ECON3315 International Economic Issues

1. ECON3315International Economic Issues Instructor: Patrick M. Crowley Issue 10b: Globalization & Development

2. Overview • Global integration and development • Import substitution • Capital flows: a double-edged sword • Growth vs openness: is there a tradeoff? • Growth and development • The dark side of globalization

3. Globalization & development Surely the true test of whether globalization is good for the world is if it alleviates poverty Claim by critics of globalization is that many of the measures actually exacerbate poverty Globalization itself involves changing codes and aligning policies with other countries so as to abide by rules set by international organizations (which are dominated by OECD countries) Globalization implies liberalization in other economic areas – such as labor markets, goods markets But globalization also implies assisting those who are adversely affected – so govt assistance programs for workers, technical support for firms etc… What are the opportunity costs of changing policy in these areas?

4. Globalization & development • “Washington” consensus – World Bank and IMF advice that usually involves liberalization of trade and capital flows, structural reform, fiscal austerity • Argument here is that these institutions impose developed country standards on developing countries • Most countries that embrace globalization do so AFTER a period of growth using policies that do not entail liberalization

5. Import substitution Alternative for developing countries is import substitution (IS) policy. Idea here is to maintain tariffs and quotas to develop domestic industries so as to substitute domestic production for imports – backing up the notion in development economics of the “infant industry”. Protection was supposed to be temporary. IS could be outward-looking in that it promotes exports (like in Asia, especially South Korea) or inward-looking without significant links to world markets (like in Latin America). In both cases, external competition by imports in the markets of the targeted industries are discouraged by tariffs. Hence, policies to pursue ISI have a strong protectionist component and are not favored by advocates of free trade. Many developing countries used this method of development in the 1960s with mixed success. Not so successful in 70s…

6. Capital flows: a double-edged sword • Positive effect of uninhibited capital flows: • (a) Additional funds available for investment • (b) With FDI, technology transfer • (c) More efficient allocation of global resources • Negative effect of uninhibited capital flows: • Can be liquidated and withdrawn quickly – cause of the Asian crisis (1997) – “capital flight” • “Contagion” effects • Has macroeconomic implications for exchange rates

7. Growth vs openness: is there a tradeoff? • Rodrik argues that openness should not substitute for a long term development strategy based on economic growth. • One way to study this is to see if lower trade barriers caused higher growth

8. So what is to blame for low growth in developing countries? Main reasons are: • Ineffective institutions – courts for upholding private property rights, govts for having clear policy, banks for efficient lending • Geographic determinants – location can be an obstacle to greater trade • Inappropriate macroeconomic policies – often countries adopt policies that do not promote growth Rodrik argues that globalization will lead to less poverty is misplacing the emphasis.

9. Development strategies: examples • Holland during the 17th century: religious and ethnic tolerance, geography, export oriented • Meiji restoration in Japan (1850s onwards): abolishment of Samurai, industrialization, openness to foreign influence • Credit subsidies in South Korea: the chaebol given import preferences, cheap loans and tax breaks • Export zones in Mauritius – allowing companies to import duty free, as long as all production is exported

10. The dark side of globalization • In his article Naim focuses on the weakening of governmental control, as more and more goods, services, capital and labor flow across borders • In particular he focuses on: - the drug trade - arms trafficking - intellectual property pirating - alien smuggling - money laundering