Economic Growth in a Shrinking World: The IMF and Globalization, Address by Anne Krueger, Acting Managing Director, IMF
June 2, 2004
Address by Anne Krueger, Acting Managing Director
International Monetary Fund
To the Pacific Council on International Policy
San Diego, June 2, 2004
Good afternoon. Thank you for that introduction [Abe/David]. I am delighted to be here. It is always good to be back in California; and it is always good to have an opportunity to discuss important economic issues outside the Washington Beltway!
We're sitting here today in one of the richest parts of the richest countries in the world. California's remarkable success as a vibrant economic force tells us a great deal about the benefits that globalization can bring. America as a whole has reaped great rewards because of its liberal, market-oriented economy; because of the ability of its entrepreneurs to adapt and grow; and because of the efficient use of capital and labor, both skilled and unskilled.
California probably exemplifies these characteristics more than any other state in the Union. As a former resident myself I well know that the state's economy has had its downs as well as its ups. Governing California is no breeze! But the economy here has been impressively resilient, in no small part because of the ability of its firms and citizens to adapt to change.
In many ways, the growth of the California and the rising living standards we have witnessed here over the past few decades has mirrored what has happened to the global economy. The postwar period has seen unprecedented levels of global economic expansion. More people have become better off, and at a faster rate, than ever before. The quality of life, measured in a range of ways that I will mention in more detail in a moment, has improved for almost everybody on the planet compared with sixty years ago.
All this makes the rise of the modern anti-globalization movement such a puzzling phenomenon. The movement rose to prominence just a few hundred miles north of here, at the ministerial meeting of the World Trade Organization (WTO) in Seattle, in 1999. The well-organized protesters appeared to succeed beyond their wildest dreams when that meeting was, in effect, abandoned. I use the word "appeared" advisedly, since there were, in fact, substantive reasons for the collapse of the Seattle meeting that had little direct connection with the work of the protesters.
Whatever the facts of the matter, though, Seattle gave a significant boost to the protesters, who have subsequently—and rather ironically—become a global movement.
The modern-day opponents of globalization are a disparate group. They are not united in their aims, nor, I think, in their understanding of the global economy. They are not even united in their methods: some at the fringes of the movement are clearly less inhibited about the use of violence, at least against property, than most protesters whose instincts are completely peaceful.
Yet for all the hassle they cause the organizers of international meetings—none of which is without its security perimeter these days—I think the protesters have fulfilled an important function. They have forced those of us who believe that globalization is an unequivocally positive development to collect our thoughts and marshal our evidence. Clarity is always a good thing—unless you are a protester, perhaps; and complacency is always dangerous.
So I want today to outline why I think globalization is undoubtedly a "good thing". I want to illustrate the benefits it has already brought, and will in future bring to the global economy. And I want to say something about the IMF's role in this process.
A shrinking world
Let me start by defining what I mean by globalization. At its broadest, we are talking about the integration of the world economy. I used the word shrinking in the title of my talk. That is what, in a real sense, globalization means. We are talking about a world benefiting from rapidly falling transport and communications costs, thanks to technological progress, combined with sharply rising trade flows thanks to trade liberalization. These forces have led increasingly to world markets driving down prices to consumers and constituting a major engine of economic growth.
The factors contributing to this much more integrated global network go beyond transport costs and tariffs, important as they have been. Advances in communications technology have been breathtaking. The ability to do business by phone, fax, and e-mail, regardless of location should not be underestimated as a force in the process of globalization. Indeed, the same technological advances have facilitated global protest: those opposed to globalization have not been slow to exploit their ability to communicate and disseminate information rapidly.
Globalization is hardly a new phenomenon, of course. Thousands of years ago, the trading nations of the Mediterranean knew what globalization was, even if they would not recognize the term. Marco Polo was another of globalization's pioneers.
But the period that has most parallels with today is that of intense industrialization in the nineteenth century. The industrial revolution that had started in Britain in the eighteenth century had spread rapidly across Europe and America. Economic growth seemed spectacular—and was by the then historical standards—fuelled by technological advances in transport, communications and production capacity.
Such progress brought dramatic falls in costs. Look at some of the figures. It cost 177.5 pence to ship a quarter (eight bushels) of wheat from Chicago to Liverpool in 1868; by 1902, that same shipment would cost barely one fourth of that (46.5 pence). International trade rose dramatically, helped by these falling transport cost as well as tariff reductions. These factors combined to even out many price differences: in 1870, for example, wheat was 58% more expensive in Liverpool than Chicago, but by 1895 the gap had narrowed to only 18%.
