People's Republic of China and the IMF
India and the IMF
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By Anne O. Krueger
First Deputy Managing Director
International Monetary Fund
Remarks at the 2002 Eisenhower National Security Conference on "National Security for the 21st Century: Anticipating Challenges, Seizing Opportunities, Building Capabilities"
September 26, 2002
It is a privilege to take part in your deliberations on "The New Global Context for Today's Security Environment".
Supporting globalization is one of the best investments we can make to improve today's security environment. Globalization is the process of integration of nations through the spread of ideas and the sharing of technological advances, through international trade, through the movement of labor and capital across national boundaries. It is a process that has been going almost throughout recorded history and that has conferred huge benefits. Globalization involves change, so it is often feared, even by those who end up gaining from it. And some do lose in the short run when things change. But globalization is like breathing: It is a not a process one can or should try to stop; of course, if are obvious ways of breathing easier and better one should certainly do so.
Like any process, globalization has been subject to ebbs and flows. It gained impetus during the period of great discoveries in the 15th century, and in later centuries from dramatic falls in the costs of communication and transportation. For instance, the fortunes of the House of Rothschild were helped by their being the first to use carrier pigeons to carry business news between London and Brussels. The invention of the telegraph and the laying of the transatlantic cable cut settlement times between New York and London from ten days to three days. Stop and think about what it must have been like when the first telegraph wire went through: it must have been as big a breakthrough as the ones in more recent times that we rave about.
After World War II, globalization received a boost from the dramatic lowering of trade barriers among the major industrialized nations. Over the last fifty years the process of integration has accelerated among the industrialized nations and also started to embrace many nations in the developing world.
II. Growth and Globalization in the 20th Century
Economic growth in the last fifty years has been faster than it was in earlier centuries. In the nineteenth century, for instance, the leading nations such as Britain grew at an average annual rate of 1.5 percent per capita. But in this present era of globalization, many countries have achieved per capita annual growth rates of 5 to 8 percent. Thus, in the heyday of their growth, the Asian Tigers achieved every decade what rapidly growing countries had previously achieved in a century.
Why has growth been faster? A big reason is growth and globalization have gone hand-in-hand: Access to a buoyant international market has greatly facilitated faster growth. It has permitted a degree of reliance on comparative advantage and division of labor that was not possible in the nineteenth century. Not only has there been rapid growth in world trade, but it has taken place in an environment where the support facilities are readily available from other trading nations. These facilities—communications, wholesalers, finance and insurance—would have been expensive for poor countries to provide themselves and would have put them at a disadvantage competitively. Of course, technology transfer helps as well to boost growth rates. Latecomers to development have the advantage of ready access to all the blueprints developed over the past several hundred years in the more advanced nations. And latecomers also derive benefits from the very large declines in the costs of transport and communications. Korea, for example, shifted from being a 70 percent rural economy to a 70 percent urban economy in the course of three decades. Such a shift would not have been possible without the support of an international economy. More recently, over the last decade, joining the international economy has helped some regions in India make the transition to an information-based economy.
The impact of the faster growth on living standards has been phenomenal. We have observed the increased well-being of a larger percentage of the world's population by a greater increment than ever before in history. Growing incomes give people the ability to spend on things other than basic food and shelter, in particular on things such as education and health. This ability, combined with the sharing among nations of medical and scientific advances, has transformed life in many parts of the developing world. Infant mortality has declined from 180 per 1000 births in 1950 to 60 per 1000 births. Literacy rates have risen from an average of 40 percent in the 1950s to over 70 percent today. World poverty has declined, despite still-high population growth in the developing world. Since 1980, the number of poor people, defined as those living on less than a dollar a day, has fallen by about 200 million, much of it due to the rapid growth of China and India.
If there is one measure that can summarize the impact of these enormous gains, it is life expectancy. Only fifty years ago, life in much of the developing world was pretty much what it used in be in the rich nations a couple of centuries ago: "nasty, brutish and short." But today, life expectancy in the developing world averages 65 years, up from under 40 years in 1950. Life expectancy was increasing even in sub-Saharan Africa until the effects of years of regional conflicts and the AIDS epidemic brought about a reversal. The gap between life expectancy between the developed and developing world has narrowed, from a gap of 30 years in 1950 to only about 10 years today.
There have been gains in other spheres of life as well. Economic growth has raised the demand for democracy and representation. As a result, many more people around the world live free. A large part of the world's population now lives under governments they have elected. According to Freedom House, the proportion of countries with some form of democratic government rose from 28% in 1974 to 62% in 2000. Electoral democracies now represent 120 of the 192 or so existing countries and constitute nearly 60% of the world's population. People have also been given much more opportunity to vote with their feet. They go where there are more opportunities and chances to build a better life.
III. Why the Protests?
There is a clear contradiction between these manifest benefits of growth and globalization and the outcry against them. The protests are particularly bewildering because the gains have come about without many, or indeed any, of the feared side effects coming to pass.
