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World Bank Tries to Defend Globalization

The World Bank released its “Globalization, Growth and Poverty” report in early December 2001. Amidst mounting crisis and protest, the Bank has tried to mobilize data and analysis in support of globalization. But the attempt to hold and consolidate ideological ground only shows how little of it the globalists have to stand on.

BY SONNY AFRICA

Bulatlat.com

The meat of the World Bank (WB) report, "Globalization, Growth and Poverty," is a number-crunching exercise to establish how being "more globalized" would improve a country's per capita income, life expectancy, and schooling levels.

This seemingly gives final affirmation of the correctness of the favorite line of reasoning of pro-globalizers: liberal trade policies lead to increased trade levels that lead to development (in terms of per capita income, growth, employment, poverty reduction, etc.). The simplicity of the argument gives it much power -- if only the reality were that simple.

The results of the number-crunching are indisputable to the extent that they are mathematical calculations performed on a data set. But serious methodological limitations mean that the conclusions drawn by the WB far exceed what the data support.

Even on its own terms the report and its policy conclusions are problematic.

Allow the devil to quote scripture. First, the report itself notes: "It is difficult to establish a link between openness and growth in a rigorous manner." (Box 1.1, p. 37) There is also backhanded acknowledgement of the absence of such a link when the report says, "Whether there is a causal connection from opening up trade to faster growth is not the issue." (p. 36) In short, even the WB much-revered by globalists is cautious about linking trade policies/levels to the growth dimension of development.

But the report even goes further when it acknowledges the uncertain causal link between trade policies and trade levels. In referring to the structure of the sampling it said: "We label the top third 'more globalized' without in any sense implying that they adopted pro-trade policies. The rise in trade [levels] may have been due to other policies or even to pure chance." (p. 34) Elsewhere it says: "Policy change was not exclusively or even primarily focused on trade" (p. 35) and "The outcome of increased integration into the world economy need not be due to changes in trade policy" (p.36).

So even if we assume that trade levels are good in themselves -- which they're not -- liberalized trade policies don't even automatically bring that about.

In itself these breaks in the simplistic (but appallingly widespread) pro-globalist argument should deflate the unwarranted enthusiasm of so many for trade liberalization. But the methodological limitations of the WB exercise and others like it go far deeper.

Misinterpreting reality

First, the WB study measures the degree of "globalization" according to the increase in the ratio of exports to GDP in the 1977-97 period (i.e. the bigger the increase, the more globalized). This kind of categorization seriously obscures countries' widely differing policy approaches and the varying levels of development they started off with.

All the results establish is a correlation between trade levels, per capita income growth and schooling (I didn't see any actual data on life expectancy) which isn't equivalent to a causal link. A causal chain would be established, rather, by investigating what set of policy measures results in what set of development outcomes, and then over what period of time.

This more careful consideration of the range of factors involved and how they really relate with each other is absolutely necessary. However the WB, far from providing such a nuanced analysis, simplifies a complex argument just to propagate its ideological line.

Take the examples of China and India. Their current performance is attributed by globalists to their liberalization policies in the past decade. The reality of these two countries -- which by the way take up two-thirds of the sample of the population-weighted "more globalized" countries and so greatly influence the aggregate results -- is very different from what rabid globalizers make it out to be.

The increase in China's growth started in the late 1970s, long before any liberalization: average GDP growth in 1979-1985 was 9.9% (China Statistical Yearbook). This compares very favorably with the average GDP growth of 9.7% in 1989-1995 (China Statistical Yearbook). Yet, horror of horrors for free marketers, state procurement of grain increased from 15.7% of domestic grain production in 1978 to 23.9% in 1988. Planned (quota) steel production was still 30% of total output in 1990, albeit down from 52% in 1981.

China went through decades of Socialist construction since 1949. As a result of this it had a substantial industrial and agricultural base by the time it started with trade and investment liberalization, selectively in the late 1980s and more aggressively in the 1990s. China could not have performed the way it did in recent years if this domestic economic base had not first been built.

Furthermore, China has only been partly liberalizing and has retained its planning mechanisms and state direction; plan prices and quotas are still in widespread use. China has also been growing rapidly even if FDI accounts for barely 10% of domestic investment.

It is a similar situation with India. Annual real GDP growth picked up significantly long before the trade reforms of the early 1990s; it averaged 5.9% in 1980-1990 compared to the 3.7% in 1950-80 (IMF). And yet average tariffs in the 1980s were actually higher than in the lower-growth 1970s (WB). Growth picked up further to an annual average of 6.2% in 1990-2000.

Domestic industrial base

Yet in India electricity is still generated and distributed according to plans and internal customs barriers apply to goods traveling across state borders. And, as with China, a domestic industrial base of sorts was also built over time using protectionist instruments. That these were in many cases used badly counts against the government implementing them, not the instruments themselves.

