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Globalization is the world economy which we think of as being globalized. We mean that the whole of the world is
increasingly behaving as though it were a part of a single market, with interdependent production, consuming
similar goods, and responding to the same impulses. Globalization is manifested in the growth of world trade as a
proportion of output (the ratio of world imports to gross world product, GWP, has grown from some 7% in 1938 to
about 10% in 1970 to over 18% in 1996). It is reflected in the explosion of foreign direct investment (FDI): FDI in
developing countries has increased from $2.2 billion in 1970 to $154 billion in 1997. It has resulted also in
national capital markets becoming increasingly integrated, to the point where some $1.3 trillion per day crosses
the foreign exchange markets of the world, of which less than 2% is directly attributable to trade transactions.

While they cannot be measured with the same ease, some other features of globalization are perhaps even more
interesting. An increasing share of consumption consists of goods that are available from the same companies
almost anywhere in the world. The technology that is used to produce these goods is increasingly standardized
and invariant to the location of production. Above all, ideas have increasingly become the common property of
the whole of humanity.

This was brought home to me vividly by a conference that I attended four years ago, where we discussed the
evolution of economic thought around the world during the half-century since World War Two (Coats 1997). We
debated whether the increasing degree of convergence in economic thinking and technique, and the
disappearance of national schools of economic thought, could more aptly be described as the internationalization,
the homogenization, or the Americanization of economics. My own bottom line was that economics had indeed
been largely internationalized, that it had been substantially homogenized, but only to a limited extent
Americanized, for non-American economists continue to make central contributions to economic thought, as the
Nobel Committee recognized by its award to Amartya Sen a few weeks before this conference took place.
Incidentally, the nicest summary of the change in economic thinking over the period was offered by the Indian
participant in that conference, who remarked that his graduate students used to return from Cambridge, England
focusing on the inadequacies of the Invisible Hand, while now they return from Cambridge Mass. focusing on the
inadequacies of the Visible Hand! In the same vein, one of the more telling criticisms of my phrase "the
Washington Consensus" was that the (substantial though certainly incomplete) consensus on economic policy
extends far beyond Washington.

However, there are areas where globalization is incomplete, even in the economic sphere. In particular, migration
is very far from being free. Highly skilled professionals have a relatively high degree of mobility, but those
without skills often face obstacles in migrating to higher-wage countries. Despite the difficulties, substantial
proportions of the labour forces of some countries are in fact working abroad: for example, around 10% of the Sri
Lankan labour force is now abroad.

Moreover, globalization is much less of a reality in other fields than it is in the economic one. Culture still displays
strong national, and even regional and local, variations. While English is clearly in the process of emerging to be a
common world language, at least as a second language, minority languages are making something of a
comeback, at least in developed countries. Sport is still very different around the world: the Americans have still
not learnt to play cricket, and most of the rest of us have still not learned to understand what they see in
baseball. Although the nation state is far less dominant than it used to be, with significant powers being devolved
both downwards to regional and local authorities and upwards to international and in Europe to supranational
institutions (and although "interfering in the internal affairs of another state" is less frowned on than formerly),
politics is still organized primarily on the basis of nation-states.

CAUSES
What explains this globalization? It is certainly not attributable to conquest, the source of most previous historical
episodes where a single economic system has held sway over a vast geographical terrain. The source lies instead
in the development of technology. The costs of transport, of travel, and above all the costs of communicating
information have fallen dramatically in the postwar period, almost entirely because of the progress of technology.
A 3-minute telephone call from the USA to Britain cost $12 in 1946, whereas today it can cost as little as 48
cents, despite the fact that consumer prices have multiplied by over eight times in the intervening period. The
first computers were lumbering away with piles of punched cards in the early postwar years, and telegrams
provided the only rapid means of written communication. There was no fax or internet or e-mail or world-wide
web, no PCs or satellites or cell-phones. Today we witness phenomena that no futurist dreamed of half a century
ago, such as Indians with medical degrees residing in Bangalore who earn a living by acting as secretaries to
American doctors by transcribing their tapes overnight.

It is clearly the availability of cheap, rapid and reliable communications that permits such phenomena, just as this
is the key to the integration of the international capital market. I presume the same factor is important in
nurturing the growth of multinational corporations, since it is this which enables them to exploit their intellectual
property efficiently in a variety of locations without losing the ability to maintain control from head office. But in
this context I would surmise that other factors are also at work, such as the spread of consumer knowledge about
what is available that comes from travel and from advertising, itself encouraged by the communications
revolution and its children like CNN. The reduction in transport costs is also a key factor underlying the growth in
trade.

Of course, it needed a reasonably peaceful world to induce economic agents to exploit the opportunities for
globalization presented by technological progress. But the technological basis for the phenomenon of
globalization implies that, barring an end to the "Pax Americana" or else extremely vigorous conscious actions to
reverse the process, globalization is here to stay.

