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 Stieglitz, 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.
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...
Introduction
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.
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’.
Some Statistics
- 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.
- 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.
- Second numberTechnological 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.
