Making Sense of Globalization A Guide to the Economic Issues CEPR Policy Paper No. 8 François Bourguignon, DELTA, Paris Diane Coyle, Enlightenment Economics Raquel Fernández, New York University and CEPR Francesco Giavazzi, IGIER, Università Bocconi, Milano and CEPR Dalia Marin, Universität München and CEPR Kevin O’Rourke, Trinity College, Dublin and CEPR Richard Portes, London Business School and CEPR Paul Seabright, Université des Sciences Sociales de Toulouse and CEPR Anthony Venables, London School of Economics and CEPR Thierry Verdier, DELTA, Paris and CEPR L. Alan Winters, University of Sussex and CEPR A study commissioned from the Centre for Economic Policy Research by the European Commission Group of Policy Advisors Centre for Economic Policy Research The Centre for Economic Policy Research is a network of 600 Research Fellows and Affiliates, based primarily in European universities. The Centre coordinates the research activities of its Fellows and Affiliates and communicates the results to the public and private sectors. CEPR is an entrepreneur, developing research initiatives with the producers, consumers and sponsors of research. Established in 1983, CEPR is a European economics research organization with uniquely wide-ranging scope and activities. CEPR is a registered educational charity. The Centre is supported by the European Central Bank, the Bank for International Settlements, the European Investment Bank, 23 national central banks and 41 companies. None of these organizations gives prior review to the Centre’s publications, nor do they necessarily endorse the views expressed therein. The Centre is pluralist and non-partisan, bringing economic research to bear on the analysis of medium- and long-run policy questions. CEPR research may include views on policy, but the Executive Committee of the Centre does not give prior review to its publications, and the Centre takes no institutional policy positions. The opinions expressed in this report are those of the authors and not those of the Centre for Economic Policy Research. Executive Committee Chair Guillermo de la Dehesa Vice Chair Hans de Gier Villy Bergström Denis Gromb Michael Saunders Jan Krysztof Bielecki Marc Hendriks Kermit Schoenholtz Diane Coyle Bengt Holmström Miguel Sebastián Gascón Kevin Darlington Jan Häggström Andrew Smith Quentin Davies Giles Keating Juha Tarkka Bernard Dewe Mathews John Lipsky Philippe Weil Fernando Fernández Méndez Sergio Lugaresi de Andes Gerard Lyons David Folkerts-Landau Sanjit Maitra Francesco Giavazzi Rafael Repullo Officers President Richard Portes Chief Executive Officer Hilary Beech Research Director Mathias Dewatripont Centre for Economic Policy Research 90-98 Goswell Road London EC1V 7RR UK Tel: (44 20) 7878 2900 Fax: (44 20) 7878 2999 Email: [email protected] Website: www.cepr.org © European Commission July 2002 Contents Foreword by Romano Prodi v Executive Summary vii 1. Globalization and its discontents: a response 1 1.1 Introduction 1 1.2 What is new about this wave of globalization? 2 1.3 Gainers and losers from globalization 3 1.4 How are our institutions responding? 4 1.5 How can policy help? 10 1.6 Shaping globalization in future 11 1.7 Conclusions 14 2. What is old and what is new about the current wave of globalization? an historical perspective 17 2.1 International commodity market integration 19 2.2 International capital market integration 27 2.3 International migration 28 2.4 Globalization and inequality during the late nineteenth century 29 2.5 The late nineteenth century anti-globalization backlash 31 2.6 Summary 32 3. Globalization and markets: what have been the effects? 33 3.1 Markets for goods and services 34 3.2 Capital markets 43 3.3 Labour markets 52 3.4 Overview 56 4. The effects of globalization on world poverty and inequality 57 4.1 The changing world distribution of income 58 4.2 What is driving the evolution of between-country inequality? 60 4.3 The evolution of within-country inequality 63 4.4 Conclusions 67 5. Globalization and future generations 69 6. The institutional responses to globalization 73 6.1 Globalization, governments and corporations 73 6.2 Corporations 75 6.3 Governments, corporations and national policies 79 6.4 Globalization and the citizen (civil society) 91 7. Cooperation among governments and the role of the EU 95 7.1 The role of regionalism in today's world 95 7.2 The international financial architecture and policies towards capital flows 97 7.3 The role of the European Union 100 8. The concerns of the street protestors: what are the answers? 