CONSEQUENCES
Globalization certainly permits an increase in the level of global output. Whether as a result of the old Heckscher-
Ohlin theory of the basis of comparative advantage as lying in different factor abundance in different countries, or
as a result of the new trade theories that explain trade by increasing returns to scale, trade will increase world
output.[2] Likewise FDI brings the best technology, and other forms of intellectual capital, to countries that would
otherwise have to make do without it, or else invest substantial resources in reinventing the wheel for
themselves. It may also bring products that would otherwise be unavailable to the countries where the
investment occurs, which presumably increases the quality, and therefore the value, of world output. And
international capital flows can transfer savings from countries where the marginal product of capital is low to
those where it is high, which again increases world output.

Globalization must be expected to influence the distribution of income as well as its level. So far as the
distribution of income between countries is concerned, standard theory would lead one to expect that all
countries will benefit. Economists have long preached that trade is mutually beneficial, and most of us believe
that the experience of widespread growth alongside rapidly growing trade in the postwar period serves to
substantiate that. Similarly most FDI goes where a multinational has intellectual capital that can contribute
something to the local economy, and is therefore likely to be mutually beneficial to investor and recipient. And a
flow of capital that finances a real investment is again likely to benefit both parties, since the yield on the
investment is expected to be higher than the rate of interest the borrower has to pay, while that rate of interest is
also likely to be higher than the lender could expect at home since otherwise there would have been no incentive
to send it abroad. Loose talk about free trade making the rich countries richer and poor countries poorer finds no
support in economic analysis. Nor is there any reason for supposing that the North benefits itself at the expense
of the South by imposing import restrictions like non-tariff barriers or agricultural subsidies: standard theory says
that, while this does indeed impoverish the South, the public in the North also suffers, and it loses more than the
producers gain. This suggests that a promising strategy for eliminating such barriers is to seek a coalition with
Northern consumers, rather than to engage in North-bashing which will simply alienate potential Northern allies.
[3]

The effects on domestic income distribution are less clear. Standard theory says that trade will tend to hurt
unskilled labour in rich countries and to help it in poor ones, since the poor countries will be able to export-labour-
intensive goods like garments to rich countries, thus increasing the demand for unskilled labour in the poor
countries and decreasing it in the rich ones. That is, within rich countries, there is a good analytical reason for
arguing that trade will tend to make the rich richer and the poor poorer. There has in recent years been a lively
debate among economists in the developed countries as to whether the increase in imports of labour-intensive
goods has been a major factor in causing the fall in the relative (and sometimes absolute) wages of the unskilled
in these countries: the majority of economists seem to have concluded that it is a contributory factor, but that the
major part of the explanation lies instead in the skill-intensive form of technological progress (Cline 1997).

It seems more difficult to doubt that exports of labour-intensive goods have been a factor that has done
something to increase the demand for unskilled labour, and therefore to equalize the income distribution, in the
exporting countries like Sri Lanka. Hence I find it betrays a sad lack of concern with the prospects of the poor to
hear, as I have during this conference, garment exports being denigrated as likely in some unexplained way to
bring negative impacts. On the other hand, some of the effects of the communications revolution must surely
have had a disequalizing effect on income distribution in these countries: think of the Indian doctors who are
acting as secretaries to American doctors rather than treating Indian patients, thereby earning more for
themselves and also tending to pull up the pay of other doctors in India, who are relatively affluent by Indian
standards. Similarly, differential mobility of skilled versus unskilled labour tends to pull up the salaries of the
skilled in developing countries toward world levels, thereby leaving less for the immobile poor. The same result
will occur if the owners of highly-mobile capital are able to evade taxes by investing abroad, and also if
governments are induced to avoid imposing high tax rates on internationally mobile capital, or on those who
might be prompted to emigrate, in the hope of keeping these factors at home. Thus the net effect of globalization
on income distribution within developing countries seems to me distinctly ambiguous.

What impact is globalization likely to have on the long-term possibilities of economic growth in developing
countries? My vision of the growth process is that it takes off when the elite in a developing country comes to
understand the opportunities of applying world-class technologies within their country, and introduces
institutional arrangements that permit individual pursuit of self-interest to serve, in general, the social good. Once
that happens the country is able to grow at a rapid rate, unless some political accident obstructs the process,
until it catches up with best-practice technology, and therefore attains the living standards of the developed
countries. Globalization is tending to make the technologies and the knowledge for this process to occur more
readily available, and therefore to enable the process to be telescoped in time. (Singapore may be a small
country, but there is no previous case in history of any country that did not enjoy massive resource discoveries
going from stark poverty to affluence in under 30 years.)

