The IMF and Good Governance -- A Factsheet
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The Challenges of Globalization for AfricaAddress by Alassane D. Ouattara
Deputy Managing Director of the International Monetary Fund
at the Southern Africa Economic Summit
sponsored by the World Economic Forum
Harare, May 21, 1997
Globalization has become a major topic of discussion and concern in economic circles since the mid-1990s. It is clear that the trend toward more integrated world markets has opened a wide potential for greater growth, and presents an unparalleled opportunity for developing countries to raise their living standards. At the same time, however, the Mexican crisis has focussed attention on the downside risks of this trend, and concerns have arisen about the risks of marginalization of countries. All of this has given rise to a sense of misgiving, particularly among developing countries.
So what is "globalization"? What are its implications for the conduct of economic policy, particularly in Africa? What are its potential benefits and risks? What will developing countries have to do to benefit from it, to avoid its downside risks? Is there any good reason to fear globalization? To answer these and other questions, it would be useful first to explain what globalization is, and what it is not, what has caused it, and what effects it has had. Situating the discussion in this context will make it easier to identify the benefits and the true risks of the trend to global integration and, in turn, to determine the correct policy response.
What is globalization?
Globalization is first and foremost a result of the expansion, diversification and deepening of trade and financial links between countries, especially over the last ten years. This reflects above all the success of multilateral tariff reduction and trade liberalization efforts. The Fund has played a key role in encouraging current account convertibility as a basis for the expansion of world trade, and more than two-thirds of the Fund's member countries have committed themselves to this principle by accepting the obligations of Article VIII. Also, economic thought itself has evolved over time, toward the general acceptance of the fact that outward- oriented and open economies are more successful than closed, inward-looking ones. Consequently, more than at any time previously, individual countries in all parts of the world are liberalizing their exchange and trade regimes in the conviction that this is indeed the best approach for growth and development. Moreover, there is a deeper commitment of national authorities throughout the world to sound macroeconomic policies, and to creating a more stable environment for investment and the expansion of economic activity. Finally, with the increasing liberalization of financial markets, and their growing sophistication, capital markets have become integrated, and capital flows are now largely driven primarily by considerations of risk and return.
The benefits of these developments are easily recognizable--increasing trade has given consumers and producers a wider choice of low-cost goods, often incorporating more advanced technologies, and facilitated a more efficient use of global resources. Greater access to world markets has allowed countries to exploit their comparative advantages more intensively, while opening their economies to the benefits of increased international competition. The rapid increase in capital and private investment flows has raised the resources available to countries able to attract them, and accelerated the pace of their development beyond what they could otherwise have achieved.
Moreover, greater openness and participation in competitive international trade have increased employment, primarily of skilled labor, in tradable goods sectors. With the expansion of these sectors, unskilled labor has found increased employment opportunities in the nontradable sectors, such as construction and transportation. The expansion of merchandise trade may also have lessened migrationary pressures. On the other hand, the movement of labor across national boundaries has in many cases lessened production bottlenecks, raising the supply response of recipient economies, and increasing income in the supplying countries through worker remittances. Openness to foreign expertise and management techniques has also greatly improved production efficiency in many developing countries.
But there are also risks to globalization. The ability of investment capital to seek out the most efficient markets, and for producers and consumers to access the most competitive source, exposes and intensifies existing structural weaknesses in individual economies. Also, with the speedy flow of information, the margin of maneuver for domestic policy is much reduced, and policy mistakes are quickly punished. Indeed, increased capital mobility carries the risk of destabilizing flows and heightened exchange rate volatility, in cases where domestic macroeconomic policies are inappropriate. And finally, it is clear that countries that fail to participate in this trend toward integration run the risk of being left behind.
Who benefits and who loses?
Success in open markets, and in attracting new investment and advanced technology, also means that the structure of economies is changing more rapidly than ever before. As with any structural change, there will be some segments of society that are at a disadvantage in the short term, even while other segments, and the economy as a whole, are benefiting. This does not mean, however, that countries should seek to isolate themselves from globalization. Rather, governments must fully embrace globalization in awareness of its potential risks, and seek to provide adequate protection for the vulnerable segments of society during the process of change.
