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Speeches and Papers

Globalization Facts and Consequences

by Gary Clyde Hufbauer, Peterson Institute for International Economics

Debate sponsored by Williams College
October 12, 2000
Revised March 13, 2001

© Peterson Institute for International Economics


 

  • The Long View. Between 1 million BC and 1500 AD, world per capita gross domestic product (in 1990 dollars) changed very little: from about $90 to about $140. Nearly everyone was miserable. Between 1500 and 1900, world per capita GDP increased from $140 to $680. Most people were miserable. Between 1900 and 2000, world per capita GDP rocketed from $680 to $6,500. Is this the curse of globalization? http://www.j-bradford-delong.net.
  • Who's Doing Well? Who's Not? World population is now 6.1 billion. The 0.9 billion in the OECD area live comfortably ($28,000 GDP per capita, in 2000 dollars). The 1.8 billion in East Asia ($4,600) and the 0.5 billion in Latin America ($7,200) are on their way. The 1 billion in India ($1,900) are making progress. That leaves 1.9 billion living in areas where income is low ($2,900) and often falling—the former Soviet Union, most of Africa, Iraq, Iran, Afghanistan, Pakistan, Bangladesh and Burma. World Development Report 2000-01.
  • Winners and Losers. What do 20th century losers have in common? Virtually all of them rejected international economic links, either explicitly (the old Soviet Union, the new Burma) or implicitly (most of Africa). What do 20th century winners have in common? They embraced the international economy: Japan, Korea, Taiwan, Spain, Ireland, Greece…. What do 21st century starters have in common? They are joining the international economy as fast as they can: Chile, Argentina, Brazil, Mexico, China, India, Poland….
  • National Borders Matter Less, but They Still Matter. All economic transactions—given variables such as distance, size, income levels, and language—are denser within national borders than across national borders. This is true of trade in goods and services, capital flows, price dispersion, and migration. For example, in the 1980s, trade between the Canadian provinces was 20 times as dense as trade between the provinces and US states. National savings and national investment are still highly correlated but state savings and state investment are practically uncorrelated. Free trade areas and customs unions reduce these "border effects". Trade densities between the United States, Canada and Mexico, and within the European Union, have almost doubled since the respective trade agreements were launched. Price dispersion is narrowing. Capital flows are probably increasing. Migration has not been much affected. Even so, countries (even within free trade areas) have a long way to go before inter-national economic integration approaches the degree of intra-national economic integration. John Helliwell, "Globalization: Myths, Facts, and Consequences", Benefactors Lecture, C.D. Howe Institute, October 23, 2000.
  • Gap between Rich and Poor Countries. It's not true that the gap between rich and poor countries is getting wider everywhere. Poor countries that joined the international economy have narrowed the income gap with the OECD. For example, the ratio between US and Chinese GDP per capita levels dropped from 12.5 in 1980 ($18,300 vs. $1,460) to 6.2 in 1995 ($23,000 vs. $3,700). But income gaps are widening for poor countries isolated from the world economy. The ratio between US and African GDP per capita levels rose from 12 in 1960 ($11,200 vs. $930) to 16.9 in 1995 ($23,000 vs. $1,360). Angus Maddison, Monitoring the World Economy 1820-1992.
  • Gap between Rich and Poor People. Nor is it true that growth leaves poor people behind. Based on panel data for 80 countries over 40 years, income of the poor rises one-for-one with overall growth. The effect of growth on income of the poor is no different in poor countries than rich countries. International trade benefits the poor as it does the overall economy. The rise of the top decile of United States income earners in the 1990's is not representative of the world economy. Dollar & Kraay, "Growth Is Good for the Poor", World Bank, March 2000.
  • Per Capita Income is Highly Correlated with Economic Freedom. The Heritage Foundation defines economic freedom in terms of trade, taxation, government regulation, foreign investment, and similar indicators. Many indicators are hallmarks of a pro-globalization attitude. In 2000, the average per capita income of 15 "free" countries was $21,200, while the average per capita income of 81 "mostly unfree" and "repressed" countries was $2,800. Heritage Foundation, 2001 Index of Economic Freedom, 2000.
  • Quality of Life and Income. Many measures of living quality are correlated with per capita income. Between 1950-55 and 1990-95, life expectancy rose 21 years in all less developed countries (from 40.9 to 61.9), but only 11.7 years in sub-Saharan Africa (from 35.3 to 47). Literacy rose by 30 percentage points in all less developed countries (from 40 percent to 70 percent), but Africa still has the lowest average literacy rate, about 55 percent. Richard A. Easterlin, "The Worldwide Standard of Living Since 1800", Journal of Economic Perspectives, Winter 2000. "Environmental protection rises step-by-step with income." Dasgupta et al, Environmental Regulation and Development, World Bank Working Paper 1448, 1995.