The process of rapid globalization started in the nineteenth century ground to a sudden halt after the First World War. The upheavals of that war, and the political chaos in much of Europe undermined the international framework that had encouraged international trade and capital flows and so helped accelerate the transfer of technology. Even before the collapse of confidence at the end of the 1920s, tensions among the industrial countries had hit trade and capital flows.
The depression, of course, brought in its wake the damaging unilateralist policies that the advocates of free trade fought hard to reverse. As tariffs rose, trade flows contracted, and international capital flows shrank. Protectionists, always masters of self-delusion, blamed these policies on the consequences of economic contraction. The truth is quite the opposite. Curbing the mobility of goods and capital hampered economic recovery and compounded the problems of collapsing investor confidence and mis-guided fiscal and monetary policies.
The postwar surge in growth
The architects of the postwar international economic system were absolutely determined to avoid a repetition of the interwar years. The founders of the Bretton Woods institutions wanted to establish a stable international financial order because they recognized that economic prosperity needed a liberal expansionary trading system, which could not happen in the absence of a stable financial system. It is interesting to read the IMF's original articles of agreement—signed sixty years ago. Let me quote from Article One that says one of the Fund's principal aims should be to:
facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income...as primary objectives of economic policy.
Alongside international financial reform came reform of the trading system. The establishment of the General Agreement on Tariffs and Trade (GATT) was based on the principle of gradual liberalization of trade, through the elimination of non-tariff-barriers and reductions in tariffs. The IMF's role in this was to help countries take full advantage of this liberalization by providing balance of payments support when needed.
The results of this new framework exceeded expectations—the postwar period was truly a golden age for much of the world economy. Between 1946 and 1973 we saw growth rates worldwide that made the achievements of the nineteenth century seem modest. America saw growth averaging 2.4% between 1950 and 1973, Germany 5%, and Japan more than 8%. Inflation was a little higher than we've recently grown used to—but only a little—while unemployment was much lower than even America has recently managed. Even developing countries achieved rising per capita incomes at rates far in excess of those realized historically.
Golden age it may have been, but the benefits of globalization had only begun in 1973. Impressive though this performance seemed at the time, it was only a foretaste of what was to come for the newly-industrializing countries. Following the success of Korea and the other original `tigers', most of the Asian economies grew at annual rates of 7%, 8% or more between 1985 and 1994, for example. China averaged GDP growth of more than 10% a year during that period.
Some economies have been transformed in the post war period. We're all familiar with the rapid growth of China as a force in the global economy. But look, too, at South Korea: its per capita income rose almost sevenfold between 1962 and 1992. The third poorest country in Asia became one of the region's richest. Even India, slow at first to engage with the world economy, has recently enjoyed very good economic performance: in the 1990s, following the first wave of economic reforms, it averaged GDP growth of about 6% a year, making it one of the rapidly-growing of all developing economies in that period.
The benefits of globalization
It's clear that the process of globalization—rapid integration of the world economy—has delivered impressive results. It has helped most countries enjoy greatly improved macroeconomic performance. And that has translated into better living standards—for almost everyone, and almost everywhere.
Look at some of the improvements we can see in the quality of people's lives. Infant mortality rates have declined sharply. In East Asia and the Pacific, for example, they dropped by nearly 60%, to 39 per 1,000 births, between the 1960s and the 1990s. Literacy rates have risen worldwide,to around 80% for men and 70% for women. In India, the proportion of the population living in poverty dropped by about one third during the 1990s.
Perhaps most striking of all is the improvement in life expectancy in the developing world. It now averages 65 years, up from 40 years half a century ago. And the gap between life expectancy in the developed and developing world has narrowed, from 30 years in 1950 to around 10 years today, because life expectancy has increased more in most poor countries.
Just as in the nineteenth century, technology is part of the explanation for the postwar surge in growth. So is the rapidly falling cost of transport and communications. In 1930, a three minute phone call from New York to London cost $293 in 1998 prices. It's now possible to make the same call for about 30 cents or less. And of course, many of the latest communications technologies—the internet, for instance—have no historical parallel. Transportation costs have plummeted too. The cost of air freight (as measured by average revenue per ton-kilometer) fell by 78% between 1955 and 1996.
But postwar growth was certainly spurred in great part by the rapid growth of world trade, itself the result of the reduction of tariff and non-tariff barriers: average tariffs on manufactured imports were over 40 percent in l947 and less than 5 percent by the late l990s in the European Union, the United States, and Japan. They had also fallen dramatically in many other countries. At the start of this new century, world trade was worth around $8 trillion—25% of global GDP. That's up from $1.5 trillion, in comparable dollar terms, in 1970, 13% of world GDP.