103 Twelve charges against globalization 104 References 108 Foreword In the light of the on-going debate on globalization, the events surrounding the European Council of Göteborg and the meeting of the G8 in Genoa in 2001 as well as the forthcoming UN conference in Johannesburg, the European Commission considered that public discussion of these issues should be able to draw on as wide a factual base as possible established by acknowledged specialists of irreproachable standing. To this effect, it commissioned from CEPR a review of the existing literature and research on globalization to make available the most up-to-date findings to a wide audience in an easily accessible format presented in non-technical language. In its mandate, the Commission decided to concentrate the treatment of globalization on economic issues in order to make the task manageable. As a result, other important dimensions to the process have had to be left out. The report does not attempt to provide a comprehensive treatment of all possible issues but an in-depth treatment of those that appear significant in the elected field. Within these self-imposed limitations, it succeeds in providing the comprehensive and timely discussion of globalization that the Commission requested. Since the report has been written by the independent experts of CEPR and under their authority, it does not represent an official position of the European Commission on the question of globalization. In many respects the findings will prove controversial, at least to those outside the circle of professional economists, contradicting as they do certain deeply held beliefs about the negative consequences of globalization. Equally, they point to the very real difficulties that certain parts of the world have experienced in trying to integrate with the world economy and to draw positive benefits from the process of globalization. Nor do they neglect the crucial issue of equity, in particular with regard to income inequality and its possible causes. Indeed, the message that governments of both developed and developing countries need to play an active role by putting in place policies which can both enable a successful transition towards open markets and the necessary support for those affected by this transition is well made and one that the Commission would certainly support. Nevertheless, while endorsing broadly the conclusions reached and appreciating the high quality of analysis that has gone into producing the report, the Commission cannot concur with all of its analysis. Since this is an independent report, such a result can be considered as normal. The Commission will use the report along with other contributions, the on-going dialogue with civil society and the work of Commission departments to maintain its efforts to ensure that Europe contributes forcefully to the development of a more humane and more just world order with the instruments at the disposal of the European Union and respecting the rights and individual charteristics of nations large and small. Romano Prodi President of the European Commission June 2002 vi Foreword Globalization is, in some respects, a centuries-old phenomenon. Only now, however, are we examining which aspects of the current wave are old and which are new and the effects of these on poverty and inequality in the world. Furthermore, it is difficult to be sure whether the poor economic performance of some countries (notably in sub- Saharan Africa) is due to their having been insufficiently open to the world economy, or whether they lacked the institutions and capacities (such as in human capital) that would have enabled them to embrace globalization successfully. This report analyses how various institutions, including corporations, national governments and the many institutions of civil society, have responded or potentially could respond to these developments. The authors consider the scope for more effective cooperation between national governments, devoting particular attention to the appropriate response of the European Union. They conclude by summarizing what economic research has to say about the concerns of the anti-globalization campaigners, how the potentially significant costs of globalization can be mitigated, and how a failure to address them would risk provoking a backlash that could destroy many of the real gains that globalization has achieved. The opinions expressed in this report are those of the authors and not those of the Centre for Economic Policy Research, which takes no institutional positions. The study was commissioned by the Group of Policy Advisors to the President of the European Commission, whose Foreword puts it in context. The report also does not represent the views of the Commission, which takes no responsibilty for any use of this material. Hilary Beech Chief Executive Officer CEPR 24 June 2002 Executive Summary This study surveys recent research about the economic effects of globalization. In some respects globalization is a centuries-old phenomenon, so we begin by asking what is old and what is new about the current wave, drawing particular comparisons with the late nineteenth century. We then go on to ask what is known about how globalization expands the reach of markets, including the markets for goods and services, as well as the markets for capital and labour. We summarize what have been the effects on poverty and inequality in the world, and assess the risks to future generations. World inequality in incomes has increased dramatically over the last two centuries.