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Globalization and the Developing Countries(for DMUG 2006)

Prof. Shigeru T. OTSUBO

GSID, Nagoya University

October 20062

What is “Globalization”?--a traditional definition--

Globalization, defined as the integration of production, distribution, and use of goods and services among the economies of the world, has been evolving since the end of World War II. The signs of globalization are manifested at a factor level in the increasing flows of capital and labor, and at the product level in a resounding growth in world trade above and beyond the growth of world output…..

From an old WB report written by Prof. Otsubo

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Growth in World Trade and GDP, 1960-2002(trade in goods and services)

Source: World Bank, World Bank Development Indicators, 2004.

100

300

500

700

900

1100

1300

1960

1965

1970

1975

1980

1985

1990

1995

2000

Year

(Inde

x 1960 =

100)

World Trade (1995 US$)

World Output (1995 US$)

4

Globalization of What?

Globalization of GoodsGlobalization of ServicesGlobalization of InvestmentGlobalization of FinanceGlobalization of Human ResourcesGlobalization of Corporate ActivitiesGlobalization of InformationGlobalization of (Harmonization of) StandardsMore…(Democracy, Market Mechanism,

i.e. American Standards?)

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5

Benefits of GlobalizationWider variety of Goods and Services have become available at lower prices.Enlarged Investment opportunity that results in higher average rate of return, more investment, and technology transfer (FDI).More choices for (possible diversification in) development Finance.Flows in Human Resources complement initial endowments and mitigate bottlenecks in the supply of (un)skilled labor.Global Corporate Activities connect national economies-consumers and producers alike, create marketing channels, and diffuse technology (technical and managerial).Lower-cost and timely access to Information that reduces transaction costs, and accelerates the process of catch up. Lower costs of cross-border trade and spot operations due to a harmonization of Standards.

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Risks associated with GlobalizationG. of Goods, Services, Investment often calls for agglomeration (scale economies) that leads to monopoly power, and uneven presence of economic activities resulting in both cross-country and regional disparities.G. of Finance creates ‘hot money’ and calls for good governance (by western standard) that often limits policy options in developing countries.G. of Human Resources accelerates brain drain.G. of Corporate Activities often goes against sovereignty and impedes the growth of indigenous firms and industries. G.of Information creates digital divide, and thus widens gaps in opportunity (ex-ante gaps) as well as welfare gaps (ex-post gaps).G. of (H. of) Standards forces social changes (democracy, market mechanism, western corporate culture, contracts, judicial system, etc.).

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Trade Integration(exports plus import volumes, ratio to GDP*)

Note: * Based on national income accounts. Trade in goods and services.

Source: DEC Analytical Database, World Bank; World Bank, World Development Indicators, 1999.

10

15

20

25

30

35

40

45

50

1960

1965

1970

1975

1980

1985

1990

1995

Year

Perc

ent Developing

Countries

High IncomeCountries

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Trade Integration by Developing Regions(exports plus import volumes, ratio to GDP*)

0

10

20

30

40

50

60

70

80

1960

1965

1970

1975

1980

1985

1990

1995

Year

Perc

ent

East Asia & Pacif ic

Latin America &Caribbean

Sub-Saharan Africa

Note: * Based on national income accounts. Trade in goods and services.

Source: DEC Analytical Database, World Bank; World Bank, World Development Indicators, 1999.

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9

Net Resource Flows to Developing Countries1970-1999

Source: World Bank, Global Development Finance, 2001 Advanced Release

0

50

100

150

200

250

300

350

400

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

Year

US$ b

illio

n

Portfolio equity flows(US$)

Foreign directinvestment, net inflows(US$)

Net flows on debt, totallong-term (NFL, US$)

Grants, excludingtechnical cooperation(US$)

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UNCTAD World Investment Report 2006, Figure 1.3

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Net Resource Flows to Developing Countries,1970-1999Private vs. Official

Source: World Bank, Global Development Finance, 2001 Advanced Release

0

50

100

150

200

250

300

350

400

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

Year

US$ b

illio

n Private net resourceflows (US$)

Official net resourceflows (US$)

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Net Resource Flows to Developing Countries,1970-1999Private vs. Official

Source: World Bank, Global Development Finance, 2001 Advanced Release

0%10%20%

30%40%50%60%70%

80%90%

100%

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

Year

Share

(%) Private net resource

flows (US$)