The IMF's role
And the multilateral framework established at the end of the Second World War has played an important role in facilitating the growth of trade and, I believe, in helping countries exploit the benefits of technological advance. I noted earlier that the link between global prosperity and the growth of international trade was recognized by those drafting the IMF's articles. They also realized that a sound international financial system is crucial in fostering trade growth: thanks to their foresight, that is what the world has enjoyed in the past 60 years.
The period between 1946 and 1973 was not without its ups and downs. But the system of fixed exchange rates established at Bretton Woods served the world economy well for many years. The switch to floating exchange rates among the industrial countries from 1973 onwards was far more successful than many anticipated, and has also contributed to sustained economic growth. The oil price shocks of the mid and late 1970s were disruptive, of course: but much less than they might have been, because of the flexibility that floating exchange rates provided.
The oil shocks are sometimes seen as a turning point in postwar economic history. In fact, the rise in oil prices was related to the worldwide surge in inflation in the late 1960s and early 1970s. The jump in oil prices certainly brought important changes in the nature of the Fund's work, because it was in this period, and after, that developing countries became the IMF's biggest customers.
The oil producing countries suddenly found themselves awash with cash surpluses in need of a home. As oil revenues were recycled, Western commercial banks lent aggressively to oil-importing developing countries, usually on a floating rate basis. With hindsight, the result was predictable,many countries were unable to service their debts as interest rates rose in the early 1980s as part of the drive to curb inflation in the industrial countries. The IMF played a leading role in helping resolve what became known as the third world debt crisis of the early 1980s.
Financial crises have always been part of the Fund's work; they still are. The challenge for the IMF is to do as much as possible to prevent them but, once crises occur, to resolve them as smoothly as possible. Of course, even if the Fund were always right in detecting trouble ahead, governments would not necessarily follow the advice on offer.
Failure to heed warnings by the Fund will inevitably lead to crisis in some cases. Crises in individual countries have been frequent: but they have rarely brought widespread disruption to the global financial system. I come back to my point: that the multilateral framework put in place in the 1940s has served the international economy well.
The most dramatic change, of course, was the collapse of the Soviet empire. The political upheaval was momentous and altered the character of international relations. It brought us a large number of new members,all urgently needing our help. They needed financial assistance, of course. But they also needed advice on how to develop normally functioning market economies. We, along with other agencies and governments, tried to provide that advice.
In the early days, the learning curve was steep for everybody concerned: the sort of economic transformation needed had never been attempted before. But it is perhaps a measure of how far all those involved succeeded that many of the countries that for decades had been completely outside the international financial system have recently joined the European Union.
The former Comecon countries weren't the IMF's only pre-occupation during the nineties. Some of the biggest financial crises the Fund has ever dealt with have erupted in the past decade or so. . The Mexican debt default in 1994; the Asian crisis of 1997-98, Russia in 1998, Brazil in 1999,Turkey in 2000 and, most recently, Argentina in 2001: these all involved enormous upheaval for the countries concerned, for the IMF and, to a great extent than usual, for the international financial system.
These crises were different in nature as well as scale. The most significant factor was that they were capital account crises, rather than the current account crises that the IMF had been used to handling. They erupted much more quickly, and the provision of assistance was often much more urgently needed. Many of us belatedly realized that financial market liberalization brought with it the need always to be conscious of the markets' judgment. At the time, that judgment can sometimes seem harsh; it can certainly be unforgiving. But we and our member countries are learning to live with and benefit from the discipline that the market can impart.
A learning process
I noted that capital account crises can occur very rapidly and require an immediate response. Such crises occur because the holders of a country's debt lose confidence in its ability to service that debt. In principle, a crisis can occur even if the country's current macroeconomic policies are sound,if the creditors believe such policies will not be sustained. When there are real,and justified,doubts about a country's economic policy, these can erupt into a full-blown crisis with astonishing speed. The only effective response is to restore creditors' confidence that a country will be able to meet its debt obligations in full. That, I hardly need add, is easier said than done.
So the past decade or so has been a very steep learning curve: for the IMF, for economists in general, and for governments. We have been trying to work out how best to detect when a crisis is imminent, how to respond to the warning signs,and, of course, how to handle crises when they do occur. Our conclusions have led us to shift the focus of much of our work: though I should point out that, for the IMF, the learning process is continuous because the world economy is always evolving and we adapt to new information and developments.
