Globalization

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In some countries, especially in Asia, per capita incomes have been moving quickly toward levels in the industrial countries since 1970. A larger number of developing countries have made only slow progress or have lost ground. In particular, per capita incomes in Africa have declined relative to the industrial countries and in some countries have declined in absolute terms. Part of the explanation is that the countries catching up are those where trade has grown strongly. Consider four aspects of globalization:

Trade
Developing countries as a whole have increased their share of world trade– from 19 percent in 1971 to 29 percent in 1999, but with great variation among the major regions. For instance, the newly industrialized economies (NIEs) of Asia have done well, while Africa as a whole has fared poorly. The composition of what countries export is also important. The strongest rise by far has been in the export of manufactured goods. The share of primary commodities in world exports – such as food and raw materials – that are often produced by the poorest countries, has declined.

Capital Movements
Many people associate globalization with sharply increased private capital flows to developing countries during much of the 1990s. The increase followed a particularly “dry” period in the 1980s. Net official flows of “aid” or development assistance have fallen significantly since the early 1980s, and the composition of private flows has changed dramatically. Direct foreign investment has become the most important category. Both portfolio investment and bank credit rose but they have been more volatile, falling sharply in the wake of the financial crises of the late 1990s.

Movement of People
Workers move from one country to another partly to find better employment opportunities. The numbers involved are still quite small, but in the period 1965-90, the proportion of labor forces round the world that was foreign born increased by about one-half. Most migration occurs between developing countries. But the flow of migrants to advanced economies is likely to provide ameans through which global wages converge. There is also the potential for skills to be transferred back to the developing countries and for wages in those countries to rise.

Spread of Knowledge (and technology)
Information exchange is an integral, often overlooked, aspect of globalization. For instance, direct foreign investment brings not only an expansion of the physical capital stock, but also technical innovation. More generally, knowledge about production methods, management techniques, export markets and economic policies is available at very low cost, and it represents a highly valuable resource for the developing countries. Growth in living standards springs from the accumulation of physical capital (investment) and human capital (labor), and through advances in technology (what economists call total factor productivity).

Many factors can help or hinder these processes. The experience of the countries that have increased output most rapidly shows the importance of creating conditions that are conducive to long-run per capita income growth. Economic stability, institution building, and structural reform are at least as important for long-term development as financial transfers, important as they are. What matters is the whole package of policies, financial and technical assistance, and debt relief if necessary.

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