I S S U E 0 2 / 0 8
Other Resources
IMF World Economic Outlook
presents economic analysis at
the global level, in major county
groups, and in many individual
countries, reviewing global
macroeconomic developments,
forecasting growth, and citing
risks.
IMF Global Financial Stability
Report provides an assessment
of global financial markets,
highlighting current potential
risks to financial market stability.
Globalization, Financial Mar-
kets, and Fiscal Policy (IMF
Policy Paper) describes how
fiscal policy can contribute
to realizing the benefits of
two important and ongoing
developments: globalization and
financial deepening.
These resources are available
online at www.imf.org.
Issues Briefs provide nontech-
nical discussions of policy
issues and serve as a source of
information to the public and
as a contribution to debate on
issues of topical interest.
M A Y 2 0 0 8
Globalization: A Brief Overview
By IMF Staff
A perennial challenge facing all of the world’s countries, regardless of their level of economic
development, is achieving financial stability, economic growth, and higher living standards.
There are many different paths that can be taken to achieve these objectives, and every coun-
try’s path will be different given the distinctive nature of national economies and political
systems. The ingredients contributing to China’s high growth rate over the past two decades
have, for example, been very different from those that have contributed to high growth in
countries as varied as Malaysia and Malta.
Yet, based on experiences throughout the world, several basic principles seem
to underpin greater prosperity. These include investment (particularly foreign
direct investment), the spread of technology, strong institutions, sound macroeco-
nomic policies, an educated workforce, and the existence of a market economy.
Furthermore, a common denominator which appears to link nearly all high-
growth countries together is their participation in, and integration with, the
global economy.
There is substantial evidence, from countries of different sizes and different
regions, that as countries “globalize” their citizens benefit, in the form of access
to a wider variety of goods and services, lower prices, more and better-paying
jobs, improved health, and higher overall living standards. It is probably no mere
coincidence that over the past 20 years, as a number of countries have become
more open to global economic forces, the percentage of the developing world
living in extreme poverty—defined as living on less than $1 per day—has been
cut in half.
As much as has been achieved in connection with globalization, there is
much more to be done. Regional disparities persist: while poverty fell in East
and South Asia, it actually rose in sub-Saharan Africa. The UN’s Human Develop-
ment Report notes there are still around 1 billion people surviving on less than
$1 per day—with 2.6 billion living on less than $2 per day. Proponents of global-
ization argue that this is not because of too much globalization, but rather too
little. And the biggest threat to continuing to raise living standards throughout
the world is not that globalization will succeed but that it will fail. It is the people
of developing economies who have the greatest need for globalization, as it
provides them with the opportunities that come with being part of the
world economy.
These opportunities are not without risks—such as those arising from volatile
capital movements. The International Monetary Fund works to help economies
Issues Brief
manage or reduce these risks, through economic analysis
and policy advice and through technical assistance in areas
such as macroeconomic policy, financial sector sustainability,
and the exchange-rate system.
The risks are not a reason to reverse direction, but for all
concerned—in developing and advanced countries, among
both investors and recipients—to embrace policy changes
to build strong economies and a stronger world financial
system that will produce more rapid growth and ensure that
poverty is reduced.
The following is a brief overview to help guide anyone
interested in gaining a better understanding of the many
issues associated with globalization.
What is Globalization?
Economic “globalization” is a historical process, the result
of human innovation and technological progress. It refers
to the increasing integration of economies around the
world, particularly through the movement of goods, ser-
vices, and capital across borders. The term sometimes also
refers to the movement of people (labor) and knowledge
(technology) across international borders. There are also
broader cultural, political, and environmental dimensions
of globalization.
The term “globalization” began to be used more com-
monly in the 1980s, reflecting technological advances
that made it easier and quicker to complete international
transactions—both trade and financial flows. It refers to
an extension beyond national borders of the same market
forces that have operated for centuries at all levels of human
economic activity—village markets, urban industries, or
financial centers.
There are countless indicators that illustrate how goods,
capital, and people, have become more globalized.
• The value of trade (goods and services) as a percentage
of world GDP increased from 42.1 percent in 1980 to
62.1 percent in 2007.
• Foreign direct investment increased from 6.5 percent of
world GDP in 1980 to 31.8 percent in 2006.
2
M AY 2 0 0 8
• The stock of international claims (primarily bank loans),
as a percentage of world GDP, increased from roughly
10 percent in 1980 to 48 percent in 2006.1
• The number of minutes spent on cross-border telephone
calls, on a per-capita basis, increased from 7.3 in 1991 to
28.8 in 2006.2
• The number of foreign workers has increased from
78 million people (2.4 percent of the world population)
in 1965 to 191 million people (3.0 percent of the world
population) in 2005.
The growth in global markets has helped to promote ef-
ficiency through competition and the division of labor—the
specialization that allows people and economies to focus
on what they do best. Global markets also offer greater
opportunity for people to tap into more diversified and
larger markets around the world. It means that they can
have access to more capital, technology, cheaper imports,
and larger export markets. But markets do not necessarily
ensure that the benefits of increased efficiency are shared
by all. Countries must be prepared to embrace the policies
needed, and, in the case of the poorest countries, may need
the support of the international community as they do so.
The broad reach of globalization easily extends to daily
choices of personal, economic, and political life. For ex-
ample, greater access to modern technologies, in the world
of health care, could make the difference between life and
death. In the world of communications, it would facilitate
commerce and education, and allow access to independent
media. Globalization can also create a framework for coop-
eration among nations on a range of non-economic issues
that have cross-border implications, such as immigration,
the environment, and legal issues. At the same time, the
influx of foreign goods, services, and capital into a country
can create incentives and demands for strengthening the
education system, as a country’s citizens recognize the com-
petitive challenge before them.
Perhaps more importantly, globalization implies that
information and knowledge get dispersed and shared.
1
BIS Quarterly Review, Bank for International Settlements (December
2006), p. 29.
2
IMF and International Telecommunications Union data.
Issues Brief M AY 2 0 0 8

Innovators—be they in business or government—can draw
on ideas that have been successfully implemented in one
jurisdiction and tailor them to suit their own jurisdiction.
Just as important, they can avoid the ideas that have a
clear track record of failure. Joseph Stiglitz, a Nobel laureate
and frequent critic of globalization, has nonetheless ob-
served that globalization “has reduced the sense of isolation
felt in much of the developing world and has given many
people in the developing world access to knowledge well
beyond the reach of even the wealthiest in any country a
century ago.”3
International Trade
A core element of globalization is the expansion of world
trade through the elimination or reduction of trade barri-
ers, such as import tariffs. Greater imports offer consumers
a wider variety of goods at lower prices, while providing
strong incentives for domestic industries to remain com-
petitive. Exports, often a source of economic growth for
developing nations, stimulate job creation as industries sell
beyond their borders. More generally, trade enhances na-
tional competitiveness by driving workers to focus on those
vocations where they, and their country, have a competitive
Trade in Goods and Services
(Percent of regional GDP)
140
Sub-Saharan Africa
CEE & CIS
120 Developing Asia
Middle East and North Africa
100 Latin America
Advanced economies
80
60
40
advantage. Trade promotes economic resilience and flexibil-
ity, as higher imports help to offset adverse domestic supply
shocks. Greater openness can also stimulate foreign invest-
ment, which would be a source of employment for the local
workforce and could bring along new technologies—thus
promoting higher productivity.
Restricting international trade—that is, engaging in pro-
tectionism— generates adverse consequences for a country
that undertakes such a policy. For example, tariffs raise the
prices of imported goods, harming consumers, many of
which may be poor. Protectionism also tends to reward
concentrated, well-organized and politically-connected
groups, at the expense of those whose interests may be
more diffuse (such as consumers). It also reduces the variety
of goods available and generates inefficiency by reducing
competition and encouraging resources to flow into pro-
tected sectors.
Developing countries can benefit from an expansion in
international trade. Ernesto Zedillo, the former president
of Mexico, has observed that, “In every case where a poor
nation has significantly overcome its poverty, this has been
achieved while engaging in production for export markets
and opening itself to the influx of foreign goods, invest-
ment, and technology.”4 And the trend is clear. In the late
1980s, many developing countries began to dismantle
their barriers to international trade, as a result of poor
economic performance under protectionist polices and
various economic crises. In the 1990s, many former Eastern
bloc countries integrated into the global trading system
and developing Asia—one of the most closed regions
to trade in 1980—progressively dismantled barriers to
trade. Overall, while the average tariff rate applied by devel-
oping countries is higher than that applied by advanced
countries, it has declined significantly over the last
several decades.

