Globalization by the Book — Keynote Address (Prakash Loungani, February 5, 2007)

IMF News, February 5, 2007

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Published: February 5, 2007

Definition and framing

Globalization defined as an extension of economic freedoms beyond national boundaries.
Five fundamental freedoms of globalization:
- Freedom to cross borders (immigration).
- Freedom to sell and buy across countries (international trade).
- Freedom to seek capital abroad and invest savings abroad (capital mobility/financial globalization).
- Spread of scientific knowledge and technology.
- Diffusion of ideas and culture (including cuisines).

Historical context and trajectory

Pre-World War I globalization: extensive cross-border commerce (John Maynard Keynes quote describing global delivery).
Reversal triggered by events beginning June 28, 1914; partial recovery over the past 60 years.
Since 1990, substantial increase in capital mobility (though by some measures not back to pre-World War I levels).
Immigration for the U.S. is “just getting back to prewar levels.”
Political diffusion: electoral democracies now represent 120 of the 192 or so existing countries, constituting nearly 60 percent of the world’s population.
Shocks to globalization over recent decades:
- Mid-1990s financial crises disrupted capital markets; lessons learned about volatile capital flows.
- September 11, 2001 posed a severe challenge, but international integration has proven resilient.
- The global economy recorded the fastest five-year pace of growth in recent decades.

Material benefits (empirical findings and statistics)

Higher incomes and poverty reduction:
- Average incomes in the United States are now about $40,000 a year, a “huge multiple” of average Chinese or Indian incomes (as noted in the address).
- The number of people living in abject poverty has fallen by nearly 500 million.
- There has been greater reduction in poverty over the last 50 years than in the previous 500 years.
Health and life expectancy:
- From Roman times through early 19th century, average human life expectancy was less than 30 years.
- In 1950, average life expectancy in developing nations was just 40 years.
- Today, average life expectancy in the developing world has risen to 65 years; in the developed world it is about 75 years.
- The life-expectancy gap used to be 30 years but is only 10 years today.
Inequality:
- Global inequality has declined when treating every individual as a citizen of Planet Earth (much driven by China and India’s income gains).
- Within-country inequality patterns vary; in some countries (e.g., United States) income inequality has increased over the last 30 years — consensus attributes much of this to technology rather than trade.
Environment:
- Historical evidence that some of the worst environmental abuses occurred under central planning in the former Soviet Union.
- In market economies, once average incomes cross a threshold of about $3000 to $4000, rising incomes and cleaner environments tend to go hand in hand.
- Technological progress and environmental advocacy enable some countries to begin clean-up at lower income thresholds than earlier advanced economies.

Social and moral benefits

Globalization associated with greater tolerance and improved moral dimensions of society as living standards rise (Ben Friedman’s thesis).
Market interactions foster cross-cultural engagement (Voltaire anecdote about the London Stock Exchange).
Access to information and knowledge reduces isolation in the developing world and increases opportunity (Joseph Stiglitz quote paraphrase).
Competitive global pressures can discipline poor governance and prompt policy change (Martin Wolf, Tom Friedman examples including IT industry pressure in Bangalore).

Concerns and criticisms (three main worries)

Job churn and displacement:
- Globalization contributes to job turnover, but technological progress is a much larger driver.
Unequal distribution of gains:
- Globalization creates many winners but also many who lose or do not share benefits; displaced workers need support and retraining.
- Policy prescription highlighted: “Protect people, not jobs.”
- Gordon Brown’s formulation: focus on “lifetime employability” rather than lifetime employment.
Weakness or absence of supporting global institutions and rules:
- Effective institutions and broadly supported rules are needed to underpin cross-border economic freedoms (analogy to U.S. inter-state transactions being supported by national institutions).

Political dynamics and outlook

Globalization is continually “put to the vote” through consumer, business, and electoral choices.
Recent U.S. electoral history cited as supportive of globalization’s political durability:
- Ross Perot’s “giant sucking sound” rhetoric did not prevail in presidential elections.
- Protectionist or anti-immigration candidates (e.g., Richard Gephardt, Pat Buchanan) failed to gain decisive political traction in primaries and elections cited.
- 2004: John Kerry dropped rhetoric about “Benedict Arnold CEOs” amid criticism.
Globalization’s future depends on democratic choices worldwide; people should be free to choose globalization and the pace at which they wish to globalize.

Policy implications and recommendations

Mitigate adjustment costs for displaced workers via unemployment benefits and retraining to support “lifetime employability.”
Strengthen institutions and rules that underpin cross-border economic freedoms to ensure broad-based support and effective governance.
Leverage technological diffusion and knowledge transfer to accelerate poverty reduction, health gains, and environmental improvements.
Recognize and respond to legitimate criticisms by making globalization’s benefits more broadly shared.

Source: Globalization by the Book, Keynote Address Given at the American Association of Publishers, by Prakash Loungani, Chief, Policy Communications, External Relations Department, International Monetary Fund