  • Quality of Life and Growth. Between the 1980s and the 1990s, the following indicators of living quality improved more in high-growth countries than moderate- or low-growth countries: poverty, infant mortality, illiteracy, life expectancy, carbon dioxide emissions, deforestation, water pollution. World Bank, The Quality of Growth, 2000. Easterlin finds a positive correlation—measured by 81 indicators—between per capita income and quality of life between 1960 and 1990. However, the correlation is uneven between decadal changes in per capita income and decadal changes in living quality. Easterlin, "Life During Growth", Journal of Economic Growth, September 1999.
  • Quality of Life and Financial Openness. Financial openness is correlated with democracy, civil liberties, and social expenditure as a percentage of GDP. World Bank, The Quality of Growth, 2000.
  • Trade and Income. The evidence is overwhelming that openness to international trade raises per capita income. One estimate suggests that, over a period of 20 years, a 10 percent rise in the ratio of trade to GDP boosts per capita income by 3.3 percent. Frankel & Rose, "Estimating the Effect of Currency Unions on Trade and Output", NBER Working Paper 7857, August 2000. Other estimates suggest that static and dynamic GDP gains could be 50 percent of policy-induced trade expansion. Francoise, McDonald and Nordstrom, "The Uruguay Round: A Global General Equilibrium Assessment", CEPR, October 1994. A sophisticated model predicts that global free trade, removing all post-Uruguay Round barriers, would lift world income by $1.9 trillion ($375 billion for Japan, $512 billion for EU and EFTA, $537 billion for the US, $371 billion for developing countries, $62 billion for Canada, Australia, New Zealand). Brown, Deardorff and Stern, "CGE Modeling and Analysis of Multilateral and Regional Negotiating Options", January 23, 2001.
  • Capital Flows and Income. The evidence is getting stronger that global capital flows likewise raise GDP. One estimate indicates that a 1 percentage point increase in the ratio of the foreign direct investment stock to GDP raises GDP in emerging nations by 0.7 percent. The gains from foreign portfolio equity holdings are equally robust. In 2000, emerging country income may have been augmented by $457 billion (7.6 percent) by foreign-owned capital stock. Hufbauer and Dobson, World Capital Markets: Challenge to the G-10, Institute for International Economics, 2001.
  • Spreading Knowledge. Why is the global economy so good for so many, especially the poor? In Ricardo's world (circa 1840), countries exchanged only goods—wine and cloth. In the global economy, a lot more moves: not only technology but also capital and skilled professionals. In 5000 BC, when everyone was isolated, it took thousands of years for useful ideas like the wheel and the spear to spread from region to region. Today, new ideas travel fast, over the Internet.
  • Losers. Does the "good things" argument mean that all exchange is good? Of course not. Consider smallpox, syphilis, AIDS, rabbits, Asian eels, African fire ants, BSE, hoof and mouth disease. . . Does the "good things" argument mean there are no economic losers? Of course not. The Industrial Revolution was no tea party. Neither is globalization. The Washington Post (24 September 2000, A34) reports the Chinese fears of Wu Dexiong of Wuhan: "You think our factory can compete with South Korean steel? What a joke. They are going to squash us." About 25 percent of displaced US manufacturing workers suffer earnings losses (in their next job) of 30 percent or more. Kletzer and Litan, "A Prescription to Relieve Worker Anxiety", Institute for International Economics, Policy Brief, March 2001.
  • Environmental Cases in the WTO. Public Citizen grossly misstates the World Trade Organization decisions in leading environmental cases. Wallach and Sforza, Whose Trade Organization, 1999. For a detailed refutation, see US Alliance for Trade Expansion, A Guide to Whose Trade Organization, November 1999, http://www.us-trade.org/WTOCover.htm. In reformulated gasoline and salmon, the WTO held that a country can apply whatever standard it wants, but when the same product is made locally as well as imported, the country can't discriminate against imports. In varietals and beef hormones, the WTO held there must be some scientific evidence for banning imports. The EU, acknowledging the "sound science" principle, is reviewing the risks posed by beef hormones.
  • Improving the WTO, the World Bank, and the International Monetary Fund. Can global economic institutions do a better job? Of course. But they cannot, at the same time, become bodies for imposing US social values on the rest of the world (environment, labor standards, human rights), and bodies that let the United States disregard international norms when its own laws are challenged.