20

0
1970 73 76 79 82 85 88 91 94 97 2000 03 06

4
Remarks by former President of Mexico Ernesto Zedillo at the
3
Joseph Stiglitz (2003), Globalization and Its Discontents (New York: plenary session of the World Economic Forum, Davos, Switzerland,
W.W. Norton & Company), p. 4. January 28, 2000.

3
Issues Brief M AY 2 0 0 8

Cross-Border Assets and Liabilities

(Percent GDP)
1990 1
2006
300 300
FDI FDI
250 Equity 250 Equity
200 Debt 200 Debt
150
Reserves 150
Reserves
100 100
50 50
0 0
-50 -50
-100 -100
-150 -150
-200 -200
-250 -250
Latin America Sub-Saharan Central and Commonwealth Developing Middle East Newly Advanced Latin America Sub-Saharan Central and Commonwealth Developing Middle East Newly Advanced
and the Africa Eastern of Independent Asia and Industrialized Economies and the Africa Eastern of Independent Asia and Industrialized Economies
Caribbean Europe States North Africa Asian Caribbean Europe States North Africa Asian
Economies Economies
1
Data series begin in 1995 for Central and Eastern Europe and the Commonwealth of Independent States

The implications of globalized financial markets ization.5 The analysis of the past 30 years of data reveals two
main lessons for countries to consider.
The world’s financial markets have experienced a dramatic
increase in globalization in recent years. Global capital flows First, the findings support the view that countries must
fluctuated between 2 and 6 percent of world GDP during carefully weigh the risks and benefits of unfettered capital
the period 1980–95, but since then they have risen to flows. The evidence points to largely unambiguous gains
14.8 percent of GDP, and in 2006 they totaled $7.2 trillion, from financial integration for advanced economies. In
more than tripling since 1995. The most rapid increase has emerging and developing countries, certain factors are likely
been experienced by advanced economies, but emerging to influence the effect of financial globalization on eco-
markets and developing countries have also become more nomic volatility and growth: countries with well-developed
financially integrated. As countries have strengthened their financial sectors, strong institutions, sounds macroeconomic
capital markets they have attracted more investment capital, policies, and substantial trade openness are more likely to
which can enable a broader entrepreneurial class to devel- gain from financial liberalization and less likely to risk in-
op, facilitate a more efficient allocation of capital, encour- creased macroeconomic volatility and to experience finan-
age international risk sharing, and foster economic growth. cial crises. For example, well-developed financial markets
help moderate boom-bust cycles that can be triggered by
Yet there is an energetic debate underway, among lead- surges and sudden stops in international capital flows, while
ing academics and policy experts, on the precise impact of strong domestic institutions and sound macroeconomic poli-
financial globalization. Some see it as a catalyst for economic cies help attract “good” capital, such as portfolio equity flows
growth and stability. Others see it as injecting dangerous— and FDI.
and often costly—volatility into the economies of growing
middle-income countries. The second lesson to be drawn from the study is that
there are also costs associated with being overly cautious
A recent paper by the IMF’s Research Department takes about opening to capital flows. These costs include lower in-
stock of what is known about the effects of financial global-

5
Reaping the Benefits of Financial Globalization, IMF Discussion Paper,
(http://www.imf.org/external/np/res/docs/2007/0607.htm).

4
Issues Brief M AY 2 0 0 8

ternational trade, higher investment costs for firms, poorer
economic incentives, and additional administrative/moni-
toring costs. Opening up to foreign investment may encour-
age changes in the domestic economy that eliminate these
distortions and help foster growth.
Looking forward, the main policy lesson that can be
drawn from these results is that capital account liberaliza-
tion should be pursued as part of a broader reform package
encompassing a country’s macroeconomic policy frame-
work, domestic financial system, and prudential regulation.
Moreover, long-term, non-debt-creating flows, such as FDI,
should be liberalized before short-term, debt-creating in-
flows. Countries should still weigh the possible risks involved
in opening up to capital flows against the efficiency costs
associated with controls, but under certain conditions (such
as good institutions, sound domestic and foreign policies,
and developed financial markets) the benefits from financial
globalization are likely to outweigh the risks.
Globalization, income inequality, and poverty
As some countries have embraced globalization, and expe-
rienced significant income increases, other countries that
have rejected globalization, or embraced it only tepidly,
have fallen behind. A similar phenomenon is at work within
countries—some people have, inevitably, been bigger ben-
eficiaries of globalization than others.
Over the past two decades, income inequality has risen
in most regions and countries. At the same time, per capita
incomes have risen across virtually all regions for even the
poorest segments of populations, indicating that the poor
are better off in an absolute sense during this phase of glo-
balization, although incomes for the relatively well off have
increased at a faster pace. Consumption data from groups of
developing countries reveal the striking inequality that exists
between the richest and the poorest in populations across
different regions.
As discussed in the October 2007 issue of the World Eco-
nomic Outlook, one must keep in mind that there are many
sources of inequality. Contrary to popular belief, increased
trade globalization is associated with a decline in inequal-
ity. The spread of technological advances and increased
financial globalization—and foreign direct investment in
particular—have instead contributed more to the recent
rise in inequality by raising the demand for skilled labor
and increasing the returns to skills in both developed and
developing countries. Hence, while everyone benefits, those
with skills benefit more.