But it is surely also true that globalization is bringing new dangers. The virulence of the East Asian crisis was
primarily a result of countries exposing themselves to the full force of the international capital market before they
had built up an unquestioned reputation for being able as well as willing to service their debts come what may,
which meant that when investors became concerned about their potential vulnerability as a result of the Thai
crisis there were no other investors willing to step in and provide stabilizing speculation even after exchange
rates and interest rates had clearly overshot. Of course, one can argue that this increased vulnerability to
external shocks has to be weighed against a decreased vulnerability to internal shocks: think how much more
Bangladesh would have suffered this year (1998) if the international community had not provided aid to partially
offset the cost of the floods, let alone how much more hunger, or even starvation, there would have been had
Bangladesh been unable to import additional rice. But this does not justify dismissing the increased dangers from
external shocks. Moreover, I might note that Professor Indraratna offered you a much longer and more
imaginative list of dangers than I have here identified, which looks beyond narrow economic questions and
considers the role of globalization in spreading such unsavoury phenomena as drugs, the sex trade, crime, and
terrorism.

POLICY ISSUES
If I am right in arguing that globalization stems from technological developments rather than policy choices,
trying to reverse it would be rather like playing at King Canute. It would be more productive to seek to maximize
the benefits it offers and minimize the risks it creates. Let me discuss what I see that involving, while restricting
myself to the narrow economic questions.

It will be clear from what was said above that I see little reason to doubt that the citizens of a developing country
can expect to benefit from being open to trade and FDI. This gives them the advantages of being able to make
relatively good use of their abundant unskilled labour and being able to access world-level technology. However,
if they rely simply on exploiting unskilled labour, they will never be able to advance far beyond the living
standards of their poorest competitors, who will be exporting similar goods. In order to raise living standards
progressively over time, it is at least as important to raise educational standards as it is in a relatively closed
economy. To a first approximation, one may summarize the policy advice of how to prosper in a global economy
as: give one's citizens a relevant set of skills through education, and then let them get on with the job of
producing whatever is useful to the world economy.

However, a second approximation requires one to recognize also the increased risks of full exposure to the world
economy. Are there ways of reducing those risks? I am convinced that there is at least one important dimension
in which prudence suggests that developing countries are well-advised to limit their integration in the world
economy, and that concerns the liberalization of short-term capital flows. If one asks what distinguishes those
countries that suffered contagion from the East Asian crisis from those that escaped it, the answer seems to me
very clear: that the victims were those that had built up a substantial stock of short-term dollar-denominated
debt as a result of having established capital account convertibility, while those who escaped catastrophe were
those that had been cautious in liberalizing their capital accounts at the short end. Since there is no persuasive
analytical reason or empirical evidence (Rodrik 1998) for believing that freedom of short-term capital flows is a
significant factor in contributing to economic growth, let alone distributional equity, I conclude that prudence
suggests seeking to postpone rather than accelerate this particular bit of liberalization.

Furthermore, one needs to ask whether there are mechanisms that can protect individuals when risks to the
economy actually materialize. The recent experience in East Asia is again instructive: the World Bank has put a
lot of effort into a crash course in developing social safety nets in the countries that fell victim to the crisis in the
past year. I am sure that many of you will recall that in the past the Bank has been critical of Sri Lanka for having
put too many resources into too wide a safety net, but I do not see any contradiction: the Bank was concerned
that Sri Lanka was trying to provide a safety net more expensive than the economy could afford, and so
indiscriminate that it eroded incentives. Those considerations need to be taken into account, but at the same
time, as Dani Rodrik's (1997) work has emphasized, an open economy has a particularly compelling need for an
adequate social safety net. I hope that you will find some reassurance that the Bank is not unmindful of the
concerns that motivated your generous welfare policies by the fact that we have recently been so active in
promoting the cause of social safety nets in East Asia.

Is there any way of ameliorating the potential negative effect on income distribution through increased
possibilities of tax evasion and a consequential incentive to limit taxes on mobile factors that I discussed above?
One can certainly envisage such measures, although they will require extensive international agreements, in the
form of tax-information sharing and potential withholding of taxes on income earned by foreigners. It is my hope
that such issues will become a part of the future agenda for international negotiation. A globalized world is going
to have to deal with a broader policy agenda than simply liberalization if the outcome is to be reasonably
equitable.

CONCLUDING REMARKS
Globalization has a technological base and is therefore here to stay. Sensible policy involves asking how one can
get the most out of it while limiting the risks that it brings. The answers on the economic level, I have suggested,
involve educating citizens with relevant skills and opening up to trade and FDI while maintaining controls on
short-term capital flows, constructing an appropriate social safety net, and seeking international actions to
reverse erosion of the tax base.

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