www.harvardmagazine.com that have managed to grow fastest and reduce today, rather than the stunning success that it is, o∞cials of the poverty the most. A typical exercise in this vein consists of divid- WTO and the World Bank would have fewer di∞culties fitting it ing developing countries into two groups on the basis of the in- within their worldview than they do now. crease in their trade—“globalizers” versus “non-globalizers”— China’s experience may represent an extreme case, but it is by no and to show that the first group did much better than the second. means an exception. Earlier successes such as South Korea and Tai- Here too, China, India, and a few other high performers like Viet- wan tell a similar story. often requires un- nam and Uganda are the key exhibits for the pro-globalization ar- conventional strategies that fit awkwardly with the of free gument. The intended message from such studies is that coun- trade and free capital flows. South Korea and Taiwan made exten- tries that have the best shot at lifting themselves out of poverty sive use of import quotas, local-content requirements, in- are those that open themselves up to the world economy. fringements, and subsidies—all of which are currently pro- How we read globalization’s record in alleviating poverty hinges hibited by the WTO. Both countries heavily regulated capital flows critically, therefore, on what we make of the experience of a small well into the 1990s. India managed to increase its growth rate number of countries that have done well in the last decade or through the adoption of more pro- policies, despite having two—China in particular. In 1960, the average Chinese expected one of the world’s most protectionist trade regimes. Its compara- to live only 36 years. By 1999, had risen to 70 years, tively mild import in the 1990s came a decade after the not far below the level of the . Literacy has risen from onset of higher growth in the early 1980s. And India has yet to open less than 50 percent to more than 80 per- itself up to world financial markets— cent. Even though economic develop- which is why it emerged unscathed from ment has been uneven, with the coastal the Asian financial crisis of 1997. regions doing much better than the inte- China has achieved By contrast, many of the countries that rior, there has been a striking reduction have opened themselves up to trade and in poverty rates almost everywhere. integration with the capital flows with abandon have been re- What does this impressive experience warded with financial crises and disap- tell us about what globalization can do pointing performance. , the for poor countries? There is little doubt world economy despite region that adopted the globalization that and foreign agenda with the greatest enthusiasm in the have played an important role in China’s 1990s, has su≠ered rising inequality, enor- development. By selling its products on having ignored mous volatility, and economic growth rates world markets, China has been able to significantly below those of the post- purchase the capital equipment and in- every rule by which World II decades. Argentina repre- puts needed for its modernization. And sents a particularly tragic case. It tried the surge in foreign investment has harder in the 1990s than virtually any coun- brought much-needed managerial and globalization is played. try to endear itself to international capital technical expertise. The regions of China markets, only to be the victim of an abrupt that have grown fastest are those that reversal in “market sentiment” by the end took the greatest advantage of foreign trade and investment. of the decade. The Argentine strategy may have had elements of a But look closer at the Chinese experience, and you discover gamble, but it was solidly grounded in the theories expounded by that it is hardly a poster child for globalization. China’s economic U.S.-based and multilateral agencies such as the World policies have violated virtually every rule by which the prosely- Bank and the IMF. When Argentina’s economy took o≠ in the early tizers of globalization would like the game to be played. China 1990s after decades of stagnation, the reaction from these quarters did not liberalize its trade regime to any significant extent, and it was not that this was puzzling— it was that reform pays o≠. joined the (WTO) only last year; to this day, its economy remains among the most protected in the What these countries’ experience tells us, therefore, is world. Chinese currency markets were not unified until 1994. that while global markets are good for poor countries, the rules China resolutely refused to open its financial markets to foreign- according to which they are being asked to play the game are ers, again until very recently. Most striking of all, China achieved often not. Caught between WTO agreements, World Bank stric- its transformation without adopting private- rights, let tures, IMF conditions, and the need to maintain the confidence of alone privatizing its enterprises. China’s policymakers were financial markets, developing countries are increasingly deprived practical enough to understand the role that private incentives of the room they need to devise their own paths out of poverty. and markets could play in producing results. But they were also They are being asked to implement an agenda of institutional re- smart enough to realize that the solution to their problems lay in form that took today’s advanced countries to accom- institutional suited to the local conditions—the plish. The United States, to take a particularly telling example, household responsibility system, township and village enter- was hardly a paragon of free-trade virtue while catching up with prises, special economic zones, partial liberalization in agricul- and surpassing Britain. In fact, U.S. import tari≠s during the lat- ture and industry—rather than in o≠-the-shelf blueprints and ter half of the nineteenth century were higher than in all but a Western rules of good behavior. few developing countries today. Today’s rules are not only im- The remarkable thing about China is that it has achieved inte- practical, they divert attention and resources from more urgent gration with the world economy despite having ignored these developmental priorities. Turning away from world markets is rules—and indeed because it did so. If China were a basket case surely not a good way to alleviate domestic poverty—but coun-