Share of Poorest and Richest Quintiles in National Consumption

Individual countries’ income distribution data are aggregated to create regional income distribution data, so both inter- and intra-country inequality are
assessed. The data use purchasing power parities based on 2005 prices and cover 93 percent of developing countries’ total population.
80

70 Richest 20%

60
Poorest 20%

50

40

30

20

10

0
Europe and Central Asia South Asia East Asia and Pacific Middle East and North Africa Latin America and the Caribbean Sub-Saharan Africa

Source: World Bank

5
Issues Brief
It is important to ensure that the gains from globaliza-
tion are more broadly shared across the population. To this
effect, reforms to strengthen education and training would
help ensure that workers have the appropriate skills for
the evolving global economy. Policies that broaden the
access of finance to the poor would also help, as would
further trade liberalization that boosts agricultural exports
from developing countries. Additional programs may in-
clude providing adequate income support to cushion,
but not obstruct, the process of change, and also making
health care less dependent on continued employment
and increasing the portability of pension benefits in some
countries.
Equally important, globalization should not be rejected
because its impact has left some people unemployed. The
dislocation may be a function of forces that have little to do
with globalization and more to do with inevitable technolog-
ical progress. And, the number of people who “lose” under
globalization is likely to be outweighed by the number of
people who “win.”
Martin Wolf, the Financial Times columnist, highlights
one of the fundamental contradictions inherent in those
who bemoan inequality, pointing out that this charge
amounts to arguing “that it would be better for everybody to
be equally poor than for some to become significantly better
off, even if, in the long run, this will almost certainly lead to
advances for everybody.”6
Indeed, globalization has helped to deliver extraordinary
progress for people living in developing nations. One of
the most authoritative studies of the subject has been car-
ried out by World Bank economists David Dollar and Aart
Kraay.7 They concluded that since 1980, globalization has
contributed to a reduction in poverty as well as a reduction
in global income inequality. They found that in “globaliz-
ing” countries in the developing world, income per person
grew three-and-a-half times faster than in “non-globalizing”
countries, during the 1990s. In general, they noted, “higher
growth rates in globalizing developing countries have trans-
6
Martin Wolf (2005), Why Globalization Works (New Haven and Lon-
don: Yale University Press), p. 157.
7
“Growth is Good for the Poor” Journal of Economic Growth (2002), and
“Trade, Growth, and Poverty”, The Economic Journal (2004).
6
M AY 2 0 0 8
lated into higher incomes for the poor.” Dollar and Kraay
also found that in virtually all events in which a country
experienced growth at a rate of two percent or more, the
income of the poor rose.
Critics point to those parts of the world that have
achieved few gains during this period and highlight it as
a failure of globalization. But that is to misdiagnose the
problem. While serving as Secretary-General of the United
Nations, Kofi Annan pointed out that “the main losers in
today’s very unequal world are not those who are too much
exposed to globalization. They are those who have been
left out.”8 A recent BBC World Service poll found that on
average 64 percent of those polled—in 27 out of 34 coun-
tries—held the view that the benefits and burdens of “the
economic developments of the last few years” have not been
shared fairly. In developed countries, those who have this
view of unfairness are more likely to say that globalization is
growing too quickly. In contrast, in some developing coun-
tries, those who perceive such unfairness are more likely to
say globalization is proceeding too slowly.
As individuals and institutions work to raise living stan-
dards throughout the world, it will be critically important
to create a climate that enables these countries to realize
maximum benefits from globalization. That means focusing
on macroeconomic stability, transparency in government,
a sound legal system, modern infrastructure, quality educa-
tion, and a deregulated economy.
Myths about globalization
No discussion of globalization would be complete without dis-
pelling some of the myths that have been built up around it.
Downward pressure on wages: Globalization is rarely the
primary factor that fosters wage moderation in low-skilled
work conducted in developed countries. As discussed in a
recent issue of the World Economic Outlook, a more significant
factor is technology. As more work can be mechanized, and
as fewer people are needed to do a given job than in the
8
From remarks at an UNCTAD conference in February 2000, in
Johan Norberg (2003), In Defense of Global Capitalism (Washington:
Cato Institute), p. 155.
Issues Brief
past, the demand for that labor will fall, and as a result the
prevailing wages for that labor will be affected as well.
The “race to the bottom”: Globalization has not caused the
world’s multinational corporations to simply scour the
globe in search of the lowest-paid laborers. There are
numerous factors that enter into corporate decisions on
where to source products, including the supply of skilled la-
bor, economic and political stability, the local infrastructure,
the quality of institutions, and the overall business climate.
In an open global market, while jurisdictions do compete
with each other to attract investment, this competition
incorporates factors well beyond just the hourly wage rate.
According to the UN Information Service, the developed
world hosts two-thirds of the world’s inward foreign direct
investment. The 49 least developed countries—the poorest
of the developing countries—account for around 2 percent
of the total inward FDI stock of developing countries.
Nor is it true that multinational corporations make a con-
sistent practice of operating sweatshops in low-wage coun-
tries, with poor working conditions and substandard wages.
While isolated examples of this can surely be uncovered, it is
well established that multinationals, on average, pay higher
wages than what is standard in developing nations, and offer
higher labor standards.9
Globalization is irreversible: In the long run, globalization
is likely to be an unrelenting phenomenon. But for signifi-
cant periods of time, its momentum can be hindered by a
variety of factors, ranging from political will to availability of
infrastructure. Indeed, the world was thought to be on an
irreversible path toward peace and prosperity in the early
20th century, until the outbreak of Word War I. That war,
coupled with the Great Depression, and then World War II,
dramatically set back global economic integration. And in
many ways, we are still trying to recover the momentum we
lost over the past 90 years or so.
That fragility of nearly a century ago still exists today—as
we saw in the aftermath of September 11th, when U.S. air
travel came to a halt, financial markets shut down, and the
economy weakened. The current turmoil in financial mar-
9
Linda Lim (2001) The Globalization Debate: Issues and Challenges
(Geneva: International Labor Organization).
M AY 2 0 0 8
kets also poses great difficulty for the stability and reliability
of those markets, as well as for the global economy. Credit
market strains have intensified and spread across asset
classes and banks, precipitating a financial shock that many
have characterized as the most serious since the 1930s.
These episodes are reminders that a breakdown in global-
ization—meaning a slowdown in the global flows of goods,
services, capital, and people—can have extremely adverse
consequences.
Openness to globalization will, on its own, deliver economic
growth: Integrating with the global economy is, as econo-
mists like to say, a necessary, but not sufficient, condition for
economic growth. For globalization to be able to work, a
country cannot be saddled with problems endemic to many
developing countries, from a corrupt political class, to poor
infrastructure, and macroeconomic instability.
The shrinking state: Technologies that facilitate commu-
nication and commerce have curbed the power of some
despots throughout the world, but in a globalized world
governments take on new importance in one critical respect,
namely, setting, and enforcing, rules with respect to con-
tracts and property rights. The potential of globalization can
never be realized unless there are rules and regulations in
place, and individuals to enforce them. This gives economic
actors confidence to engage in business transactions.
Further undermining the idea of globalization shrinking
states is that states are not, in fact, shrinking. Public expen-
ditures are, on average, as high or higher today as they have
been at any point in recent memory. And among OECD
countries, government tax revenue as a percentage of GDP
increased from 25.5 percent in 1965 to 36.6 percent in 2006.
The future of globalization
Like a snowball rolling down a steep mountain, globaliza-
tion seems to be gathering more and more momentum.
And the question frequently asked about globalization is not
whether it will continue, but at what pace.
A disparate set of factors will dictate the future direc-
tion of globalization, but one important entity—sovereign
governments—should not be overlooked. They still have the
power to erect significant obstacles to globalization, ranging
7
Issues Brief M AY 2 0 0 8

from tariffs to immigration restrictions to military hostilities.
Nearly a century ago, the global economy operated in a very
open environment, with goods, services, and people able to
move across borders with little if any difficulty. That open-
ness began to wither away with the onset of World War I in
1914, and recovering what was lost is a process that is still
underway. Along the process, governments recognized the
importance of international cooperation and coordination,
which led to the emergence of numerous international or-
ganizations and financial institutions (among which the IMF
and the World Bank, in 1944).
Indeed, the lessons included avoiding fragmentation and
the breakdown of cooperation among nations. The world is
still made up of nation states and a global marketplace. We
need to get the right rules in place so the global system is
more resilient, more beneficial, and more legitimate. Inter-
national institutions have a difficult but indispensable role
in helping to bring more of globalization’s benefits to more
people throughout the world. By helping to break down bar-
riers—ranging from the regulatory to the cultural—more
countries can be integrated into the global economy, and
more people can seize more of the benefits of globalization.