Official net resourceflows (US$)

4

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Average MFN Tariffs in Industrial Countries(on imports of manufactures from various regions)

Post-Round Pre-RoundOECD 3.0 5.5Latin Amer 3.2 4.4Asia 5.2 7.8Africa 6.7 8.4Europe 7.3 9.5

0

1

2

3

4

5

6

7

8

9

10

OECD LatinAmerica

Asia Africa Europe

Perc

ent

Post-Round

Pre-Round

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Average Tariffs in Developing Countries(on imports of manufactures from various regions)

From industrial countries From developing countriesPost-Round Pre-Round Post-Round Pre-Round

Latin America 18.2 22.1 Latin America 19.7 24.9Asia 8.4 12.4 Asia 6.3 9.1Africa 23 23 Africa 19 19.1Europe 15.5 26.4 Europe 15.2 22

0

5

10

15

20

25

30

Lat

inA

merica

Asi

a

Afr

ica

Euro

pe

Lat

inA

merica

Asi

a

Afr

ica

Euro

pe

From industrial countries From developing countries

Perc

ent

Post-Round

Pre-Round

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Goods vs. Service Trade

0

100

200

300

400

500

600

700

800

900

1975 1980 1985 1990 1995

(cur

rent

US$, 197

5=100)

Merchandise exports

Service exports

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Service Trade Components

0

200

400

600

800

1000

1200

1400

1975 1980 1985 1990 1995

(US $

bill

ion)

Professional services

Travel services

Transport services

5

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0.010.1

110

1001975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995

Price index of information processing, 1975-94(100=1US$ per instruction per second)

IBM Mainframe (1975)

Digital Vax (1979)

Cray I (1976)

IBM PC (1981) SUN Microsystems 2 (1984)

Pentium chip (1994)

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Cost of a 3-Minute Telephone Call,New York to London

(Constant 1990, U.S. $)

188.51

244.65

45.86 31.58 3.324.8

53.2

050

100150200250300350

1920 1930 1940 1950 1960 1970 1980 1990 2000

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Gross Income of Bank Credit Clerks*, 1994

(US$ per year)

Zurich 78,100 Tokyo 63,400 Abu Dhabi 47,800 Paris 42,000 New York 29,000 Bangkok 14,200 Tel Aviv 15,800 Rio de Janeiro 7,600 Jakarta 3,900 Bombay 1,900 Nairobi 1,600

Note: * With completed banking training, 10 years of experience, around 35 years of age, and married with two children.

Source: World Bank, database for Global Economic Prospects and the Developing Countries, 1995.

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Number of MNEs and Their Affiliates in Major Countries Number of

MNEs (A) Number of

Affiliates (B) (B)/(A) Data year

U.S.A. 3,470 18,608 5.36 1994Japan 3,967 3,405 0.86 1995Germany 7,292 11,581 1.59 1994France 2,126 8,682 4.08 1995U.K. 1,467 3,894 2.65 1992Canada 1,691 4,583 2.71 1995China 379 45,000 118.73 1993Korea 4,806 3,878 0.81 1996Singapore n.a. 19,160 n.a. 1994Total Developed Countries

36,380 93,628 2.57

Note: 1. MNEs are defined as enterprises which run their business in more than two countries. 2. (A) is the number of MNEs originating from the corresponding country, and (B) is the number of

foreign affiliates in said country. Source: United Nations, World Investment Report, 1997; Kaigai Jigyou Katsudou Chousa, 1995.

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Regionalization under GlobalizationThere is a surge in the formation of regional arrangements in the 1990s, even with the successful completion of the Uruguay Round.New motives for new arrangements.—Deep integration—Safe haven— Insurance—Buy out

Open regionalism can be conducive to free world. Developing countries can utilize regional arrangements to effectively negotiate in multilateral organizations such as the WTO.

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Number of GATT/WTO Member Countries

1980 1987 1990 1999 2000* Non-OECD members

61 65 76 110 116

OECD members 24 24 24 24 24 Source: Adopted from World Bank, World Development Report 1999/2000, Table 2.1.

Original source: WTO, Annual Report, various years.

* As of November 30, 2000.

