India and the IMF
Russian Federation and the IMF
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Address on Globalization
I'm delighted to be here in St Petersburg for this economic forum.
I'm especially glad to be here at a time when this magnificent city is celebrating its three hundredth anniversary. That anniversary makes the topic you asked me to speak about particularly apt. It would be fair to say that global trade, the drive to open the Russian economy, was one of Peter the Great's principal motives in founding this great city.
Indeed, long before the city's foundation, trade had played a vital role in the development of this whole region. More than a thousand years ago, when this area belonged to the principality of Novgorod, trade was its lifeblood. The Neva river was the route for trade with Western and Northern Europe and, later, the Hanseatic League.
One cannot help mischievously wondering whether back in the ninth century or, more recently, in the early eighteenth century, anti-globalization protesters were a force to be reckoned with. My instinct tells me not in the way we are used to.
But fear of change has always been with us. There have always been those resistant to new and novel ideas and who wanted to reject the unfamiliar. Sometimes persuasion is the best way of overcoming such prejudice. At other times, those who wanted to embrace the new and the different have used the stick rather than the carrot. Peter the Great wanted to use St Petersburg to modernise Russia. New, Western ideas were in, old traditional ideas were out. I'm told that beards, as symbols of the old order, were taxed.
Trade and globalization
International trade has a long and honourable pedigree. For thousands of years, individuals and nations have prospered by buying from and selling to each other. And for thousands of years international trade has been the driving force behind globalization. Economists did not dream up the laws of comparative advantage while locked away from the real world. Quite the opposite. They were simply explaining what they had observed. Even before money was invented as a means of exchange, traders were bartering—offering the best of what they had in exchange for what they wanted. In doing so, they were making judgments about relative economic value.
Globalization is not new—and nor are most of its consequences. Even in the past few centuries, there have been several periods during which the integration of the world economy took place with surprising speed. Marco Polo, for instance, was one of the early trading entrepreneurs, finding new products and developing new markets for them. The "universal age" of the sixteenth century—the age of the great explorers—was a period of rapid, constant change and, significantly, of contact between people across huge distances.
More recently, of course, the late nineteenth century saw the drive for new markets coincide with unprecedented technological change and the growth of funds looking for a home. The export of capital from Britain in particular fuelled growth across the British Empire and in the new world. Even by today's standards, capital flows were very large.
And it wasn't just capital that left what some people now refer to as "old Europe". Between 1871 and 1915, some 36 million people left Europe in search of new opportunities, a new life. An important by-product of this migration, of course, was a jump in productivity in those industries that had been facing labour surpluses.
So rapid was the process of economic integration—globalization—during this period, that it was not until the 1980s that trade again reached the levels it had in the period before the First World War.
Opponents of globalization
I said that I suspected anti-globalization sentiments did not, in the past, manifest themselves in the way they have done recently. But they did exist. Large-scale welfare gains are often accompanied by localised, short-term losses. Technological progress inevitably means some jobs will become redundant. The early stages of the industrial revolution in Britain, for instance, saw great upheaval as machines replaced hand weaving and spinning. Cars superseded horses—and their coachmen—at the beginning of the twentieth century.
Those worst affected—and those most afraid—want to stop progress in its tracks. And they tried then as they do now. In the late nineteenth-century for instance, landowners in what was, in relative terms, land-poor Europe resisted the globalization process, just as did the owners of labour in what had previously been the labour-poor New World.
I want to suggest in a moment that the protesters might not be the biggest obstacle to globalization today. First, though, I want to make some observations about modern-day globalization, and how it is arguably different in several respects from earlier periods of intense global integration.
Globalization in the twentieth 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 managed to grow at an average annual rate of 1.5 percent per capita. Contrast that with the per capita annual growth rates of 5 to 8 percent that some countries have achieved in the period since the Second World War. In the heyday of their growth, the Asian Tigers achieved in every decade what rapidly growing countries had previously achieved in a century.
Why has growth been faster? One big factor is that growth and globalization have gone hand-in-hand. Relatively easy access to a buoyant international market has greatly facilitated faster growth. Newly-industrialising countries have been joining an already-sophisticated global economy. Countries like Britain, Germany, France and America were, in effect, blazing a trail in the nineteenth century. They were developing in ways that were, at the time, unprecedented. The process of industrialisation was wholly new.