The IMF staff who contributed to this Issues Brief are Julian Di Giovanni, Glenn Gottselig, Florence Jaumotte, Luca Antonio Ricci,
and Stephen Tokarick, with assistance from Mary Yang. Matt Rees served as a consultant on the project.

The Issues Briefs series is produced by the Policy Communication Division of the
External Relations Department in collaboration with staff in other IMF departments.
The series is published by the IMF in English, French, and Spanish and is also available
electronically on the IMF’s website, http://www.imf.org.

To request hard copies please contact IMF Publication Services

700 19th Street, N.W. Washington, D.C. 20431.
Telephone: (202) 623-7430 Fax: (202 623-7201
Email: publications@imf.org

8
Coming Together http://yaleglobal.yale.edu/about/essay.jsp

Coming
Together

Globalization
means
reconnecting
the human
community

Nayan Chanda

YaleGlobal, 19
November 2002

The exponential growth in the exchange of goods, ideas, institutions and people that we see today is part of a long-term historical trend. Over
the course of human history, the desire for something better and greater has motivated people to move themselves, their goods, and their ideas
around the world.

Since the first appearance of the term in 1962 'globalization' has gone from jargon to cliche. The Economist has called it "the most abused word
of the 21st century." Certainly no word in recent memory has meant so many different things to different people and has evoked as much
emotion. Some see it as nirvana - a blessed state of universal peace and prosperity - while others condemn it as a new kind of chaos.

If properly defined and applied, the "g-word" actually does have some utility. It can best be understood as a leitmotif of human history. It is a trend
that has intensified and accelerated in recent decades and come into full view with all its benefits and destructive power. Just as climate has
shaped the environment over the millennia, the interaction among cultures and societies over tens of thousands of years has resulted in the
increasing integration of what is becoming the global human community.

Globalization - defined by Webster's dictionary as a process that renders various activities and aspirations "worldwide in scope or application" -
has been underway for a long time. Thousands of years before the root word for this concept - 'globe' - came into use, our ancestors had already
spread across the earth. In fact, the process by which they migrated and populated all the continents except Antarctica was a kind of proto-
globalization. Some 50,000 years ago early forms of homo sapiens, who developed in east Africa, began to travel to the far corners of the world,
including to the continents of North and South America. Rising sea levels at the end of the ice age separated the Americas from the Eurasian
land mass, creating two worlds that were now cut off from each other. They would not be reconnected until Christopher Columbus's
serendipitous landing on a Caribbean island in 1492. That same year a German geographer, Martin Behaim, built the first known globe as a
representation of the earth.

The reconnection was called the 'Columbian exchange,' and it is celebrated as a landmark in the history of globalization. The discovery of the
New World brought together peoples who had been separated for over 10,000 years. No less significant has been the exchange of plants and
animals. A Peruvian tuber, the potato, has become a staple throughout the world, Mexican chili pepper has taken over Asia, and an Ethiopian
crop, coffee, found new homes from Brazil to Vietnam, to name just a few. In the intervening period, societies have not only evolved in radically
different ways and developed different economic and political structures, but they have also invented different technologies, grown different
crops and, most importantly, developed different languages and ways of thinking. That diversity makes the job of reconnecting civilizations both
challenging and rewarding.

Historically there were four main motives that drove people to leave the sanctuary of their family and village: conquest (the desire to ensure
security and extend political power), prosperity (the search for a better life), proselytizing (spreading the word of their God and converting others
to their faith), and a more mundane but still powerful force -curiosity and wanderlust that seem basic to human nature. Therefore, the principal
agents of globalization were soldiers (and sailors), traders, preachers and adventurers. Signs of trade in the dawn of civilization can be seen in
old seashells carried deep into the interior of Africa. Thousands of years ago traders carried goods from one part of the globe to another across
oceans. Missionaries traversed deserts and mountains and sailed the seas. The spread of Buddhism from India to Indonesia led to the creation
of the Borobudur temple, which is one of the first monuments of globalization. From the Chinese Buddhist monk Faxian's journey to India in the
4th century, to the Arab explorer Ibn Batuta's travels to Europe, Asia and Africa a thousand years later, adventurers have continued to find new
frontiers and establish connections among far-flung societies, cultures and economies. Even though travel was slow and dangerous, ambitious
and acquisitive leaders - from Alexander the Great to Genghis Khan - ventured far from home and brought new lands under their sway. Conquest
meant globalization in both directions, since the rulers often ended up being as influenced by those they ruled as vice versa.

The cast of characters whose drive and determination have established links of both domination and cooperation has changed with times. Small
bands of traders carrying their wares on their backs or in boats have been replaced by giant enterprises, starting with the Dutch and British East
India Companies in the 17th century. In place of solitary pilgrims and priests have come vast religious organizations that spread their beliefs,
along with their languages, literatures and architecture. The few intrepid adventurers and travelers of past centuries who brought distant
societies together have given way to thousands and even millions of refugees and immigrants fleeing across borders, as well as hundreds of
millions of tourists jetting around the world. All these comings and goings deepen and broaden the connections among far parts of the world and
facilitate the transmission of goods, ideas and cultures.

The commercial history of the past five hundred years is marked by other trends and transactions that have strengthened the bonds of
interconnectedness. The rubber plants uprooted from the jungles of Brazil and transplanted in Malaysia by British colonialists in the first years of
the 20th century provided the raw material for the tires in Henry Ford's Model T; the indentured rubber tapper from China and India altered

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Malaysia's ethnic composition forever. The introduction of new crops like corn and sweet potatoes from the New World had a dramatic impact on
demography. For example, the growth of population in China, which had been held in check by the shortage of irrigable rice fields, got a boost
from new crops that could be grown on marginal soil. Similarly, Chechnya's population grew apace after the arrival of corn from the New World.

From the Roman empire, to Pax Britannica two centuries ago, to the Pax Americana of today, the power of super states has been another force
changing the nature of interdependence. In the emerging global supply chain that now feeds consumer production worldwide, Western and
American multinational corporations have taken a lead role.

The expanding circle of free trade has boosted economic growth and spawned a burgeoning middle class, which, in turn, has increased
consumption of globally produced goods and rise in international tourism. Most striking have been the world's two most populous countries,
China and India. With rising income and greater consumption has come more personal freedom and a growing demand for accountable
government. Even though the vast majority of the world population is still poor, the ideas of democracy, human rights and press freedom have
spread. The percentage of countries which hold multi-party elections to choose their governments has grown from less than thirty percent in
1974 to over sixty percent of the 192 countries in the world.

The most powerful force for transmitting the ideas of democracy and human rights across borders is the revolution in information technology in
the second half of the 20th century. The telephone, television and the Internet have been the key tools. In the late 19th century, it took Queen
Victoria sixteen and a half hours to send a message of greeting across a transatlantic cable to President James Buchanan. Today vast amounts
of information in multiple formats - text, voice, video - are transmitted at the speed of light. Moreover, a three minute call from New York to London
costs less than a dime, instead of the $300 it cost in 1930. This dramatic drop in the price of telecommunications has made the benefits of the
information explosion available to much of humanity.

