Globalization and Its Impacts On Developing Countries

Adam Smith on his famous work Wealth Of Nations wrote that, "The discovery of America and that of a passage to the East Indies by the Cape of Good Hope are the two greatest and the most important events recorded in the history of mankind."

He reasoned that- " Uniting in some measure, the most distant parts of the world, by enabling them to relieve one anther's wants, to increasing one anther's enjoyment and to encourage one anther's industries, their general tendency would seem beneficial.

However, later Smith himself recognized the depredation of imperialism and colonialism on many countries.

John Maynard Keynes, in his essay National Self Sufficiency argued, "economic entanglements through trade and finance added to global destabilization - let good be homespun whenever it is reasonably and conveniently possible, and finance be national."

After the Great Depression, he changed his mind and championed for open trade.

Joseph Stiglitz, in his book Globalization and Its Discontents argues that the pro-globalization policies have the potential of doing a lot of good, if undertaken properly and they incorporate the characteristics of each individual country. Countries should embrace globalization on their own terms, taking into account their own history,culture, and traditions. However, if poorly designed—or if a cookie-cutter approach is followed—pro-globalization policies are likely to be costly. They will increase instability, make countries more vulnerable to external shocks, reduce growth, and increase poverty.

After the 1999 World Trade Organization (WTO) ministerial meeting collapsed amidst protests, rioting and tear gas in Seattle,it has become increasingly difficult for international economic organizations to meet without attracting a large crowd of protesters. These protesters are mainly from developed countries who represent labor organizations worried about jobs as a result of companies moving to the South, US and EU farmers who are anxious to defend their large subsidies, activists who vehemently denounce corporate capitalism or NGOs who are concerned about the negative environmental impacts of globalization. However, there are only a few people who represent the developing countries. Economists so far have failed to provide a convincing case whether globalization is beneficial or detrimental to the poor.

The Doha Round also known as the Doha Development Round of trade negotiation was launched in 2001 hoping that increasing trade and integration would help the developing countries prosper and enable them to address their own development challenges like poverty, illiteracy, and poor infrastructure among others. However, as of 2008 talks have stalled over a divide on major issues, such as agriculture, industrial tariffs and non-tariff barriers, services, and trade remedies between the developed nations like the USA, Japan, the EU and big emerging economies like Brazil, India, China and South Africa. The most recent round of negotiations, July 23-29 2008, broke down after failing to reach a compromise on agricultural import rules. And negotiations are not expected to resume until 2009.

So, what is this buzzword and how has it affected the developing countries so far?

Introduction

What is Globalization?

When used in an economic context, the United Nations defines globalization as the reduction and removal of barriers between national borders in order to facilitate the flow of goods, capital, services and labour...although considerable barriers remain to the flow of labour...

Globalization, generally means enhanced trade and financial integration, has been one of the most important factors that has helped the Asian Tigers, China and India to attain GDP growth rates over 5% and lift millions of people out of poverty and underdevelopment. Globalization promises prosperity through division of labor and specialization based on comparative advantage. India is reaping the benefits of globalization mainly from the service sector while China is benefiting from the manufacturing sector. Not only has North-South trade increased but the South-South trade is also increasing in recent years. China has been able to reduce poverty, based on the standard $1-a-day measure, by more than 400 million between 1990 and 2000. Since the wave of globalization started in the 1980s, according to the World Bank, the number of people living on $1 a day or less declined from 1.5 billion to 1.1 billion in absolute terms between 1981 and 2001. Furthermore, according the IMF, world trade has grown five times in real terms and its share of world GDP has risen from 36% to 55% since 1980. We have not seen progress of this scale since the Industrial Revolution.

Sadly, the benefits of globalization have not been even across the world. Some countries like the US have faced win-lose situations, others like China have faced win-win situations, and many countries from Africa and South Asia have faced lose-lose situations.

A paper entitled 'Globalization and the Least Deeveloped Countries (LDC)' produced at the Istanbul Declaration on Least Developed Countries in July 2007 argued that due to their practical exclusion from economic and political processes — and other special constraints — many LDC s find themselves in a ‘globalization and exclusion trap’.

• According to the Human Development Report 2005, the poorest 40 percent of the world’s population — 2.5 billion people, living on less than $2 a day — now accounts for just five percent of all global income.

• The least developed countries' share of the world merchandise exports fell from nearly 3 percent in 1950 to below 1 percent in 2004

• The least developed countries contributed 0.69 percent of global output in 2005 even though they accounted for almost 12 percent of the world’s population.

