Wednesday, 30 November 2011

Combining policies to benefit from globalization: the case of China

For a developing country to benefit from globalization takes a combination of many factors. No single policy can work without many others in place in the same time, and a whole situation can get out of hand simply because one element goes wrong. Offering cheap labor is not enough to make growth happen, and there are plenty of risks in the volatile global market.

          The larger the gaps, and the more the world is globalized, the more difficult is development for the developing countries, and the more “conditional” the convergence between them and the developed countries.

          It is surely urgent for the international community to take development as the top priority on the global agenda. But the developing countries must do the right things themselves to make progress.

          In the case of China, there are still many great challenges, and further challenges are emerging—such as the conflicts with existing economic powers in the areas of trade and resource supplies. But hopefully, China may provide a case of successful development in the era of globalization. At least, as one of the most difficult cases, China’s example may encourage other developing countries to face their own special challenges and overcome their particular difficulties

Tuesday, 29 November 2011

Bangladesh: development outcomes and challenges in the context of globalization

The foregoing discussions highlight the importance of many global economic issues in Bangladesh’s development challenges. While most low-income countries depend largely on the export of primary commodities, Bangladesh has made the transition from being primarily a jute-exporting country to a garment-exporting one. The transition has been dictated by the country’s resource endowment, characterized by extreme land scarcity and a very high population density, which makes economic growth dependent on the export of labor-intensive manufactures. The issue of access of labor-intensive manufacturing exports from developing countries to the major global markets is, therefore, of utmost importance for Bangladesh. Given the important role of workers’ remittances in its economy, Bangladesh is also greatly concerned with the issue of freer movement of temporary workers across borders.

            It is not easy for a least developed country like Bangladesh to specialize in manufactured exports, which currently account for more than 90 percent of the country’s export earnings. Having low wage costs can hardly compensate for its relative disadvantage in marketing skills and infrastructure (including transport, ports, product standards, and certification facilities). Moreover, its existing and potential exports are likely to have low domestic value-added contents because of their heavy dependence on imported raw materials and intermediate goods; this makes it difficult for Bangladesh to satisfy the so-called “rules of origin” in getting preferential access for its exports in the markets of the developed countries. Thus, while Bangladesh stands to benefit from the European Union’s decision to allow duty-free import of “everything but arms” from the least developed countries, it would like to see a relaxation of the “rules of origin” in order to benefit even more, and it would also like to see other industrialized countries, particularly the US, replicate such trade concessions.27

            Bangladesh also needs to worry about non-tariff barriers such as those relating to environmental or labor standards. Possible anti-dumping actions against its exports are also an important latent threat. Besides, tough sanitary and phytosanitary trade regulations are an impediment for diversifying into prospective agro-processed export items. Clearly, the so-called trade-related assistance sought by the least developed countries like Bangladesh under the WTO arrangements needs to address these issues in a comprehensive manner.

            Bangladesh’s export base remains low as the impressive success in garment export has yet to be replicated in other industries. Indeed, its experience with the garment industry has demonstrated the limitation of relying on enclavetype arrangements to facilitate export growth in a specific activity, while postponing institutional reforms for improving the investment climate generally. Lack of a favorable investment climate is also reflected by the fact that, in spite of very liberal policies, Bangladesh has yet to become a favorite destination for foreign direct investment.

            Bangladesh’s development experience also brings into focus the issues surrounding the role of foreign aid, such as in meeting the funding needs for achieving the Millennium Development Goals and providing support to absorb economic shocks. Foreign aid currently received by Bangladesh is much lower compared to the average of low-income countries both as a proportion of GDP and in per capita terms; and this disparity has been increasing over the years.28 One explanation for this lies in the perceived low “aid absorptive capacity” of the country due to weak governance. Donors are concerned about the possible misuse of aid funds, given the governancechallenged environment in Bangladesh. But there is ample evidence that part of the problem also lies with the donors insisting on unrealistic project design and aid conditionalities (Mahmud 2006). In a recent review of its aid operations in Bangladesh, the World Bank, for example, has admitted the need for finding a “good local fit” for its projects and for engaging in a wide range of critical sectors rather than waiting for reforms to occur (World Bank 2006b). Given Bangladesh’s record in reducing poverty and improving social development indicators, the international donor community faces the challenge to find ways of helping the country to achieve its development goals.