Meanwhile, innovations like satellite television have connected people's emotions across borders and oceans: the news of Princess Diana's
death flashing on cable TV's immediately elicited wreathes of flowers from around the world. The free flow of information is also helping bridge
the political divide: September 11 triggered a candlelight vigil among young Iranians. But it has also been hardening attitudes along ideological
boundaries. The Arabic-language satellite station Al Jazeera's live broadcast of Israeli-Palestine violence has widened the gulf between Arabs
and Israelis.

The falling cost of communications and transportation has boosted economic growth while literacy and better health care have improved quality
of life. People the world over are living longer and healthier lives, while the number of people living in poverty has dropped in most regions
(though it has increased in Africa and South Asia).

Yet faster growth has its cost, too. The reduction in poverty worldwide has negative environmental consequences. Close to one percent of the
world's rainforest is disappearing every year because of expanding agriculture and trade in forest products. The closely knit global
communication network that makes growth possible has also made the world as a whole more vulnerable to everything from disease and
mischief to terror. HIV infection in humans developed in Africa and South America but has spread to the entire world, now infecting some 14,000
people each day. In 1997, in barely five hours the "I love you" computer virus released by pranksters in Manila wreaked $700 million worth of
damage worldwide. The September 11 hijackers made use of electronic transfers of funds to finance their operation. They also relied on the
Internet to coordinate their moves and buy airline tickets. Since the attacks, Osama Bin Laden's favorite means of communicating with the world
from his cave has been satellite TV.

Not that any of this mixture of the good and the bad is new. Throughout history, the introduction of breakthrough technologies has brought
disruption, and created winners and losers. When the Old World connected with the New World through colonizers and explorers, new
pathogens like small pox and influenza caused a "demographic holocaust," killing three out of every four Native Americans. The colonization of
the Americas and vast parts of Asia, Africa, the Middle East and Latin America, has destroyed traditional social structures and political power
while speeding up the process of economic integration. The need for labor to mine silver and work the plantations resulted in the transfer of
some 10 million slaves from Africa. On the other hand, the economies of Europe and Asia boomed, fuelled by the flow of precious metals and
new commodities.

No other country has played as significant a role in reconnecting the world as the United States, itself an early product of modern globalization. A
vast majority of some 60 million people who left their place of birth in the most intense period of globalization in the late 19th century went to the
US. Immigrants and slaves built the richest nation in history. They drew upon world resources - starting with the water mill and steam engine
technology from Britain - and emerged as a leading innovator and the most potent engine of globalization. With the American victory in the World
War II Pacific arena and the launch of the Marshall plan, US economic and military power has spread to far corners of the world, culminating in
the end of the Cold War. The fall of the Berlin Wall symbolized the end of a global ideological division and gave a boost to the latest burst of
globalization itself. It is no wonder many around the world see - and resent - globalization as a euphemism for Americanization.

At the same time, the end of the Cold War has brought into sharper focus the other huge chasm that exists between the rich and the developing
nations. While globalization has created unprecedented riches, many people have also been left mired in poverty. Industrialized countries with
developed infrastructure, institutions and education, and middle income countries which opened up the economy have benefited most from
globalization, but the poorest countries have not grown, or in some cases have even sunk back. Thus despite the overall fall in the rate of
poverty, close to a third of the world population still lives in utter poverty without access to electricity or drinking water. The gap between the rich
and the poor countries and between the wealthy and the indigent within countries has also widened. The rules of global engagement that have
evolved, and the institutions that manage them - from the International Monetary Fund to the World Trade Organization - reflect the power
imbalance between wealthy and poor nations.

Thanks to the wider diffusion of information, today's have-nots are more aware of the gap between themselves and the rich West, and between
themselves and Western-backed domestic elites. This consciousness can be a powerful source of resentment and protest, such as the
anti-American demonstrations from Venezuela to the Philippines. Overt or subliminal political and cultural messages carried with goods, ideas
and entertainment from the developed world have added to the sense of disruption in many traditional societies. Combined with the misery and
misrule in many countries, the bright lights of the West lure many to seek their fortunes elsewhere. The rising tide of illegal immigrants washing
over the developed countries has become a major concern. The reconnection of the world through goods and ideas has also evoked conflicting
responses - from admiration to bitter nationalistic and religious resistance. While students in Iran clamor for an American-style life, many in the

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West oppose globalization as the symbol of iniquitous free market capitalism. Many people around the globe also see a Western-led globalization
aimed at destroying Islam.

What does all this mean for globalization? Will globalization be forced to retreat in the face of growing disillusionment and dangers such as
terrorists' who abuse open borders and easy economic transactions? There is, of course, a precedent for such a decline in globalization.
Between the two World Wars, free trade and the free movement of people did slow to a crawl, thanks to the raising of tariff walls and a closed
door to immigration. But those restrictions did not dampen the same four basic motivations - conquest, search for prosperity, proselytizing and
curiosity - that have driven globalization. The Allied victory against the Nazis and Japan, in fact, reopened the flood gates of globalization, giving
a further boost to trade and travel.

To be sure, many issues could throw a wrench into the engines of international integration - issues like the growing anti-immigrant sentiment in
Europe, the West's farm subsidies and intellectual property rights concerns, and the tightened visa policies of the US since Sept. 11. However,
the secular trend of people connecting with the world would be hard to reverse. The search for prosperity still drives businesses to expand
beyond their borders and consumers to buy the best at an affordable price, irrespective of the country of origin. The same curiosity about others
that led the likes of Ibn Batuta to leave home leads millions to travel, to watch foreign movies, eat different foods and enjoy international music
and sports events. The biggest difference between the globalization of the past and that of today lies in its visibility and speed. The accelerated
speed of global interaction has telescoped its impact and the global spread of the media has made it instantly visible - something that in the past
happened in slow motion and often out of sight. With all its promises and pitfalls, the historical process of reconnecting the human community is
here to stay and increasingly visible and increasingly a challenge. Our task - whether we are citizens, scholars or statesmen - is to understand
and manage globalization, doing our best to encourage its favorable aspects and keep its negative consequences at bay.

Nayan Chanda is editor of YaleGlobal Online. His essay does not reflect the view of the Center for the Study of Globalization.

Rights:
© Copyright 2003 Yale Center for the Study of Globalization.

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Globalism's discontents
Joseph E Stiglitz
The American Prospect Winter 2002

Integration with the global economy works just fine when sovereign countries define the terms. It works
disastrously when terms are dictated.

FEW SUBJECTS HAVE POLARIZED PEOPLE THROUGHOUT the world as much as globalization.
Some see it as the way of the future, bringing unprecedented prosperity to everyone, everywhere. Others,
symbolized by the Seattle protestors of December 1999, fault globalization as the source of untold
problems, from the destruction of native cultures to increasing poverty and immiseration. In this artide, I
want to sort out the different meanings of globalization. In many countries, globalization has brought huge
benefits to a few with few benefits to the many. But in the case of a few countries, it has brought
enormous benefit to the many. Why have there been these huge differences in experiences? The answer is
that globalization has meant different things in different places.

The countries that have managed globalization on their own, such as those in East Asia, have, by and
large, ensured that they reaped huge benefits and that those benefits were equitably shared; they were
able substantially to control the terms on which they engaged with the global economy. By contrast, the
countries that have, by and large, had globalization managed for them by the International Monetary Fund
and other international economic institutions have not done so well. The problem is thus not with
globalization but with how it has been managed.

The international financial institutions have pushed a particular ideology-market fundamentalism-that is

both bad economics and bad politics; it is based on premises concerning how markets work that do not
hold even for developed countries, much less for developing countries. The IMF has pushed these
economics policies without a broader vision of society or the role of economics within society. And it has
pushed these policies in ways that have undermined emerging democracies.

