Economic Growth in a Shrinking World: The IMF and Globalization, Address by Anne Krueger, Acting Managing Director, IMF
IMF News, June 2, 2004
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- Published: June 2, 2004
Definition of globalization ("A shrinking world")
- Globalization defined as the integration of the world economy driven by rapidly falling transport and communications costs and sharply rising trade flows due to trade liberalization.
- Technological advances in communications (phone, fax, e-mail) cited as central facilitators of globalization and of rapid information dissemination, including global protest movements.
Historical parallels and transport costs
- Nineteenth-century industrialization compared to modern globalization.
- Shipping cost example:
- 177.5 pence to ship a quarter (eight bushels) of wheat from Chicago to Liverpool in 1868; by 1902 the same shipment cost 46.5 pence.
- Price convergence example:
- In 1870, wheat was 58% more expensive in Liverpool than Chicago; by 1895 the gap had narrowed to only 18%.
Postwar surge in growth
- Bretton Woods objective quoted (Article One): "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."
- Observed growth between 1946 and 1973 exceeded nineteenth-century achievements.
- Growth averages cited:
- America: 2.4% between 1950 and 1973.
- Germany: 5% (same period).
- Japan: more than 8% (same period).
- Rapid growth in newly-industrializing Asian economies:
- Most Asian economies grew at annual rates of 7%, 8% or more between 1985 and 1994.
- China averaged GDP growth of more than 10% a year during that period.
- Country transformations:
- South Korea: per capita income rose almost sevenfold between 1962 and 1992.
- India: in the 1990s, following initial reforms, averaged GDP growth of about 6% a year.
The benefits of globalization — living standards and costs
- Health, education, and poverty outcomes:
- Infant mortality in East Asia and the Pacific dropped by nearly 60%, to 39 per 1,000 births, between the 1960s and the 1990s.
- Literacy rates worldwide: 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.
- Life expectancy in the developing world: now averages 65 years, up from 40 years half a century ago.
- Gap in life expectancy between developed and developing world narrowed from 30 years in 1950 to around 10 years today.
- Communications and transport cost declines:
- In 1930, a three minute phone call from New York to London cost $293 in 1998 prices; comparable calls are now possible for about 30 cents or less.
- Air freight (average revenue per ton-kilometer) fell by 78% between 1955 and 1996.
- Trade expansion and tariff reductions:
- 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.
- World trade at the start of the new century: worth around $8 trillion—25% of global GDP.
- World trade in 1970: $1.5 trillion in comparable dollar terms, 13% of world GDP.
The IMF's role in facilitating globalization
- The IMF viewed as promoting international financial stability to enable countries to exploit benefits of trade and technology.
- Historical roles and adaptations:
- Support for the postwar fixed-exchange-rate system and later adaptation to floating exchange rates after 1973.
- Leading role in resolving the third world debt crisis of the early 1980s.
- Institutional tools and focus:
- Article IV surveillance: regular examination of economies and economic policies of all members.
- Increased attention to debt sustainability.
- Introduction of the Financial Sector Assessment program to examine banks, financial institutions, regulation and supervision.
- Promotion of internationally established Standards and Codes and provision of technical assistance.
- IMF membership noted as 184 members.
Financial crises, capital-account crises, and learning
- Recent crises listed as examples of the 1990s–2000s:
- Mexican debt default in 1994; the Asian crisis of 1997-98; Russia in 1998; Brazil in 1999; Turkey in 2000; Argentina in 2001.
- Key lessons:
- Many recent crises were capital account crises rather than current account crises; they erupted quickly and required urgent assistance.
- Crises occur when creditors lose confidence in a country's ability to service debt—even if current policies appear sound—if creditors doubt policy sustainability.
- Importance of restoring creditor confidence to resolve crises.
- Structural reforms highlighted as necessary for stable market economies:
- Properly functioning judicial systems, enforceable property rights, accountable and transparent public institutions, efficient tax systems, modern and effective public expenditure management, adequately supervised banks.
- Corruption, secretive institutions, weak enforcement, and tax evasion undermine investor and citizen confidence.
- IMF adjustments in practice:
- Greater emphasis on debt sustainability analysis, financial sector assessments, Standards and Codes, technical assistance, and surveillance.
Globalization's opponents and policy implications
- Composition and motives of anti-globalization movement:
- Described as disparate, not united in aims or methods; includes fringe elements more accepting of property-directed violence.
- Some opponents motivated by fear of change or narrow self-interest (e.g., protection of uncompetitive industries).
- Some protesters genuinely concerned about the poor but risk impeding processes that reduce poverty.
- Policy responses recommended:
- Use evidence and reason to persuade skeptics; counter misleading statistics.
- Societal measures to assist those adversely affected: social safety nets, education, job retraining.
- Rich countries urged to lead by example with a genuine commitment to free trade.
- Recognition that developing countries are heavily protectionist and would benefit substantially from trade liberalization.
- Trade negotiation implications:
- Developing countries would receive around two thirds of the benefits of a successful conclusion to the Doha round.
- Estimated total benefits of Doha: "from several hundred billion to one trillion dollars over the next decade or so."
- IMF initiative: Trade Integration Mechanism proposed to help reassure countries fearful of short-term costs of trade liberalization.
Conclusion
- The intellectual case for globalization is strong and reinforced by sixty years of experience.
- Continued advocacy, evidence presentation, and targeted assistance are necessary to sustain and extend the benefits of globalization while mitigating adjustment costs for affected populations.
- Warning against repeating protectionist and nationalistic policies of the 1930s, which caused severe harm.
Source: Address by Anne Krueger, Acting Managing Director, International Monetary Fund, To the Pacific Council on International Policy, San Diego, June 2, 2004.