Modern-day tigers, though, gain from the past experience of advanced industrial nations. They can benefit from comparative advantage and division of labour in a way that was not possible in the nineteenth century. The rapid growth in world trade in the second half of the twentieth century has taken place in an environment where the support facilities are readily available from other trading nations. These facilities—communications, wholesalers, finance and insurance—that essentially amount to a global trading infrastructure would have been expensive for poor countries to provide themselves. Having to do so would have put them at a serious competitive disadvantage.
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, experienced a dramatic economic transformation in only three decades: from being largely a rural economy to being a largely urban one. Such a shift would not have been possible without the support of an international economy and without policies intended fully to exploit the benefits of globalization. Countries such as India that remained suspicious of, and reluctant to participate fully in the global economy grew at a significantly slower pace. The more closed an economy remains, the more slowly it can expect to grow. But India, too, has begun to recognise the benefits that globalization can bring. Over the last decade, joining the international economy has helped some regions in India make the transition to an information-based economy.
The benefits of growth
The impact of the faster growth on living standards has been phenomenal. A larger proportion of the world's population has become better off at a faster pace and by a greater margin that ever before. Growing incomes ensure that people, and their governments, are able to start spending on things other than basic food and shelter; in particular on things such as education and health.
When combined with the sharing among nations of medical and scientific advances, this 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. Perhaps most strikingly, 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 in freedom. A large part of the world's population now lives under governments they have elected.
According to Freedom House, an independent, non-partisan research organisation, the proportion of countries with some form of democratic government has risen from 40% in 1987 to 63% in 2002: 121 of the world's 192 countries are now electoral democracies. The proportion of the world's population living in countries defined as not free has fallen from 47% in 1972, to 35% in 2002. Tellingly, Freedom House reckons that the total GDP of free countries in 2002 was $26.8 trillion; that of countries classed as not free—with more than a third of the world's population—was only $1.7 trillion.
The growth of democracy has been accompanied by other freedoms, as well. More people have the opportunity to vote with their feet. They go, as they always have when given the chance, to where there are more opportunities and chances to build a better life.
The paradox of opposition
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. Some of the opposition to globalization is simply misguided. Some reflects a failure to distinguish between relative and absolute measures.
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. 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 that this is 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 about $5000.
What about the impact of growth and globalization on labour and social conditions in the developing world? Some perspective is needed here. I know many protesters distrust moral relativism, but it really does make sense to pause before condemning conditions in the so-called "sweatshop" factories in developing countries in such absolute terms. It is always important to consider what other choices are available to people in those countries. In Vietnam, for instance, the growth of the footwear industry has translated in to a five-fold increase in wages in a short period of time. They are still a pittance in comparison with wage levels in industrial countries. But those higher wages, however modest in absolute terms, have completely transformed for the better the lives of those workers and their families.
Insisting that such workers be given a "decent wage" by industrial country standards would completely erode any competitive advantage for businesses using unskilled labour on the international market. Likewise, child labour is 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. The quickest way for them to be able to is, unquestionably, through more rapid economic growth.
Concerns that globalization is associated with a loss of control are also misplaced. Poverty itself deprives people of any control. Growth does far more to give people back some control over their lives than any alleged harm that multinationals or the fickle flows of foreign capital inflict.
Another frequent complaint is that the benefits of globalization are not universally shared. Inequality of outcomes is said to be the Achilles Heel of globalization. One has to wonder about this preoccupation with inequality. 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.
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 even in their case, their offspring often sent remittances from their urban jobs so that rural living standards were rising rapidly.
What's more, 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. Domestic concerns about inequality of incomes can be addressed—and very often is—through government policies.
At the global level, 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.
So is all well?
I'm sure I have left you in no doubt that I am wholly convinced of the benefits of globalization. But I am not complacent. More needs to be done to lock those benefits in place.
For a start, governments need to demonstrate more confidence in the economic philosophy they espouse. It is not enough to argue in favour of globalization, to re-iterate a belief in the benefits of free trade. Policymakers need to be bold and to embrace the policies that will strengthen the process of globalization. In particular, they need to show that their commitment to global free trade is genuine.