More generally, globalization itself has been governed in ways that are undemocratic and have been
disadvantageous to developing countries, especially the poor within those countries. The Seattle protestors
pointed to the absence of democracy and of transparency, the governance of the international economic
institutions by and for special corporate and financial interests, and the absence of countervailing
democratic checks to ensure that these informal and public institutions serve a general interest. In these
complaints, there is more than a grain of truth.

BENEFICIAL GLOBALIZATION

Of the countries of the world, those in East Asia have grown the fastest and done most to reduce poverty.
And they have done so, emphatically, via "globalization." Their growth has been based on exports-by
taking advantage of the global market for exports and by closing the technology gap. It was not just gaps
in capital and other resources that separated the developed from the less-developed countries, but
differences in knowledge. East Asian countries took advantage of the "globalization of knowledge" to
reduce these disparities. But while some of the countries in the region grew by opening themselves up to
multinational companies, others, such as Korea and Taiwan, grew by creating their own enterprises. Here
is the key distinction: Each of the most successful globalizing countries determined its own pace of
change; each made sure as it grew that the benefits were shared equitably; each rejected the basic tenets
of the "Washington Consensus," which argued for a minimalist role for government and rapid privatization
and liberalization.

In East Asia, government took an active role in managing the economy. The steel industry that the Korean
government created was among the most efficient in the world-performing far better than its private-
sector rivals in the United States (which, though private, are constantly turning to the government for
protection and for subsidies). Financial markets were highly regulated. My research shows that those

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regulations promoted growth. It was only when these countries stripped away the regulations, under
pressure from the U.S. Treasury and the IMF, that they encountered problems.

During the 196os, 1970s, and 198os, the East Asian economies not only grew rapidly but were remarkably
stable. Two of the countries most touched by the 1997-1998 economic crisis had had in the preceding
three decades not a single year of negative growth; two had only one year-a better performance than the
United States or the other wealthy nations that make up the Organization for Economic Cooperation and
Development (OECD). The single most important factor leading to the troubles that several of the East
Asian countries encountered in the late 199os-the East Asian crisis-was the rapid liberalization of financial
and capital markets. In short, the countries of East Asia benefited from globalization because they made
globalization work for them; it was when they succumbed to the pressures from the outside that they ran
into problems that were beyond their own capacity to manage well.

Globalization can yield immense benefits. Elsewhere in the developing world, globalization of knowledge
has brought improved health, with life spans increasing at a rapid pace. How can one put a price on these
benefits of globalization? Globalization has brought still other benefits: Today there is the beginning of a
globalized civil society that has begun to succeed with such reforms as the Mine Ban Treaty and debt
forgiveness for the poorest highly indebted countries (the Jubilee movement). The globalization protest
movement itself would not have been possible without globalization.

THE DARKER SIDE OF GLOBALIZATION

How then could a trend with the power to have so many benefits have produced such opposition? Simply
because it has not only failed to live up to its potential but frequently has had very adverse effects. But
this forces us to ask, why has it had such adverse effects? The answer can be seen by looking at each of
the economic elements of globalization as pursued by the international financial institutions and especially
by the IMF.

The most adverse effects have arisen from the liberalization of financial and capital markets-which has
posed risks to developing countries without commensurate rewards. The liberalization has left them prey
to hot money pouring into the country, an influx that has fueled speculative real-estate booms; just as
suddenly, as investor sentiment changes, the money is pulled out, leaving in its wake economic
devastation. Early on, the IMF said that these countries were being rightly punished for pursuing bad
economic policies. But as the crisis spread from country to country, even those that the IMF had given
high marks found themselves ravaged.

The IMF often speaks about the importance of the discipline provided by capital markets. In doing so, it
exhibits a certain paternalism, a new form of the old colonial mentality: "We in the establishment, we in
the North who run our capital markets, know best. Do what we tell you to do, and you will prosper." The
arrogance is offensive, but the objection is more than just to style. The position is highly undemocratic:
There is an implied assumption that democracy by itself does not provide sufficient discipline. But if one
is to have an external disciplinarian, one should choose a good disciplinarian who knows what is good for
growth, who shares one's values. One doesn't want an arbitrary and capricious taskmaster who one
moment praises you for your virtues and the next screams at you for being rotten to the core. But capital
markets are just such a fickle taskmaster; even ardent advocates talk about their bouts of irrational
exuberance followed by equally irrational pessimism.

LESSONS OF CRISIS

Nowhere was the fickleness more evident than in the last global financial crisis. Historically, most of the
disturbances in capital flows into and out of a country are not the result of factors inside the country.
Major disturbances arise, rather, from influences outside the country. When Argentina suddenly faced
high interest rates in 1998, it wasn't because of what Argentina did but because of what happened in
Russia. Argentina cannot be blamed for Russia's crisis.

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Small developing countries find it virtually impossible to withstand this volatility. I have described capital-
market liberalization with a simple metaphor: Small countries are like small boats. Liberalizing capital
markets is like setting them loose on a rough sea. Even if the boats are well captained, even if the boats
are sound, they are likely to be hit broadside by a big wave and capsize. But the IMF pushed for the boats
to set forth into the roughest parts of the sea before they were seaworthy, with untrained captains and
crews, and without life vests. No wonder matters turned out so badly!

To see why it is important to choose a disciplinarian who shares one's values, consider a world in which
there were free mobility of skilled labor. Skilled labor would then provide discipline. Today, a country that
does not treat capital well will find capital quickly withdrawing; in a world of free labor mobility, if a
country did not treat skilled labor well, it too would withdraw. Workers would worry about the quality of
their children's education and their family's health care, the quality of their environment and of their own
wages and working conditions. They would say to the government: If you fail to provide these essentials,
we will move elsewhere. That is a far cry from the kind of discipline that free-flowing capital provides.

The liberalization of capital markets has not brought growth: How can one build factories or create jobs
with money that can come in and out of a country overnight? And it gets worse: Prudential behavior
requires countries to set aside reserves equal to the amount of short-term lending; so if a firm in a poor
country borrows $ ioo million at, say, 20 percent interest rates shortterm from a bank in the United States,
the government must set aside a corresponding amount. The reserves are typically held in U.S. Treasury
bills-a safe, liquid asset. In effect, the country is borrowing $100 million from the United States and
lending $100 million to the United States. But when it borrows, it pays a high interest rate, 20 percent;
when it lends, it receives a low interest rate, around 4 percent. This may be great for the United States, but
it can hardly help the growth of the poor country. There is also a high opportunity cost of the reserves; the
money could have been much better spent on building rural roads or constructing schools or health clinics.
But instead, the country is, in effect, forced to lend money to the United States.

THAILAND ILLUSTRATES THE TRUE IRONIES OF SUCH policies: There, the free market led to
investments in empty office buildings, starving other sectors-such as education and transportation--of
badly needed resources. Until the IMF and the U.S. Treasury came along, Thailand had restricted bank
lending for speculative real estate. The Thais had seen the record: Such lending is an essential part of the
boombust cycle that has characterized capitalism for 200 years. It wanted to be sure that the scarce
capital went to create jobs. But the IMF nixed this intervention in the free market. If the free market said,
"Build empty office buildings," so be it! The market knew better than any government bureaucrat who
mistakenly might have thought it wiser to build schools or factories.