We also recognize how important debt sustainability is in judging whether a country has sound economic policies that will deliver lasting economic growth. But we have also learned that many more fundamental reforms are needed if emerging market countries are to enjoy greater economic stability. Our experience in the former Communist economies reinforced our view that markets cannot work at all well without properly functioning judicial systems, enforceable property rights, accountable and transparent public institutions, efficient tax systems, modern and effective public expenditure management. Their absence impedes everyday economic activity.
Investors get nervous if they cannot be sure they will get legal protection in the event of, for example, arguments about property ownership. If tax evasion is the norm, ordinary citizens have no incentive to pay their taxes, and the government's public finances remain precarious. Inadequately supervised banks can undermine confidence in the domestic financial system. Secretive public institutions do not inspire the confidence of citizens or foreign investors. Bribery and corruption do not usually go hand in hand with prosperous well-functioning economies.
All these issues are now an essential part of the Fund's work. We regularly examine the economies and economic policies of all our members,in our Article IV surveillance work. As part of that process, we now pay far more attention to debt sustainability. We have introduced what we call the Financial Sector Assessment program, aimed at looking more closely at banks and other financial institutions, and at how they are regulated and supervised. We also help countries adopt internationally established Standards and Codes. We provide technical assistance to countries that need help to implement some of the reforms I've mentioned. And, of course, we continue to provide advice on macroeconomic policy.
The Fund, then, is a facilitator of globalization. By promoting international financial stability, and by encouraging our 184 members to pursue sound macroeconomic policies we aim to enable everybody to enjoy the benefits that globalization brings.
Yet if globalization is so self-evidently beneficial, why are the protesters so vehemently opposed to it? I pointed out earlier that globalization is not a new phenomenon; and nor is opposition to it. Some of this reflects a fear of change itself. Some of it, I think, reflects a clear appreciation of narrow self-interest. The nineteenth century Luddites in Britain had logic on their side, to the extent that their jobs were indeed under threat. But the progress they opposed offered much larger benefits to society as a whole. A similar pursuit of self-interest is clearly identifiable today in opposition to cheap imports from uncompetitive industries. Yet competition drives costs down, encourages efficiency and benefits consumers.
Some of the anti-globalization protesters are, I think, simply misguided. They are genuinely concerned about the poor and about the plight of poor countries. But they are, ironically, seeking to impede the process that can best help the poor. The evidence is clear: sustained and rapid economic growth is the best means of reducing poverty and raising living standards. Look at the examples of growth and rising living standards I cited earlier. The improvements I described did not happen in spite of globalization but because of it.
Of course at the margin there will always be those who lose out, whose job disappears without being immediately replaced by another. We need to do more as societies to help those adversely affected to adjust. That is where social safety nets, education and job retraining opportunities come in.
We also need to do more to encourage governments in poor countries to seize the benefits on offer. There is much talk of the protectionist behavior of the industrial countries. I do think the rich world should do more to lead by example—to demonstrate a genuine commitment to free trade.
But I am constantly surprised by how few people recognize that developing countries are heavily protectionist, and at great cost to themselves. Trade barriers between developing countries are much higher than those imposed by rich countries on poor ones.
Developing countries would be the principal beneficiaries of a successful conclusion to the Doha round of trade talks now under way. Around two thirds of the benefits would accrue to them. When you consider that estimates of the total benefits range from several hundred billion to one trillion dollars over the next decade or so, you begin to realize how much is potentially at stake.
Here, too, the IMF is seeking to do its part to promote globalization. I was in Geneva two weeks ago to explain to members of the WTO General Council how we hope a new initiative, the Trade Integration Mechanism, will help reassure those countries afraid of the short-term costs of trade liberalization. The benefits of further liberalization will be overwhelmingly positive, of that we have no doubt. But some countries might need time, and assistance to adjust, and we don't want a successful outcome put at risk because of their anxieties.
The intellectual case for globalization is a powerful one indeed. And the experience of countries in the past sixty years reinforces that case. We will never convince those who see protest as an end in itself, or as a chance to disrupt daily life for the great majority of people. But many protesters are blinded by misleading statistics promulgated by those who have narrow self-interest at heart. We should seek to persuade the skeptics by reason and by more effective deployment of the evidence in our armory.
Few people now have first-hand experience of how much harm was inflicted by the protectionist and nationalistic economic policies of the 1930s. We cannot afford to risk a repeat of that damaging period in order to understand how harmful a halt to globalization would be.