• UNCTAD has estimated that the number of people living in poverty in the least developed countries will increase from 334 million in 2000 to 470 million in 2010. While growth is increasing and poverty is falling in some LDCs — especially in Asia — the incidence of poverty is increasing in others, most notably in Africa

Global Trade and Developing Countries

World trade stood at over $18 trillion in 2004, having grown at an average rate of 10.6 percent per annum between 1950 and 2000. Developing country trade has also risen rapidly in absolute terms, from $40 billion in 1950 to almost $6 trillion in 2004. Nevertheless, the developing country percentage share of total trade has remained almost unchanged during this period, at just under 32 percent.If China is excluded, the share of developing countries in global trade has actually fallen from 31 percent in 1950 to 25.7 percent in 2004, reflecting very uneven participation in the expansion of trade, and weak performance by many of the poorest countries.

Agriculture

Agriculture, and trade in agricultural products, is particularly important for developing countries. Agriculture forms the basis of many of these economies, underpinning their food security,export earnings and rural development. It contributes between 30 to 60 percent of their GDP, and between 25 and 95 percent of export earnings. Up to 90 percent of the labor force in many developing countries is employed in agriculture,mostly as smallholder farmers in rural areas.

However, these countries remain marginalized in global agricultural trade. Their share of world agricultural exports has dropped steadily, from 3.3 percent in 1970-1979 to 1.5 percent in 1990-1998. Their market share of many key agricultural commodities also fell significantly from the 1980s to the 1990s — by over 30 percent for such commodities as timber, coffee, tea and cocoa, and about 20 percent for cattle. Despite the dominance of agricultural products in the exports of developing countries, the overall picture is one where the majority of them are net food importers, as total imports are much larger than total exports. The resulting trade deficits are largely financed by foreign aid. As a result, these countries are especially vulnerable to fluctuations in commodity prices. In 2002-2003 alone, food imports increased by over $1 billion and reached $7.6 billion the year after, whereas exports only amounted to $2.2 billion.

There are a number of reasons that have contributed to the above situation.

1. Globalization of Markets and OECD subsidies The economies of developing countries now have to compete in a more fiercely competitive world market.The gradual removal of trade barriers, rising demand for higher quality products and higher standards, the continuous erosion of trade preferences and the costly compliance with the new trade rules hamper the competitiveness of producers in developing countries in both world and domestic markets.OECD agricultural subsidies increased in absolute terms from an average of $305 billion in 1986-1988 to $378 billion in 2004, exceeding the total income of 1.2 billion people living below the dollar-a-day poverty line.63 The hidden cost of this agricultural support falls disproportionately on the developing countries, whose consumers spend more on agricultural produce as a proportion of their income, while the benefits go mostly to a small number of farmers in developed countries. For example, in 2004, seven of Britain’s richest men collectively earned over $4 million a year in farm payouts from the EU. While most developing countries are net food importers and thus may not gain from further agricultural trade liberalization in the short term, because the removal of OECD subsidies would lead to higher world prices of basic foodstuffs, the WTO has already agreed to a revolving fund to assist affected countries. Moreover, such subsidies provide a disincentive for LDCs to invest in food production which could reduce their import dependency in the medium to long term.

1. Technological Challenges Most of the developing countries are at an early stage of agricultural technology and the potential to increase productivity is enormous. They lack advanced technology like the farmers of rich countries have access to. New developments in biotechnology and bioenergy production may pose further threats to export-based growth in developing countries if the new technologies result in a sharp increase in productivity in more advanced economies, thereby pushing down prices in products competing with those of the developing countries.Therefore, it calls for substantial investment in irrigation and rural infrastructure.

Trade In Manufacturing and Services

The share of manufactured goods in developing countries exports was 33 percent for 2000-2003 percent excluding Bangladesh), mainly dominated by labor intensive products such as garments.Some of these countries have a strong comparative advantage in textiles, as the sector requires simple technology and unskilled labor. Partly because of quotas under the Multifibre Arrangement (MFA) until 2005, the industry grew rapidly. Since the expiration of the MFA, many of these industries have lost ground to larger and more competitive producers such as China, and as a result face job and export earning losses. Nepal lost 90% workers from the garment and textile industry after the end of Multi-Fiber Agreement (MFA) in January 2005.

The share of developing countries in global commercial services was just 0.4 percent of exports in 2002, and 1 percent of imports. However, this hides the importance of the service sector in the economies of the developing countries themselves. On average, the service sector comprises 41 percent of GDP in these countries and 18 percent of their total trade.In terms of GDP, it accounts for 65 percent in the Gambia, 45 percent in Benin, around 40 percent in Lesotho and Nepal and 38 percent in Rwanda. Because much of the service sector in the developing countries is in the informal sector it is also an important source of employment. In Bangladesh, Benin and the Niger, 30 percent of the labor force is employed in the service sector; in Djibouti, 50 percent; and in the Solomon Islands, 20 percent.While the majority of the service sectors in developing countries comprise of small-scale activities for the local market, export sectors of interest include tourism, construction, transport and health services.