THE COSTS OF VOLATILITY

Capital-market liberalization is inevitably accompanied by huge volatility, and this volatility impedes
growth and increases poverty. It increases the risks of investing in the country, and thus investors demand
a risk premium in the form of higherthan-normal profits. Not only is growth not enhanced but poverty is
increased through several channels. The high volatility increases the likelihood of recessions-and the poor
always bear the brunt of such downturns. Even in developed countries, safety nets are weak or
nonexistent among the selfemployed and in the rural sector. But these are the dominant sectors in
developing countries. Without adequate safety nets, the recessions that follow from capital-market
liberalization lead to impoverishment. In the name of imposing budget discipline and reassuring investors,
the IMF invariably demands expenditure reductions, which almost inevitably result in cuts in outlays for
safety nets that are already threadbare.

But matters are even worse-for under the doctrines of the "discipline of the capital markets," if countries
try to tax capital, capital flees. Thus, the IMF doctrines inevitably lead to an increase in tax burdens on
the poor and the middle classes. Thus, while IMF bailouts enable the rich to take their money out of the
country at more favorable terms (at the overvalued exchange rates), the burden of repaying the loans lies

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with the workers who remain behind.

The reason that I emphasize capital-market liberalization is that the case against it-and against the IMF's
stance in pushing it-is so compelling. It illustrates what can go wrong with globalization. Even economists
like Jagdish Bhagwati, strong advocates of free trade, see the folly in liberalizing capital markets.
Belatedly, so too has the IMF-at least in its official rhetoric, though less so in its policy stances-but too late
for all those countries that have suffered so much from following the IMF's prescriptions.

But while the case for trade liberalization-when properly done-is quite compelling, the way it has been
pushed by the IMF has been far more problematic. The basic logic is simple: Trade liberalization is
supposed to result in resources moving from inefficient protected sectors to more efficient export sectors.
The problem is not only that job destruction comes before the job creation-so that unemployment and
poverty result-- but that the IMF's "structural adjustment programs" (designed in ways that allegedly
would reassure global investors) make job creation almost impossible. For these programs are often
accompanied by high interest rates that are often justified by a single-minded focus on inflation.
Sometimes that concern is deserved; often, though, it is carried to an extreme. In the United States, we
worry that small increases in the interest rate will discourage investment. The IMF has pushed for far
higher interest rates in countries with a far less hospitable investment environment. The high interest rates
mean that new jobs and enterprises are not created. What happens is that trade liberalization, rather than
moving workers from low-productivity jobs to high-productivity ones, moves them from low-productivity
jobs to unemployment. Rather than enhanced growth, the effect is increased poverty. To make matters
even worse, the unfair trade-liberalization agenda forces poor countries to compete with highly subsidized
American and European agriculture.

THE GOVERNANCE OF GLOBALIZATION

As the market economy has matured within countries, there has been increasing recognition of the
importance of having rules to govern it. One hundred fifty years ago, in many parts of the world, there
was a domestic process that was in some ways analogous to globalization. In the United States,
government promoted the formation of the national economy, the building of the railroads, and the
development of the telegraph-all of which reduced transportation and communication costs within the
United States. As that process occurred, the democratically elected national government provided
oversight: supervising and regulating, balancing interests, tempering crises, and limiting adverse
consequences of this very large change in economic structure. So, for instance, in 1863 the U.S.
government established the first financial-- banking regulatory authority-the Office of the Comptroller of
Currency-because it was important to have strong national banks, and that requires strong regulation.

The United States, among the least statist of the industrial democracies, adopted other policies.
Agriculture, the central industry of the United States in the mid-nineteenth century, was supported by the
1862 Morrill Act, which established research, extension, and teaching programs. That system worked
extremely well and is widely credited with playing a central role in the enormous increases in agricultural
productivity over the last century and a half We established an industrial policy for other fledgling
industries, including radio and civil aviation. The beginning of the telecommunications industry, with the
first telegraph line between Baltimore and Washington, D.C., was funded by the federal government. And
it is a tradition that has continued, with the U.S. government's founding of the Internet.

By contrast, in the current process of globalization we have a system of what I call global governance
without global government. International institutions like the World Trade Organization, the IMF, the
World Bank, and others provide an ad hoc system of global governance, but it is a far cry from global
government and lacks democratic accountability. Although it is perhaps better than not having any system
of global governance, the system is structured not to serve general interests or assure equitable results.
This not only raises issues of whether broader values are given short shrift; it does not even promote
growth as much as an alternative might.

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GOVERNANCE THROUGH IDEOLOGY

Consider the contrast between how economic decisions are made inside the United States and how they
are made in the international economic institutions. In this country, economic decisions within the
administration are undertaken largely by the National Economic Council, which includes the secretary of
labor, the secretary of commerce, the chairman of the Council of Economic Advisers, the treasury
secretary, the assistant attorney general for antitrust, and the U.S. trade representative. The Treasury is
only one vote and often gets voted down. All of these officials, of course, are part of an administration
that must face Congress and the democratic electorate. But in the international arena, only the voices of
the financial community are heard. The IMF reports to the ministers of finance and the governors of the
central banks, and one of the important items on its agenda is to make these central banks more
independent-and less democratically accountable. It might make little difference if the IMF dealt only
with matters of concern to the financial community, such as the clearance of checks; but in fact, its
policies affect every aspect of life. It forces countries to have tight monetary and fiscal policies: It
evaluates the trade-off between inflation and unemployment, and in that trade-off it always puts far more
weight on inflation than on jobs.

The problem with having the rules of the game dictated by the IMF-and thus by the financial
community-is not just a question of values (though that is important) but also a question of ideology. The
financial community's view of the world predominates-even when there is little evidence in its support.
Indeed, beliefs on key issues are held so strongly that theoretical and empirical support of the positions is
viewed as hardly necessary.

Recall again the IMF's position on liberalizing capital markets. As noted, the IMF pushed a set of policies
that exposed countries to serious risk. One might have thought, given the evidence of the costs, that the
IMF could offer plenty of evidence that the policies also did some good. In fact, there was no such
evidence; the evidence that was available suggested that there was little if any positive effect on growth.
Ideology enabled IMF officials not only to ignore the absence of benefits but also to overlook the
evidence of the huge costs imposed on countries.

AN UNFAIR TRADE AGENDA

The trade-liberalization agenda has been set by the North, or more accurately, by special interests in the
North. Consequently, a disproportionate part of the gains has accrued to the advanced industrial countries,
and in some cases the less-developed countries have actually been worse off. After the last round of trade
negotiations, the Uruguay Round that ended in 1994, the World Bank calculated the gains and losses to
each of the regions of the world. The United States and Europe gained enormously. But sub-Saharan
Africa, the poorest region of the world, lost by about 2 percent because of terms-of-trade effects: The
trade negotiations opened their markets to manufactured goods produced by the industrialized countries
but did not open up the markets of Europe and the United States to the agricultural goods in which poor
countries often have a comparative advantage. Nor did the trade agreements eliminate the subsidies to
agriculture that make it so hard for the developing countries to compete.

THE U.S. NEGOTIATIONS WITH CHINA OVER ITS MEMbership in the WTO displayed a double
standard bordering on the surreal. The U.S. trade representative, the chief negotiator for the United States,
began by insisting that China was a developed country. Under WTO rules, developing countries are
allowed longer transition periods in which state subsidies and other departures from the WTO strictures
are permitted. China certainly wishes it were a developed country, with Western-style per capita incomes.
And since China has a lot of "capitas," it's possible to multiply a huge number of people by very small
average incomes and conclude that the People's Republic is a big economy. But China is not only a
developing economy; it is a low-income developing country. Yet the United States insisted that China be
treated like a developed country! China went along with the fiction; the negotiations dragged on so long
that China got some extra time to adjust. But the true hypocrisy was shown when U.S. negotiators asked,
in effect, for developing-country status for the United States to get extra time to shelter the American

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textile industry.

