Globalization, Transition and Economic Growth January 22, 2004 Presentation by Dalia Treigiene IMF Resident Representative office in Lithuania
Globalization refers to the growing integration of economies and societies around the world. The economic dimensions include: increases in the flows of trade Increase in the flows of capital increase in mobility of individuals across the borders
Modern globalization can be divided into two waves: The first wave: end of 19th and beginning of the 20th century. The second (and the current) wave of globalization: 1950 1980; 1980 present. 40 10 35 30 Merchandise exports/world GDP (left axis) Foreign capital stock/developing country GDP (left axis) Immigrants to the U.S.A. by decade (right axis) 9 8 7 (in percent) 25 20 15 6 5 4 (in millions) 3 10 2 5 1 0 1870 1920 1950 1980 2000 0 Source: World Bank, 2002
Summary: The retreat of globalization in the interwar periods was driven by policy and not technology. Today the mainstream advice strongly favors openness of the developing countries to trade and foreign direct investment, making retreat of globalization less likely.
Benefits of Globalization openness combined with sound domestic policies leads to faster growth. the faster growth has directly transferred into increased living standards. number of people living on less than dollar a day decreased by 200 million since 1980s.
Negative consequences - income inequalities? 1. Within industrial countries increased inequality is linked to increasing wage gap between skilled and unskilled workers; the gap is caused by technological changes rather than reduced trade t barriers 2. In the transition economies a return to a system rewarding performance. 3. In the developing countries the factors are complex; (wars, natural disasters, technological change); social safety nets needed.
Summary: Across the countries, the globalization itself promoted convergence of per capita incomes between developed and developing countries. The income gap between the globalizers and nonglobalizers has widened further.
Role of the IFIs The IMF strives to promote sharing the economic gains of globalization by: encouraging trade and investment openness, increasing financial stability; lending to countries in difficulties; working out debt relief schemes for the heavily indebted poor countries; assisting countries with reforms that generate growth and poverty reduction; providing technical assistance and training.
Role of the IFIs - continued The World Bank calls for: A. Poor countries to open their economies and improve their investment climates; introduce better social protection. B. Developed countries to open their markets to exports from developing countries; reduce their large agricultural subsidies; increase development assistance, particularly to address problems s in education and health.
Transition and Integration into the World Economy, 1990-2003 Countries of Central Eastern Europe, Baltics and CIS are particularly obvious examples of the process of growing international integration. However, the process of integration has not been uniform across the countries. Integration has been rapid and deep in the EU accession countries of Central Eastern Europe (CEE) and the Baltics. Degree of integration into the world economy and capital markets was smaller in the CIS countries. The integration through trade and foreign direct investments plus market oriented reforms led to faster growth in CEE and Baltics than in CIS.
GDP growth, 1990-2003* 140 130 Indices (1990=100) 120 110 100 90 80 70 60 CEE and Baltics CIS 50 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 *2003 projections
Real GDP annual changes, 1991-2003 10 5 in percent 0-5 CEE, Baltics -10 CIS -15 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Benefits and risks of capital inflows Source: : Agenor. Benefits and Costs of International Financial Integration: Theory and Facts. 2001. Benefits: Investment and Growth -- by supplementing the relatively low level of savings in emerging markets/transition economies, capital inflows, if used for investment, can boost economic growth. In this respect the FDI tends to be the best b type of inflow, and the portfolio the worst. Consumption Smoothing -- this should be used only in case of temporary adverse shock. Increased Stability of the Banking Sector -- if capital inflows come to the banking sector, the sector benefits from more competition and more sophisticated international banking techniques + easier access (through the parent bank) to funds in foreign currency. Increased Macroeconomic Discipline -- the mobility of capital prevents the government to pursue unsound policies, the capital would just move quickly elsewhere if the policies were not prudent.
Benefits and risks of capital inflows - continued Risks: Asymmetric access -- the emerging economy can borrow at favorable terms only in good times, i.e. this has procyclical effect -- making the good times better, and vice versa. Misallocation of capital -- the borrowers may use this for luxury consumption goods, rather than investment, with very low impact on growth and d problems of repayment; with FDI this is of course not possible. Loss of macrostability -- under the fixed exchange rate, if not sterilized (through reduction of domestic credit etc.), large capital inflows can increase money supply, with impact on inflation, etc. under the flexible exchange rate they can lead to both nominal and real appreciation. Interdependence/Contagion Effect -- negative developments in neighboring countries can lead to general loss of confidence of investors and d capital outflows.
Foreign Direct Investment,, 1991 2002 net inflows, in USD million 25000 USD million 20000 15000 10000 5000 CEE, Baltics CIS 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Total Capital Flows, 1992 2000 net inflows, in USD million 25000 20000 15000 CEE and Baltics CIS in USD million 10000 5000 0-5000 -10000-15000 1992 1993 1994 1995 1996 1997 1998 1999 2000
Average Inflation rate, 1991 2002 annual percentage changes Year CEE, Baltics CIS 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 117.7 207.3 35.3 32.2 25 17.6 8.5 7.9 4.2 6.2 5.5 2.4 96.1 1063.9 1426.3 1616.2 251.2 43.6 16.6 10.5 25.9 19.8 10.6 5.7
Cumulative Foreign Direct Investments per capita, estimated as of 1991-2003 2003, in USD CEE and Baltics 1767 CIS 242
Trust in the business environment and progress in transition X-axis EBRD transition index, 2002 Y-axis - EBRD trust index, 2002 Source: : Transition Report 2003: Integration and Regional Cooperation. EBRD, 2003. The trust score represents the country s s average proportion of firms demanding advance payment for sale.
Openness of the transition countries relative to other regions, 1995-2002 Exports plus imports, in percent of GDP 100 90 80 70 60 50 40 30 20 10 0 1995 2002 CIS Mercosur SEE and Croatia Accession countries in CEB EU ASEAN Source: : Transition Report 2003: Integration and Regional Cooperation. EBRD, 2003. ASEAN Association of South East Asian Nations (six out of ten members included: Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam) Mercosur Argentina, Brazil, Paraguay, and Uruguay