Many developing countries are interested in greater services liberalization under Mode 4 of the WTO’s General Agreement on Trade in Services (GATS). Mode 4 covers the temporary movement of workers, and greater liberalization would potentially allow the workers from these countries to benefit more from ‘brain circulation’ and ‘brain gain’. However, the liberalization of labor has not been given the same level of attention as the liberalization of goods and other services. Little has been done which would enable them to obtain special priority in market access for commitments under Mode 4. To date, talks have focused on liberalization in the higher skilled categorieswhich could exacerbate concerns over ‘brain drain’.

Tarrif Barriers

Average tariffs applied by the OECD to developing country products are often considerably higher than those applied to other developed countries. Although border protection,including tariff and non-tariff measures, has declined substantially over the past three decades, it remains significant particularly in areas of agriculture and labor intensive industrial products where developing countries have a comparative advantage. Average agricultural tariffs are close to 10 percent in Canada and the United States, rising to more than 20 percent in the EU and Japan — barriers which when taken together are estimated to cost the developing countries the equivalent of $2.5 billion in potential export earnings per year.

Developing countries also face significant tariff escalation. Tariff escalation is particularly prevalent in tropical raw products such as coffee, tea, meat, hides and skins, fruits, cocoa and sugar. According to UNCTAD, these Non Tariff Barriers doubled in the period 1994-2004, and there has been a sevenfold increase in testing and certification requirements since the conclusion of the Uruguay Round. Some countries see the opportunity to gain greater market access by improving product standards. Rwanda is investing in improving its share of higher volume ‘fully washed coffee’ — for example,less than 7 percent of Rwandan coffee is ‘fully washed’ and such coffee canattract a higher market price of $3.18 per pound compared with the lower price for unwashed coffee of $1.96. However, the marked increase in the use of Non Tariff Barriers in recent years has often placed costly and unnecessary burdens on firms which struggle to meet technical, health or administrative requirements for their exports. Furthermore, these countries are often not included or cannot participate effectively in the various international standard-setting processes.

Migration

Globalization and the temporary movement of low skilled workers can have a positive effects on the economies of developing countries. The temporary movement of lower skilled labor can offer positive benefits for developing countries,specifically in relation to skills upgrading, brain circulation, and remittances. Remittances play a significant role as a source of relatively stable external funding,and are also of greater importance to many developing countries than to other developing countries. It is estimated that remittances to all developing countries reached $167 billion in 2005. While the share of developing countries represents only a small part of this total — some $10.4 billion in 2004 — remittances account for a greater share of GNI in these countries compared with other sources of financing. Indeed, several countries including Bangladesh, Cambodia, Lesotho, Nepal,Sudan and Yemen have come to depend heavily on remittances as a source of foreign exchange. While remittances cannot substitute for ODA or for domestic social protection systems, they provide an important source of development finance for meeting immediate needs at the household level. However, the use of such remittances within a broader development framework, geared towards longer term productive activities, such as collateral for microcredit, remains a challenge. In addition, it will be necessary to continually monitor the negative incentive and dependency effects that remittances could create.

The importance of temporary worker schemes can be contrasted with the permanent migration of skilled workers — the so-called ‘brain drain’ — faced by many developing countries. Permanent migration can undermine the ability of a country to develop, leading to skills shortages in important sectors such as health,education, engineering and IT. While the severity of the brain drain effect varies significantly by occupation and country, it is notable that approximately 65,000 African born physicians and 70,000 African-born professional nurses were working overseas in a developed country in the year 2000, representing about one-fifth of African-born physicians in the world, and about one-tenth of African-born professional nurses.Between 1990 and 2000, the number of foreign born, highly skilled persons residing in OECD countries increased by 70 percent, compared to 28 percent for the lower skilled categories. For developing countries, the depletion of human capital stock has been problematic, given the particularly strong push factors involved in the brain drain.The intensity of the brain drain has increased for most developing countries since 1990, and around one in five people born in an LDC with a tertiary education was working in an OECD country in 2000.77 The emigration rate among the tertiary educated population has been conservatively estimated at 41 percent for the Caribbean region, 27 percent for Western Africa, 18.4 percent for Eastern Africa, and 16 percent for Central America. For some countries, the level of intensity is especially high, such as 83.8 percent in Haiti, 76.4 percent in Samoa, 67.5 percent in Cape Verde, 63 percent in the Gambia and 52.5 percent in Sierra Leone. This situation is particularly problematic given that developing countries are well behind other developing countries in terms of achievement of higher education levels and this gap is widening.The global labor market is increasingly integrated for skilled workers who are more accepted by receiving countries, can command higher wages, and who can relocate more easily. Australia, Canada and the United States have programs to attract skilled migrants, thereby exacerbating brain drain in developing countries. There are large recruitment campaigns in ‘at risk countries’ where the skill exodus is severe. Furthermore, the specifics of immigration laws and visa practices discourage brain circulation or temporary migration.

For further information: - www.undp.org/poverty/docs/inclglob/LDCs_Istanbul_ENGLISH_final.pdf