In year 2005, WTO has 148 member countries, of which 30 are OECD(30) members.OECD30 = OECD24 + (Czech Republic, Hungary, Korea, Mexico, Poland, Slovak Republic)

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Number of Existing Regional Integration Schemes(by their establishment year)

Regions Prior to 1969 1970-79 1980-89 1990- Total Europe 1 2 0 36 39 Americas 2 1 15 22 40 Asia and Oceania 0 0 1 2 3 Middle East 0 0 3 1 4 Africa 2 2 0 4 8 Other (across multiple regions)

1 1 1 4 7

Total 6 6 20 69 101 Source: JETRO, White Paper on International Trade, 1996.

Up to October 2005, 180 RTAs have been notified to GATT/WTO. Some are overlapping and or dissolved.

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Uneven Process of Globalization

Many countries have become less integrated with the world economy.Growth and integration go together.Slow integrators will continue to lag behind in their growth.Much can be done to promote integration.

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Average Growth in Real Per Capita Income and Exports(106 Low and Middle Income Countries)

1.9

-0.6

-2.5-3-2-10123

Percent P.C.IGrowth

Top 1/3

(10.2%)

Middle 1/3

(3.5%)

Bottom 1/3

(-3.2%)

Export Performers:

(Export Growth)

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But there were large disparities across regions(Changes in trade to GDP ratios*)

-1

-0.5

0

0.5

1

1.5

2

High Income East Asia Latin America Europe &Cent. Asia

South Asia Mid.East &No.Africa

Sub-SaharanAfrica

1975-84 1985-94

* Annual Average Changes

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FDI up significantly, but mostly for a few countries(FDI to GDP Ratios*)

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

High Income East Asia Europe & C. Asia Latin America Mid. E. & N.Africa Sub-Saharan A. South Asia

81-83

91-93

* GDP in purchasing power parity terms.

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Most developing countries lack access tointernational credit markets

(Distribution of countries by credit rating in 1995)

Credit Rating Quartile

Region A B C D TotalHigh income 19 7 1 27

Developing Countries 13 32 54 99East Asia 5 2 3 10South Asia 3 2 5Latin America and the Caribbean 1 10 13 24

Middle East and North Africa 4 4 6 14Sub-Saharan Africa 6 19 25

Europe and Central Asia 3 7 11 21

Source: Institutional Investor, March 1995.

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Growth is associated with the initial level of integration(initial level: 1981-83 average, real p.c. gdp growth: 1984-93)

-1.5

-1-0.5

00.5

1

1.52

2.5

High Moderate Weak Low

75m25

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East and South Asia had the highest proportion of fast integrating countries in the 1980s

(Speed of integration classes)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

E.Asia S.Asia ECA LAC MENA SSA

Fast Moderate Weak Slow

(early 1980s to early 1990s)

Percent of countries in integration class

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Share in Private Flows to LMICs(Percentage, 1991-94)

29

13

8 6 6 6 5 4 4 3 3 2

05

101520253035

ChinaMex

icoArg

entin

aKorea

Malays

iaPortu

galBraz

ilThail

and

IndiaTurke

yHungaryIndones

ia

Total 12 countries 89%

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What can developing countries doto improve integration?

(Standard Answers before the Asian Crisis)Liberalization of trade and investment regimes

Macroeconomic stability

“Micro” policies– Infrastructure development– Privatization– Technology transfer

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Low tariffs mean high trade ratios

0

10

20

30

40

50

60

70

80

0 5 10 15 20 25 30 35

*Trade to GDP ratio adjusted for country size.

Tariff Rate

Trade/GDP Ratio*

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Foreign investors don’t like instability

0

0.5

1

1.5

2

2.5

3

3.5

4

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

Exchange rate volatility 1984-93

FDI as % of GDP 1991-93

35

Private players reduceagricultural marketing costs...