Insistent globalists may invoke the counterfactual: that their growth would have been even faster if they'd "globalized" earlier. But invoked arbitrarily, this kind of reasoning is akin to questioning data -- little more than a desperate last stand. An argument would have to be presented that avoids self-serving circularity. Anyway there's always the counter-counterfactual: growth would have been even faster if they hadn't globalized at all!

The China and India cases are not presented as absolutes, nor as models to follow strictly. There are serious developmental limitations to both countries. But the least their experience shows is that their economic performance can't be attributed to the unfettered operation of free markets as impelled by fanatical trade and investment liberalization.

Another example is the Philippines itself. It is increasingly "globalized": Trade jumped to 101.5% of gross domestic product (GDP) in 1996-2000 from 60.9% in 1986-90; exports alone leapt to 45.7% of GDP from 29.1%. Foreign investments increased 166% between the two periods, from US$ 2.58 billion in 1986-90 to US$ 6.86 billion in 1996-2000.

Yet development performance has been dismal despite this (indeed, for the Left the dismal record is precisely because of this). Per capita GDP is as low as it was in the 1980s even as inequality has been worsening. The trend of high unemployment rates is nowhere near being reversed and is as high as during the crisis-ridden 1980s. Who, in truth, has really gained from all this "globalizing?"

The WB report particularly cites nine countries as notable "globalizers." Of these, China and India however are clearly not of the globalist mold. They also cited the "well-known reformers" Philippines, Argentina and Mexico -- but surely the dismal development record of at least these three countries should make one question the proclaimed virtues of so-called globalization. Look at where Argentina is now – in economic chaos and under a state of siege.

Confused about “globalization”

It's of the utmost importance to define the issue properly. Blinded by ideology, free-marketeers conflate two distinct questions in asking "Should countries globalize?"

One question is: Should countries "globalize," as in adopt policies of trade and investment liberalization?

The usual answer is, "Yes, as fast and as extensively as possible." Competitive forces are invoked as a magic bullet of sorts. But that is misguided and anti-developmental: a certain level of industrial and agricultural development has to FIRST be achieved. Such levels of development are attained by a broad and deep range of non-market mechanisms including radical wealth and asset reforms, protectionism and government support.

For one thing, this conditions what kind of exports there are. There's a world of difference between US exports by a US manufacturer integrated into the US economy and "Philippine" exports which really just come from import-intensive pseudo-manufacturers in export enclaves.

Surely "Made in the Philippines" should mean something far more than "Made by Intel in an Ecozone enclave in the Philippines?" And yet over 2/3 of world trade is intra-TNC trade (UNCTAD)- if these aren't genuinely "third world" TNCs, then it's safe to presume that the gains from trade accrue to first world TNCs.

The WB report obscures this when it says peculiar things like, "Low-income countries are now competing head-on with high-income countries while previously they specialized in primary commodities." (p.24)

The other question is: Should countries "globalize," as in increase the levels of trade and investment? The usual answer is, "Yes, as soon as possible and at all costs." Again, this is misguided and anti-developmental. There are certainly gains to be had for a country from increasing trade (ex. expanded markets, access to production inputs) and investment (ex. capital augmentation, technology transfer).

But trade and investment should happen on terms beneficial to the country. Yet so many countries have been like the Philippines whose governments have been bizarrely fixated on increasing exports and investments immediately and at whatever cost, without regard for the startling conditions of agricultural and industrial backwardness. Some notable failures resulting from this are so-called "export industries" which are so import- and foreign investment-dependent that they are barely integrated into the domestic economy -- with correspondingly meagre domestic benefit.

The flip-side of the ever-broader incentives given to foreign investors are ever more potential benefits lost. After decades of attracting foreign investors, where's the genuine technology transfer? Where's the domestic industrial base that creates jobs? Yet how much has been foregone in terms of revenue and foreign exchange? But the government's orientation is to give ever more generous incentives -- i.e. to attract investors at all costs.

A dangerous obsession

Consider how dangerous this obsession is. It is strange for instance that the Philippine government is so eager to gear the country towards even more pseudo-manufacturing of IT goods and to bank on IT services considering the global IT bust. With so many countries doing the same thing -- not least being China, India, Mexico and Brazil -- all that will happen is a race to the bottom. Countries will compete for IT investments and business on the basis of ever cheaper labor and ever greater investment incentives, leaving host countries with ever less benefits and the likes of Texas Instruments and Microsoft laughing all the way to the bank. There are some 4 million jobless Filipinos... how many jobs does the government think IT will really provide?

Anyway, the point about not relying on market mechanisms to develop domestic economies is borne out by the experience of virtually ALL currently advanced countries, of the NICs (especially Korea and Taiwan), and even of those bandied about as the "new globalizers" such as China, India and Vietnam.

The challenge to globalization fanatics is straightforward: to provide a historical account of a country that has developed its agriculture and industry under a liberalized trade and investment regime (i.e. with neither a protectionist nor Socialist approach lurking in the background). (Bulatlat.com)

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