30 July - August 2002

Reprinted from Harvard Magazine. For copyright and reprint information, contact Harvard Magazine, Inc. at www.harvardmagazine.com tries that have scored the most impressive gains are those that with them—would add considerably to these gains. What is have developed their own version of the rulebook while taking ad- equally important, the economic benefits would accrue directly vantage of world markets. to workers from developing nations. There would be no need for The that developing nations confront in those mar- “trickle down.” kets are highly asymmetric. Import barriers tend to be highest for If the political leaders of the advanced countries have chosen to manufactured products of greatest interest to poor countries, champion trade liberalization but not international labor mobil- such as garments. The global intellectual-property-rights regime ity, the reason is not that the former is popular with voters at tends to raise prices of essential home while the latter is not. medicines in poor countries. They are both unpopular. When But the disconnect between asked their views on trade policy, trade rules and development fewer than one in five Americans needs is nowhere greater than in reject import restrictions. In the area of international labor most advanced countries, includ- mobility. Thanks to the e≠orts of ing the United States, the pro- the United States and other rich portion of respondents who countries, barriers to trade in want to expand imports tends to , financial services, and in- be about the same or lower than vestment flows have now been the proportion who believe im- brought down to historic lows. migration is good for the econ- But the one market where poor omy. The main di≠erence seems nations have something in abun- to be that the beneficiaries of dance to sell—the market for trade and investment liberaliza- labor services—has remained tion have managed to become untouched by this liberalizing politically e≠ective. Multina- trend. Rules on cross- tional firms and financial enter- labor flows are determined al- prises have been successful in most always unilaterally (rather setting the agenda of multilateral than multilaterally as in other trade negotiations because they areas of economic exchange) and have been quick to see the link remain highly restrictive. Even a between enhanced market ac- small relaxation of these rules cess abroad and increased profits would produce huge gains for at home. Cross-border labor the world economy, and for poor flows, by contrast, usually have nations in particular. not had a well-defined con- Consider, for example, insti- stituency in the advanced coun- tuting a system that would allot tries. Rules on foreign workers temporary work permits to have been relaxed only in those skilled and unskilled workers rare instances where there has from poorer nations, amounting been intense lobbying from spe- to, say, 3 percent of the rich coun- cial interests. When Silicon Val- tries’ labor force. Under the Rallying to the cry of “Enough!” thousands of demonstrators filled the ley firms became concerned scheme, these workers would be plaza in front of the government palace in Buenos Aires last summer. about labor costs, for example, allowed to obtain in the rich countries for a period they pushed Congress hard to be allowed to import software en- of three to five years, after which they would be expected to re- gineers from India and other developing nations. turn to their home countries and be replaced by new workers. (While many workers, no doubt, will want to remain in the host It will take a lot of work to make globalization’s rules countries permanently, it would be possible to achieve acceptable friendlier to poor nations. Leaders of the advanced countries will rates of return by building specific incentives into the scheme. have to stop dressing up policies championed by special interests For example, a portion of workers’ earnings could be witheld at home as responses to the needs of the poor in the developing until repatriation takes place. Or there could be penalties for world. Remembering their own history, they will have to provide home governments whose nationals failed to comply with return room for poor nations to develop their own strategies of institu- requirements: sending countries’ quotas could be reduced in pro- tion-building and economic catch-up. For their part, developing portion to the numbers who fail to return.) A back-of-the-enve- nations will have to stop looking to financial markets and multi- lope calculation indicates that such a system would easily yield lateral agencies for the recipes of economic growth. Perhaps most $200 billion of income annually for the citizens of developing na- di∞cult of all, economists will have to learn to be more humble! tions—vastly more than what the existing WTO trade agenda is expected to produce. The positive spillovers that the returnees Dani Rodrik ’79 is Hariri professor of international at the would generate for their home countries—the experience, entre- Kennedy School of Government and author of The New Global Economy preneurship, investment, and work ethic they would bring back and Developing Countries: Making Openness Work.

Photograph by Daniel Luna/Associated Press Harvard Magazine 31

Reprinted from Harvard Magazine. For copyright and reprint information, contact Harvard Magazine, Inc. at www.harvardmagazine.com