What Is Globalization?

What is Globalization? (Part one of a four part series)

Globalization is one of the most charged issues of the day. It is everywhere in public discourse - in TV sound bites and slogans on placards, in web-sites and learned journals, in parliaments, corporate boardrooms and labor meeting halls. Extreme opponents charge it with impoverishing the world's poor, enriching the rich and devastating the environment, while fervent supporters see it as a high-speed elevator to universal peace and prosperity. What is one to think?

Amazingly for so widely used a term, there does not appear to be any precise, widely-agreed definition. Indeed the breadth of meanings attached to it seems to be increasing rather than narrowing over time, taking on cultural, political and other connotations in addition to the economic. However, the most common or core sense of economic globalization - the aspect this paper concentrates on - surely refers to the observation that in recent years a quickly rising share of economic activity in the world seems to be taking place between people who live in different countries (rather than in the same country). This growth in cross-border economic activities takes various forms:

International Trade: A growing share of spending on goods and services is devoted to imports from other countries. And a growing share of what countries produce is sold to foreigners as exports. Among rich or developed countries the share of international trade in total output (exports plus imports of goods relative to GDP) rose from 27 to 39 percent between 1987 and 1997. For developing countries it rose from 10 to 17 percent. (The source for many of these data is the World Bank's World Development Indicators 2000.)

Foreign Direct Investment (FDI). Firms based in one country increasingly make investments to establish and run business operations in other countries. US firms invested US$133 billion abroad in 1998, while foreign firms invested US$193 billion in the US. Overall world FDI flows more than tripled between 1988 and 1998, from US$192 billion to US$610 billion, and the share of FDI to GDP is generally rising in both developed and developing countries. Developing countries received about a quarter of world FDI inflows in 1988-98 on average, though the share fluctuated quite a bit from year to year. This is now the largest form of private capital inflow to developing countries.

Capital Market Flows. In many countries (especially in the developed world) savers increasingly diversify their portfolios to include foreign financial assets (foreign bonds, equities, loans), while borrowers increasingly turn to foreign sources of funds, along with domestic ones. While flows of this kind to developing countries also rose sharply in the 1990s, they have been much more volatile than either trade or FDI flows, and have also been restricted to a narrower range of 'emerging market' countries.

Overall observations about globalization. First, it is crucial in discussing globalization to carefully distinguish between its different forms. International trade, foreign direct investment (FDI), and capital market flows raise distinct issues and have distinct consequences: potential benefits on the one hand, and costs or risks on the other, calling for different assessments and policy responses. The World Bank generally favors greater openness to trade and FDI because the evidence suggests that the payoffs for economic development and poverty reduction tend to be large relative to potential costs or risks (while also paying attention to specific policies to mitigate or alleviate these costs and risks).

It is more cautious about liberalization of other financial or capital market flows, whose high volatility can sometimes foster boom-and-bust cycles and financial crises with large economic costs, as in the emerging-market crises in East Asia and elsewhere in 1997-98. Here the emphasis needs to be more on building up supportive domestic institutions and policies that reduce the risks of financial crisis before undertaking an orderly and carefully sequenced capital account opening.

Second, the extent to which different countries participate in globalization is also far from uniform. For many of the poorest least-developed countries the problem is not that they are being impoverished by globalization, but that they are in danger of being largely excluded from it. The minuscule

0.4 percent share of these countries in world trade in 1997 was down by half from 1980. Their access to foreign private investment remains negligible. Far from condemning these countries to continued isolation and poverty, the urgent task of the international community is to help them become better integrated in the world economy, providing assistance to help them build up needed supporting institutions and policies, as well as by continuing to enhance their access to world markets.

Third, it is important to recognize that economic globalization is not a wholly new trend. Indeed, at a basic level, it has been an aspect of the human story from earliest times, as widely scattered populations gradually became involved in more extensive and complicated economic relations. In the modern era, globalization saw an earlier flowering towards the end of the 19th century, mainly among the countries that are today developed or rich. For many of these countries trade and capital market flows relative to GDP were close to or higher than in recent years. That earlier peak of globalization was reversed in the first half of the 20th century, a time of growing protectionism, in a context of bitter national and great-power strife, world wars, revolutions, rising authoritarian ideologies, and massive economic and political instability.

In the last 50 years the tide has flown towards greater globalization once more. International relations have been more tranquil (at least compared to the previous half century), supported by the creation and consolidation of the United Nations system as a means of peacefully resolving political differences between states, and of institutions