While globalization raises the rewards of good policy, it also accentuates the costs of poor policy. Credibility of economic policy, once lost, has become more difficult to regain. What is now critical is the perception of markets that economic policy formulation and implementation is consistent and predictable. This underscores the importance of flexible and well-informed policy-making, of solid, well-governed institutions, and of transparency in governance. Countries with a poor or inconsistent policy record will inevitably find themselves passed by, both from expanding trade and from private capital flows for development. These are the countries that run the risk of marginalization.
What policy response to globalization?
More importantly, no one set of policies is a sufficient condition for success--indeed, experience shows that poor policies in one area can obstruct progress, even if policies in other areas are good. The three objectives of policies complement and reinforce each other:
Globalization will continue to reinforce the interdependencies between different countries and regions. It can also deepen the partnership between the advanced countries and the rest of the world. And to support this partnership in a mutually beneficial way, the advanced countries could help to further open their markets to the products and services in which the developing world has a comparative advantage. In addition, the reform efforts of the African countries will need to continue to be supported by adequate financing on concessional terms. In this regard, I am pleased to note that the Fund has put the ESAF, our concessional lending facility, on a permanent footing, so that it can continue to support reform efforts of the poorer countries, especially in Africa. Moreover, the Fund and the World Bank have recently begun implementing the framework for action to resolve the external debt problems of heavily indebted low-income countries (HIPC), including their large multilateral debt. Three African countries--Burkino Faso, Côte d'Ivoire, and Uganda--are among the first countries to be considered under the Initiative.
The challenge facing the developing world, and African countries in particular, is to design public policies so as to maximize the potential benefits from globalization, and to minimize the downside risks of destabilization and/or marginalization. None of these policies is new, and most African countries have been implementing them for some time. In particular, sub-Saharan Africa has made substantial progress toward macroeconomic stability:
Finally, the restructuring of many African economies is gaining momentum. Throughout the continent, government intervention in economic activity is on the wane. Administrative price controls are being reduced and agricultural marketing has been widely liberalized. The process of restructuring and privatizing state enterprises has been underway for some time in most countries, though with varying speed and degrees of success. And finally, fiscal reform is gaining ground--African countries are taking firm steps to rationalize their tax systems, to reduce exemptions, and to enhance administrative efficiency. At the same time, they are also reorienting expenditures away from wasteful outlays towards improved public investment and spending on key social services, particularly health and basic education.
But, as I pointed out earlier, it is essential to achieve the right combination of policies. While Africa is clearly on the right track, there is still some way to go. I see five main areas where African countries need to achieve greater progress in order to speed up their participation in globalization:
With closer economic integration, each country has an interest in ensuring that appropriate policies are followed in its partner countries. This could be achieved by coordination the relevant national policies within a regional context. Throughout the continent, African governments are coming together to coordinate components of their policies, and virtually all countries are now members of regional organizations. Efficient regional cooperation allows the economies of Africa to overcome the disadvantages of their relatively small size and, by opening access to larger markets, to realize economies of scale. The obligations of membership in some of these organizations also make it easier for each individual country to achieve further progress in regulatory and judicial reform (as is the case in the CFA franc zone); to rationalize payments facilities and to relax restrictions on capital transactions and investment flows (as in the Cross-Border Initiative); and to develop the mutual economic infrastructure (as in the SADC). Enhancing the trade links among themselves naturally also strengthens their ability to participate in trade on a global scale, and could lead toward further progress in the direction of nondiscriminatory multilateral trade liberalization.
The challenge for the future will be to ensure that these regional organizations are perceived as effective vehicles for the integration of African countries into the world economy, providing mutual support to their members in their reform efforts. They should not be considered as defensive mechanisms, intended to ward off the "negative" aspects of globalization. Common regional objectives should be set in terms of international best practices. And the regional organizations should seek to push through reforms in the areas of the legal and regulatory frameworks, financial sector restructuring, labor and investment code reform, and exchange and trade liberalization that seek to reach international standards as quickly as possible. The pace of progress should be what is feasible, not what is comfortable for the slowest member.
IMF EXTERNAL RELATIONS DEPARTMENT