Trade negotiations in the service industries also illustrate the unlevel nature of the playing field. Which
service industries did the United States say were very important? Financial services-industries in which
Wall Street has a comparative advantage. Construction industries and maritime services were not on the
agenda, because the developing countries would have a comparative advantage in these sectors.

Consider also intellectual-property rights, which are important if innovators are to have incentives to
innovate (though many of the corporate advocates of intellectual property exaggerate its importance and
fail to note that much of the most important research, as in basic science and mathematics, is not
patentable). Intellectual-property rights, such as patents and trademarks, need to balance the interests of
producers with those of users-not only users in developing countries, but researchers in developed
countries. If we underprice the profitability of innovation to the inventor, we deter invention. If we
overprice its cost to the research community and the end user, we retard its diffusion and beneficial
effects on living standards.

In the final stages of the Uruguay negotiations, both the White House Office of Science and Technology
Policy and the Council of Economic Advisers worried that we had not got the balance right-that the
agreement put producers' interests over users'. We worried that, with this imbalance, the rate of progress
and innovation might actually be impeded. After all, knowledge is the most important input into research,
and overly strong intellectual-property rights can, in effect, increase the price of this input. We were also
concerned about the consequences of denying lifesaving medicines to the poor. This issue subsequently
gained international attention in the context of the provision of AIDS medicines in South Africa [see
"Medicine as a Luxury" by Merrill Goozner, on page A7]. The international outrage forced the drug
companies to back down-and it appears that, going forward, the most adverse consequences will be
circumscribed. But it is worth noting that initially, even the Democratic U.S. administration supported the
pharmaceutical companies.

What we were not fully aware of was another danger-what has come to be called "biopiracy," which
involves international drug companies patenting traditional medicines. Not only do they seek to make
money from "resources" and knowledge that rightfully belong to the developing countries, but in doing so
they squelch domestic firms who long provided these traditional medicines. While it is not clear whether
these patents would hold up in court if they were effectively challenged, it is clear that the lessdeveloped
countries may not have the legal and financial resources required to mount such a challenge. The issue has
become the source of enormous emotional, and potentially economic, concern throughout the developing
world. This fall, while I was in Ecuador visiting a village in the high Andes, the Indian mayor railed against
how globalization had led to biopiracy.

GLOBALIZATION AND SEPTEMBER 11

September 11 brought home a still darker side of globalization-- it provided a global arena for terrorists.
But the ensuing events and discussions highlighted broader aspects of the globalization debate. It made
clear how untenable American unilateralist positions were. President Bush, who had unilaterally rejected
the international agreement to address one of the long-term global risks perceived by countries around the
world-global warming, in which the United States is the largest culprit-called for a global alliance against
terrorism. The administration realized that success would require concerted action by all.

One of the ways to fight terrorists, Washington soon discovered, was to cut off their sources of funding.
Ever since the East Asian crisis, global attention had focused on the secretive offshore banking centers.
Discussions following that crisis focused on the importance of good information-transparency, or
openness-- but this was intended for the developing countries. As international discussions turned to the
lack of transparency shown by the IMF and the offshore banking centers, the U.S. Treasury changed its
tune. It is not because these secretive banking havens provide better services than those provided by
banks in New York or London that billions have been put there; the secrecy serves a variety of nefarious

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purposes-including avoiding taxation and money laundering. These institutions could be shut down
overnight-or forced to comply with international norms-if the United States and the other leading
countries wanted. They continue to exist because they serve the interests of the financial community and
the wealthy. Their continuing existence is no accident. Indeed, the OECD drafted an agreement to limit
their scope-and before September ii, the Bush administration unilaterally walked away from this
agreement too. How foolish this looks now in retrospect! Had it been embraced, we would have been
further along the road to controlling the flow of money into the hands of the terrorists.

There is one more aspect to the aftermath of September ii worth noting here. The United States was
already in recession, but the attack made matters worse. It used to be said that when the United States
sneezed, Mexico caught a cold. With globalization, when the United States sneezes, much of the rest of
the world risks catching pneumonia. And the United States now has a bad case of the flu. With
globalization, mismanaged macroeconomic policy in the United States-the failure to design an effective
stimulus package-has global consequences. But around the world, anger at the traditional IMF policies is
growing. The developing countries are saying to the industrialized nations: "When you face a slowdown,
you follow the precepts that we are all taught in our economic courses: You adopt expansionary monetary
and fiscal policies. But when we face a slowdown, you insist on contractionary policies. For you, deficits
are okay; for us, they are impermissible-- even if we can raise the funds through `selling forward,' say,
some natural resources." A heightened sense of inequity prevails, partly because the consequences of
maintaining contractionary policies are so great.

GLOBAL SOCIAL JUSTICE

Today, in much of the developing world, globalization is being questioned. For instance, in Latin America,
after a short burst of growth in the early 1990s, stagnation and recession have set in. The growth was not
sustained-some might say, was not sustainable. Indeed, at this juncture, the growth record of the so-called
postreform era looks no better, and in some countries much worse, than in the widely criticized import-
substitution period of the 195os and 196os when Latin countries tried to industrialize by discouraging
imports. Indeed, reform critics point out that the burst of growth in the early 199os was little more than a
"catch-up" that did not even make up for the lost decade of the i98os.

Throughout the region, people are asking: "Has reform failed or has globalization failed?" The distinction
is perhaps artificial, for globalization was at the center of the reforms. Even in those countries that have
managed to grow, such as Mexico, the benefits have accrued largely to the upper 30 percent and have
been even more concentrated in the top io percent. Those at the bottom have gained little; many are even
worse off. The reforms have exposed countries to greater risk, and the risks have been borne
disproportionately by those least able to cope with them. Just as in many countries where the pacing and
sequencing of reforms has resulted in job destruction outmatch-- ing job creation, so too has the exposure
to risk outmatched the ability to create institutions for coping with risk, including effective safety nets.

In this bleak landscape, there are some positive signs. Those in the North have become more aware of the
inequities of the global economic architecture. The agreement at Doha to hold a new round of trade
negotiations-the "Development Round"-promises to rectify some of the imbalances of the past. There has
been a marked change in the rhetoric of the international economic institutions-at least they talk about
poverty. At the World Bank, there have been some real reforms; there has been some progress in
translating the rhetoric into reality-in ensuring that the voices of the poor are heard and the concerns of
the developing countries are listened to. But elsewhere, there is often a gap between the rhetoric and the
reality. Serious reforms in governance, in who makes decisions and how they are made, are not on the
table. If one of the problems at the IMF has been that the ideology, interests, and perspectives of the
financial community in the advanced industrialized countries have been given disproportionate weight (in
matters whose effects go well beyond finance), then the prospects for success in the current discussions of
reform, in which the same parties continue to predominate, are bleak. They are more likely to result in
slight changes in the shape of the table, not changes in who is at the table or what is on the agenda.

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September 11 has resulted in a global alliance against terrorism. What we now need is not just an alliance
against evil, but an alliance for something positive-a global alliance for reducing poverty and for creating a
better environment, an alliance for creating a global society with more social justice.

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