I'm not going to point the finger of blame here. I do not need to. All governments, to some extent, are guilty. At the abstract level, it is easy to accept that the evidence in favour of multilateral free trade is indisputable. Putting that commitment into practice is far more difficult. I've already mentioned the problem of resistance to change, especially from those who feel directly threatened.
Governments find it hard to resist pressure from special interest groups. Even the talk of job losses is politically harmful—especially if people perceive those jobs as being exported to other countries, and, thus, other workers. It is hard to resist the temptation to make exceptions, to act to protect groups of workers.
It is [almost] always a mistake, though. Interfering with the market inevitably produces distortions. Protecting one group of workers, from foreign competition, say, can have the effect of penalising others—in the same country. Without exception, such protection, whatever form it takes, puts up the price for consumers. It reduces overall economic welfare, both at the national and the global level. While a social safety net is very important, it can be achieved in ways that do not block improvements in overall economic welfare.
The multilateral trading system set up more than fifty years ago has served us well. As I said, the growth of trade has been accompanied by spectacular rates of economic growth—in the developing market economies and also, we should remember, in the industrial economies. The gradual dismantling of trade barriers has been sometimes painful—especially for the poor negotiators!—but ultimately beneficial.
We cannot afford to rest on our laurels, though. Freeing up trade flows is a continuous process. That much was recognised when the Doha round of negotiations was launched—in the face of considerable scepticism, as I remember—in November 2001. It has been dubbed the development round, in recognition of the urgent need to do more to bring developing countries, especially the poorest, into the world economy. Helping all countries to participate fully in the benefits of globalization is a key element in consolidating international political stability.
The lead in the Doha talks will have to be taken, in the first instance, by the major industrial economies. But developing countries have an important, and often overlooked role in moving towards an open, global trading system and progress needs to be speeded up.
Somebody, eventually, will have to make the first move. Developing countries have nothing to lose and a great deal to gain by acting to deregulate trade among themselves.
Locking in the benefits
I drew attention at the outset to earlier periods of globalization. These put the experiences of our own era into a broader context. But they also offer important lessons for us in how we go forward. The opponents of globalization have made us think about what its benefits are, and as a result, I believe we have become more coherent and effective in rebutting many of the criticisms.
But the protesters have sometimes been a distraction. It is right to make careful assessments about what the benefits of globalization are, and can be; and to seek to exploit those benefits are far as possible. But it is equally important to try to ensure that we preserve those benefits. The transformation of the world economy after the first world war is a sharp reminder that globalization can be halted, or reversed. We need always to be vigilant against that. That is one reason why I think it is so important for progress to be made during the Doha round.
In his assessment of what went wrong in the 1930s, the historian Harold James mentions the failure of institutional regulation. I think there is a lesson for us here. In the recent past, we have not always put enough emphasis on institutional reform at a national level. We have paid lip service to the importance of law and order, property rights, the elimination of corruption, and so on. But we have not always followed up with properly effective procedures for ensuring these reforms have been implemented.
Globalization, well-managed, is important for all of us. But I believe that opening up to the international economy is especially crucial for Russia. I note the government's commitment to double real income in ten years. That goal is achievable, but it will require a strong commitment to structural reforms. In addition, using the international economy to benefit from Russia's comparative advantage will be critical. I know of no economy that has achieved income-doubling in a decade that has not been integrating with the international economy as it did so. Thus, Russia's decision to join the WTO is welcome and will provide a further stimulus to growth.
The international institutions
I've talked about the role of governments in facilitating globalization. I cannot end, though, without mentioning the role of the international institutions, including my own. Our task is complementary to national effort, of course—we cannot act as a proxy for governments. But our central role is to facilitate the process of globalization. In a very real sense, that is what we exist for. The IMF seeks to help governments reap the benefits of globalization by helping to maintain international financial stability. Our main aim is to prevent crises, by taking, or helping governments to take pre-emptive action. Resolving crises is only a secondary—though obviously important and eye-catching-part of our job.
Economic sustainability is our business. Efficient markets, at the national and international level are key to delivering the conditions necessary for the stability that we all—governments, firms and individual citizens—cherish. [They provide the environment that, ultimately, enables us all to live a life deemed worthy for ourselves and others.]
Thank you very much.
IMF EXTERNAL RELATIONS DEPARTMENT