Take the perennial concern that rapid growth depletes our fuel resources and once that happens growth will come to a complete dead stop. World oil reserves today are higher today in 1950. Then the world's known reserves of oil were expected to be enough for only 20 more years of consumption. That is, we were expected to run out by 1970. It did not happen. Today, our known reserves are enough to keep us going for another 40 years at our present rate of consumption. There is no doubt that by the time 2040 rolls around research and development will have delivered new breakthroughs in energy production and use.
Nor have we done irreparable harm to the environment. The evidence shows quite convincingly that economic growth brings an initial phase of deterioration in some aspects, but followed by a subsequent phase of improvement. The turning point at which people begin choosing to invest in cleaning up and preventing pollution occurs at a per capita GDP of 5000 dollars.
What about the impact of growth and globalization on labor and social conditions in the developing world? Conditions in so-called "sweatshop" factories in developing countries should be compared to the other choices available to people in those countries. For instance, the growth of the footwear industry in Vietnam has translated in to a five-fold increase in wages in a short period of time; while still a pittance by our standards, the higher wages have completely transformed for the better the lives of those workers and their families. Insisting that such workers be given a "decent wage" by our standards would completely erode any competitive advantage of businesses using unskilled labor on the international market. Likewise, child labor in sometimes prevalent in developing countries because the alternatives are so much worse: starvation or malnutrition, forced early marriages (for girls) or prostitution, or life on the streets as a beggar. There is ample evidence that parents in developing countries, like parents everywhere, choose schooling for their young when they can afford to do so, and the quickest path to that outcome is through more rapid economic growth.
Concerns that globalization is associated with a loss of control are also misplaced. In fact, it is poverty that is a state of almost total loss of control. Growth has done more to give people a control over their lives than any alleged loss of control to multinationals or fickle flows of foreign capital.
Some anti-globalizers allege that the gains of globalization are not universally shared. Inequality of outcomes is said to be the Achilles Heel of globalization. This characterization is misleading in several respects. At the very outset, one has to wonder about the preoccupation with inequality. As Chinese Premier Deng Tsiao Ping famously remarked: "I have a choice. I can distribute wealth or I can distribute poverty." Poor people are desperate to improve their material conditions in absolute terms rather than to march up the income distribution. Hence it seems far better to focus on impoverishment than on inequality. And there is no doubt that growth reduces the incidence of impoverishment. Empirical studies show clearly that the incomes of those at the bottom of the income distribution rise one-for-one with growth. To take one specific example, identifying who lost in absolute terms in Korea during its period of high growth in the 1960s or 1970s is a difficult task. The losers were largely older peasants, and in their case too their offspring often sent remittances from their urban jobs so that rural living standards were rising rapidly.
Even if one is going worry about inequality, there is no evidence that globalization has any systematic impact on a country's income inequality. Many countries have experienced fast growth by opening up to the world economy, but without changes in inequality. In any event, countries that are concerned about inequality of incomes within their countries can, and do, address it through government policies.
If one looks not at within-country inequality but at world inequality, the news is actually very encouraging. The evidence, though difficult to piece together, suggests that world inequality is declining. This is happening in large part because of the phenomenal growth of China and India. Because the majority of the poor reside in these two countries, their growth helps to reduce inequality of world incomes, even though many smaller countries have had stagnant incomes.
What the protestors are against is not growth or globalization, but change and fear of the impacts of change. There once used to be warnings that train travel in excess of 15 miles per hour would be hazardous to health. Many of the alleged hazards of growth and of joining the international economy are similar to such warnings. To be sure, there are losers whenever there is change. But as we get richer, we can afford greater protection and insurance against
In summary, 20th century growth and globalization have brought great benefits to the majority of the world's population. In the nineteenth century, while governments helped build railroads and so on, there was no presumption that they were responsible for growth and therefore had to do something when it faltered. In the twentieth century in contrast development has been a conscious goal of policy and is deemed to be the responsibility of policymakers. The underlying beliefs on which development policies were based in the first decades after 1945 were a deep-seated distrust of markets and a strong commitment to placing the government in charge of the commanding heights of the economy.
Gaining access to growth in the 20th century has required putting in place institutions and implementing policies that ran counter to these beliefs. In that sense, the barriers to rapid growth in the 20th century were not economic but political. The Asian tigers were the first to shake off these beliefs and enjoy rapid growth and, much later, China and India have followed in their footsteps.
This perspective leads me to conclude on an optimistic note on the prospects for continued economic growth and globalization in the 21st century. Many more countries are choosing economic policies today without the ideological baggage that slowed their growth in the 20th century. These countries can continue to bank on the kind of supportive international economy that was instrumental in helping many of them in the 20th century. Though global economic conditions have been weak over the last year, a recovery is underway and the medium-term prospects for global economic growth remain good. And the gains from international division of labor and specialization are far from exhausted. If heavily-populated countries such as India, China and Vietnam can all join the global economy at around the same time and can all experience rapid growth simultaneously, it should surely be possible to make room for the others.
Countries in which citizens have a say in their government, and where citizens can concentrate on—and succeed in—improving their material fortune and their families' lives, are not countries likely to present security threats. Thank you.
IMF EXTERNAL RELATIONS DEPARTMENT