(Cocoa marketing costsas a share of the selling price, 1989)

0

10

20

30

40

50

60

70

Cameroon Cote D'Ivoire Ghana Malaysia Nigeria Brazil Indonesia

Source: World Bank staff estimates base on Ruf (1993)

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Actions by industrial countries...Persist on liberalization—Agriculture—Textiles/garments

Enhance WTO negotiations with proper treatments of developing country members—TRIM—Trade and environment

Enhance the “rules-based” system—Antidumping—Safeguards

Encourage North-South arrangements—Association agreements

Monitoring and regulating international financial flows— IMF (and BIS?) on crisis prevention, pre-crisis dialogue

Stabilize exchange rates among key currenciesAssisting IT strategies of developing countries

10

37

Spending per Capita on Information Infrastructurein 1998 (US$)

19.93

28.28

22.89

13.49

11.56

129.11

0 20 40 60 80 100 120 140

OECD Countries

Middle East & North Africa

Sub-Saharan Africa

Latin America & Caribbean

Eastern Europe & Central Asia

Asia Pacific

Source: John Gage, “From Digital Divide to Digital Opportunity: Business Leaders Report for Davos”, Development Outreach, World Bank Institute (Spring 2000).

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Globalization and Domestic Disparity

Uneven process of globalization in domestic economy, as well.Spatial (Geographical) DisparityIntegration, Growth,

and Income InequalityManagement/Governance matters

in controlling disparity in Development under Globalization.

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Economic Integration and Income Inequality in China

0

1

2

3

4

5

6

7

8

9

10

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

YearP

ercen

t

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

Pers

ent

Trade (% ofGDP, PPP)

Gross FDI (% ofGDP, PPP)

Gini-1

Gini-2

Gini-3

11

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Is the East Asian Growth (Model) Invincible?

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Speed of Integration and GDP Growth, 1970-1992(18 Major Developing Economies)

0

2

4

6

8

10

-6 -4 -2 0 2 4 6

GD

P G

row

th R

ate

(per

cent

)

Speed of Integration (percent)

Korea

China

ThailandMlaysia

Indonesia

Mexico

Argentina

BrazilChile

Philippines

Venezuela

NigeriaIran

FSU South Africa

India

Saudi Arabia

Algeria

Correlation Coefficient = +0.51

Source: International Economics Department, World Bank.

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Asian Financial CrisisChanges in Exchange Rates(vs. US$, Benchmark: end June 1997)

Source: IMF, International Financial Statistics CD-ROM (March 2001).

-100.00

-80.00

-60.00

-40.00

-20.00

0.00

20.00

1997

Q2

1997

Q4

1998

Q2

1998

Q4

1999

Q2

1999

Q4

2000

Q2

2000

Q4

Japan (Yen)

S. Korea (Won)

Hong Kong (HK$)

Singapore (S$)

Malaysia (Ringgit)

Thailand (Baht)

Indonesia (Rph)

Philippines (Peso)

China (RMB)

Russia (Ruble)

Brazail (Reals)

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Asian Financial CrisisChanges in Output

(GDP Volume Index, 1995=100)

Source: IMF, International Financial Statistics CD-ROM (March 2001).

90.00

100.00

110.00

120.00

130.00

140.00

1995 1996 1997 1998 1999

YearG

DP

Volu

me

Inde

x

S. Korea

Hong Kong

Singapore

Malaysia

Thailand

Indonesia

Philippines

China

Brazil

12

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East Asia, too, is vulnerable to violent forces of globalization…..

East Asian Growth Model has been robust to trade integration.has been robust to investment integrationthrough FDIs.is not yet robust to financial integrationthrough portfolio equity and other S-T flows.

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East Asian Financial Crisis was…..

Not a Current Account Crisis.But a Capital Account Crisis.That requires different kind of medicine (rescue package), different from the standard IMF package.And that requires deeper and more sophisticated institutional reform.

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How to Manage Development under Globalization

How to form the virtuous cycle of integration and growth.Asian crisis shows …..A need for Good Governance.

— Sound macroeconomic management.— Fiscal (revenue and expenditure) & debt management.— Monetary policy rules (incl. exchange rate schemes).— Re-regulations and monitoring.

— Domestic reform efforts.— Financial sector reform.— Corporate sector reform.— Public sector reform.— Market reform (incl. deregulations and competition laws).

— Institutional development (incl. judicial system).— Global governance (incl. global financial architecture).

Decentralization and national strategies. And more ….. 48

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Issues of Global GovernanceWTO Trade and Investment Negotiations.Global Financial Architecture.

IMF reformFrom post-crisis rescue package to pre-crisis monitoring and dialogue.

Regional IMF?Environmental Issues.

Trade and environmentInvestment and environmentGlobal market for environment?

Global IT Development.New International Organization?Make IT cooperation mainstream in ODA agenda 50

Globalization and the Developing Countries

The End …..