Monday, 28 November 2011

The Middle East: challenges and opportunities of globalization

Two sets of determinants are responsible for MENA’s failure thus far to reap the potentially large benefits of globalization. First is the configuration of political and geo-strategic circumstances that has regularly disrupted the region both with intra-regional conflict and with interference from foreign partners in its internal affairs, and has encouraged the hemorrhage of domestic resources—either to be spent on security and defense or to be transferred abroad by the private sector to escape endemic instability. Second is a combination of poorly designed and executed national economic and social policies. Except in three or four of the region’s twenty-two countries, economic management has been passive and crisis-driven, lacking a clear vision and related programs for achieving proclaimed goals such as productivity growth, job creation, and export diversification.

      Despite their wealth of human and natural resources and rich cultural heritage, countries of the Middle East risk further impoverishment and isolation. Globalization poses enormous policy challenges for the region. The policies associated with past socialist regimes and centrally planned economies sorely need revision. Creating an enabling environment for private sector investment and exporting will help to achieve the growth that is needed to absorb the swelling tide of job-seekers. But adjustment is a difficult process, given the embeddedness of certain policies, institutional arrangements, and norms. Revisiting the role of the state in MENA is imperative in the new global context. At the same time, a delicate balance should be achieved between those policies that aim at integrating the region into the world and those that are needed to maximize its development potential.

      The region will make no real progress on the development plane while it lives in constant turmoil, the root of which is humiliation and threats to the identity and future of an entire generation of young Arabs. Globalization should mean widening the scope of human choice and the full exercise of human rights. The Middle East, more than any region in the world, needs a fair arbitrator in the global political arena, along with the provision of all other public goods. When the international community can deliver respect for the rights of individuals to security in their own homes, citizens of the region can better demand democracy from their leaders.

Sunday, 27 November 2011

Fooling ourselves: evaluating the globalization and growth debate

Does trade policy promote growth? As economic policy questions go, thisone is important. Unfortunately, the attempts of a long literature looking at cross-country evidence have failed to provide a convincing answer. Several studies find an empirical connection between openness and growth, but they tend to suffer from basic methodological shortcomings. Recent studies address these shortcomings but, once they do, they no longer find a robust empirical relationship between openness and growth. We interpret this to mean that the linear regression framework typically used is too simplistic to capture the true underlying relationship between trade policy and growth—a relationship that is full of nuances and dependent on mechanisms and circumstances. A different approach seems more promising.

          This approach looks at microeconomic evidence instead of at macroeconomic evidence. It focuses on and models the specific mechanisms through which trade or trade policy operate instead of looking directly at the macroeconomic outcomes. It takes into account other elements that might influence the impact of policy measures instead of restricting this impact to be state-independent. This comes at a cost. This approach is more limited in scope. In particular, it does not provide a simple answer to the original question. Instead, it can only provide (conditional) answers to partial aspects of it. Whether one is comfortable with this more limited approach is a matter of taste. Because we believe that there are in fact no general answers to the trade and growth question, we are comfortable with investigating the smaller questions whose answers provide a more reliable basis for policy recommendation. Others will surely beg to differ.

Sunday, 20 November 2011

Openness and poverty reduction in the short and long run

Liberalization and industrial performance: evidence from India and the UK

There can no a priori assumption that an industrial sector will benefit from or be harmed by liberalization; to make a prediction, one has to look into initial technological conditions and the institutional environment. We have first argued and provided evidence that liberalization should enhance performance to a larger extent in firms or industries that are initially closer to the technological frontier. Second, we have shown that domestic institutional and policy choices, such as those that pertain to labor institutions, have a central bearing on whether firms and industries benefit from liberalization.

            Our microeconomic analysis allows us to revisit the debate on liberalization. Here we believe that the devil is in the detail. For example, we saw that even if liberalization had a positive aggregate impact on productivity and output in India, it also had a negligible or negative impact on firms far below the technological frontier. This in turn suggests that complementary policies can be designed to encourage technological upgrading, either through providing incentives to existing firms or through reallocating workers from low- to high-productivity firms. Similarly, our finding that pro-worker labor regulations may limit the potential positive impact of liberalization points to complementarities between macroeconomic reforms such as tariff reductions and more microeconomic institutional reforms.

            The finding that there are both winners and losers from liberalization helps us to understand why liberalization itself is often opposed even if its overall impact is positive. Even if liberalization reduces barriers to entry, groups or industries that would potentially lose from liberalization may oppose complementary institutional reforms, thus further reducing the overall impact of liberalization on economic performance. Identifying a set of liberalization reforms that are both growth-enhancing and politically feasible is an important subject for future research.