Globalisation is working

Contrary to Robert Wade's arguments last month, countries that open up their economies tend to prosper. We need to help more of them reap globalisation's benefits
August 26, 2006

Globalisation isn't working, according to Robert Wade (July). If you exclude China—a mere 1.3bn people—it has not made much of a dent in global poverty or inequality, he claims. And if you ignore the boom years since 2000—why bother using up-to-date statistics?—it hasn't delivered faster growth either. This is a weak argument, which appears to stand up only by excluding evidence that contradicts it—but even on its own terms it isn't correct. In fact, developing countries that have embraced globalisation are growing faster than before; so fast that they are closing the gap with rich countries, slashing poverty and reducing global inequality for the first time since the industrial revolution catapulted Europe forward. Globalisation is working.

Wade claims that, "If the liberal argument holds, we would expect the global shift towards free markets in the past 25 years to have raised the rate of world economic growth. Instead, there has been a slowdown in developed and developing countries. Between the era of managed capitalism (roughly 1960-78) and the era of globalisation (roughly 1979-2000), the growth rate of world output fell by almost half, from 2.7 per cent to 1.5 per cent."

Not so. According to the latest IMF figures, the world economy grew by 3.3 per cent a year from 1986-95 and by 3.9 per cent a year from 1996-2005. Better still, while in 1986-95 emerging economies grew only fractionally faster than advanced economies (3.7 per cent a year compared with 3 per cent), in 1996-2005 they grew over twice as fast (5.5 per cent a year compared with 2.7 per cent). Far from stagnating, the world economy is booming—and developing countries are outpacing developed ones.

But in any case, Wade's methodology is shoddy. Even if global growth had slowed since 1979, one could not deduce from such aggregate figures that globalisation wasn't working. Contrary to what he asserts, there has not been a global shift towards free markets, let alone one that can be dated to 1979. Countries have opened their markets to varying degrees and at different times; some have failed to liberalise at all or have even become more protectionist. What's more, globalisation is not the only economic change of the past 40 years, and so cannot necessarily be considered responsible for any particular change in economic performance. The right way to judge whether globalisation is working is to look at individual economies' performance before and after they liberalised, controlling for other changes that might affect the picture—and one finds a mountain of evidence that it is indeed delivering the goods.

For instance, World Bank studies of 19 countries over four decades conducted in the early 1990s showed that liberalisation boosts economic growth. More recently, Romain Wacziarg and Karen Welch of Stanford University have found that between 1950 and 1998, "countries that have liberalised their trade regimes have experienced, on average, increases in their annual rates of growth on the order of 1.5 percentage points compared to pre-liberalisation times."

Consider China. Since 1978, it has gone from a system where trade was determined by the central government's five-year plan to one where a huge number of private companies engage in foreign trade, import licences have largely been abolished, industrial tariffs have fallen to single figures and service sectors are being opened up too. The volume of China's trade has risen seventy-fold, trade's share in the economy fivefold and the country's share in world trade has jumped from 0.8 per cent to 7.7 per cent. Over the same period, Chinese living standards, as measured by GDP per person at purchasing power parity, have risen fivefold—and the country has witnessed the fastest fall in poverty ever recorded.

China's great leap forward has certainly helped reduce global inequality since 1980, as Wade now concedes: "the Gini coefficient has indeed fallen since 1980, meaning that international income distribution has become more equal." (Four years ago, in his Prospect debate with Martin Wolf on global poverty and inequality, Wade hotly disputed this.) Yet Wade dismisses this fall in inequality by claiming it is solely due to China. Even if this were true, it would surely still be very welcome: it is no small matter if the Chinese, who account for one in four of the developing world's population, are catching up with Americans and Europeans. But the fall in inequality is not just due to China. India, home to more than a fifth of the developing world's population, is also catching up with the west. Indeed, the income share of the poorest 70 per cent of the world's population has increased significantly since 1980. The countries that are continuing to fall behind are mostly in sub-Saharan Africa. It is a tragedy that some very poor countries are doing very badly. But it is not an indictment of globalisation—by and large, the poorest countries are victims not of globalisation, but of a lack of it—nor does it alter the fact that global inequality is falling overall.

Wade points out that absolute income gaps are widening and argues that this is a matter for concern. Really? Consider again his example of economy A, where the average income is $10,000, and economy B, where it is $1,000. Their relative income is 10:1 and the absolute gap between them is $9,000. Suppose B grows at a racy 10 per cent a year. Its income will rise by $100 to $1,100. If the absolute gap between A and B is not to widen, A can add at most $100 to its income of $10,000, which means growth cannot exceed 1 per cent. In short, because A starts off so much richer than B, even if B booms the absolute gap between them will initially widen unless A stagnates—and if A stagnates, B is unlikely to boom, since A's demand for its exports will also stagnate. Perhaps Wade wants the gap between rich and poor to shrink through economic stagnation in rich countries—if so, he should say so explicitly. But surely what is happening now is preferable: rich countries are growing steadily, but poor countries are growing faster, and thus catching up in relative terms. If this continues, they will eventually narrow the absolute gap too. For example, if B grows at 10 per cent a year for 30 years, its income will rise to $17,449; while if A grows at 2 per cent a year over the same period, its income will rise to $18,114.

Wade also dismisses the huge fall in global poverty since 1980, by saying its scale "depends entirely on China." In fact, while the proportion of people in developing countries living in extreme poverty almost halved between 1981 and 2001, from 39.5 per cent to 21.3 per cent—a huge achievement, regardless of whether those who escaped poverty were Chinese or Congolese—even (arbitrarily) excluding China, the poverty rate fell from 31.5 percent to 22.8 per cent. Wade calls this "only 9 per cent": in fact, this 9 percentage-point fall means the poverty rate fell by over a quarter. Extreme poverty edged down in Latin America and the Caribbean, fell by two fifths in south Asia and more than halved in north Africa and the middle east.

There's no doubt about it: globalisation is working. We need to do more to help everyone reap its benefits, not misguidedly try to protect the poor from trade-led development.