52676
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IAN GOLDIN
KENNETH REINERT
for
GLOBZATION
DE VELOPMENT
for
GLOBA L I ZATION
DE VE LOP M E N T
T R A D E , F I N A N C E , A I D , M I G R AT I O N , A N D P O L I C Y
REVISED EDITION
IAN GOLDIN
KENNETH REINERT
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Contents
FOREWORD by Fran�ois Bourguignon IX
ACRONYMS AND ABBREVIATIONS XIII
ACKNOWLEDGMENTS XVII
ABOUT THE AUTHORS XIX
1
BACKGROUND AND CONTEXT 1
2
GLOBALIZATION AND POVERTY 21
3
TRADE 47
4
FINANCE 79
5
AID 113
6
MIGRATION 15 1
with Andrew L. Beath
7
IDEAS 193
8
TOWARD A POLICY AGENDA 227
REFERENCES 265
INDEX 285
v
vi Contents
Boxes
1.1 John Maynard Keynes on Globalization 7
1.2 International Agreements, Institutions, and Key Players 8
2.1 The Experience of Being Poor 27
2.2 Volatile Widgets in the 1990s 39
2.3 The Idea of Global Public Goods 42
3.1 Export Processing Zones 60
3.2 Textile and Clothing Protection 65
3.3 The Integrated Framework 71
4.1 Financial Crises 83
4.2 Targeting Poor People: Commercial Microfinance 90
4.3 Creating Links 95
4.4 The Nairobi Stock Exchange 101
5.1 Aid in Zaire 127
5.2 Millennium Development Goals 145
6.1 Migrant Dreams Become Nightmares 163
6.2 Musical Doctors 175
6.3 Migrant Labor Institutions of the Philippines 184
7.1 Mercantilism 196
Figures
1.1 Trade and Extreme Poverty in Historical Perspective 10
2.1 Per Capita Income by World Region 22
2.2 The Growth of World Population 24
2.3 Population Age Distributions 25
2.4 Relative Economic Strength of Developing Countries,
Historical and Projected 26
2.5 The Historical Evolution of World Poverty 27
2.6 The Recent Evolution of World Poverty 28
2.7 Regional Incidence of Extreme Poverty 29
2.8 Life Expectancy by World Region 30
2.9 Infant Mortality 31
2.10 Female Youth Literacy Relative to Male Youth Literacy
and Infant Mortality 32
2.11 Trade and FDI for Low- and Middle-Income Countries 34
2.12 Sectoral Composition of Developing Country
Nominal Exports 35
Contents vii
2.13 Nominal Flows of Aid, FDI, Portfolio Investment,
and Remittances to Developing Countries 38
2.14 Foreign Remittances Per Capita and as a Percentage
of Per Capita GDP, 2003 40
2.15 Communication Access, 2004 44
3.1 Low- and High-Technology Manufactured Exports of Some
Developing Countries, 2003 57
3.2 Some Characteristics of the Maquiladora Industry
in Mexico 59
3.3 Tariff Escalation on Developing-Country Exports
to Developed Countries 62
3.4 OECD Agricultural Subsidies 63
3.5 Primary Commodity Prices in the 20th Century 68
3.6 Arms Imports Per Capita, 2003 72
4.1 Net Private Capital Flows to Low-Income Countries,
1970�2004 82
4.2 Net Private Capital Flows to Middle-Income Countries,
1970�2004 84
4.3 Net Private Capital Flows to Low- and Middle-Income Countries
as a Percentage of GDP, 1970�2004 86
4.4 Global Shares of Population, PPP GDP, and FDI, 2004 93
4.5 Net Inward Portfolio Equity Flows to Developing Countries,
1995�2004 100
4.6 Net Inward Debt Flows to Developing Countries,
1997�2004 103
4.7 Gross Inward Bank Lending, 1996�2004 105
4.8 Composition of Financial Development 107
5.1 Magnitude and Vintage of Major Aid Organizations 117
5.2 Inflows of Official Development Assistance by Region,
1960�2004 119
5.3 Foreign Aid Receipts as a Percentage of Low- and Middle-Income
Country GDP, 1960�2004 123
5.4 Breakdown of Aid Flows to Sub-Saharan Africa
(excluding Nigeria) 123
5.5 External Debt of Developing Countries 141
5.6 Aid and Support for Agriculture as a Share of GDP, 2002 146
6.1 Inflow of Migrants to the United States and Canada,
1820�2003 155
viii Contents
6.2 Rates of Emigration to the United States by Income,
1989�2000 169
6.3 Flows of Official Remittances to Regions of the Developing World,
1975�2006 178
Tables
5.1 Average Annual Aid Flows Per Person in Real 2000 US Dollars,
1960�2003 116
5.2 Developments in the History of Foreign Aid 118
5.3 Major Deployments of Foreign Assistance 120
5.4 ODA as a Share of GNI, 2005 and Estimated for 2006 122
5.5 Yields of Major Food Crops (kg/ha) in Developing Nations,
1970�2004 138
6.1 Historical Rates of Migration 154
6.2 Stock of International Migrants, 1990, 2000, and 2005 157
6.3 Major Channels of Modern International Migration 159
6.4 Economic Importance of Remittances, 2003 177
7.1 Potential Effects of Intellectual Property Protection
on Poor People 205
7.2 Idea Changes in Development Thinking 212
8.1 Examples of Policies Affecting Globalization Processes
and Outcomes 230
8.2 A Global Policy Checklist 260
Foreword
G lobalization has been taking place for centuries, moving from the
colonization of the inhabited parts of the world to the appearance of
nations, from conquests to independent countries, from sailboats and cara-
vans to steamboats, truck fleets and cargo planes, from trade in a few com-
modities to global production and distribution networks and to the present
explosion of international flows of services, capital, and information. Based
on Maddison's recent estimates on the world economy over the past millen-
nium, it is possible to calculate that world merchandise exports amounted
to approximately US$40 per capita--at today's purchasing power--in 1870.
This figure had tripled to US$120 by 1913. After a slowdown due to the two
consecutive world wars it was then multiplied by almost 10 between 1950
and 2000, to reach approximately US$1,000 per capita today. Seventeen per-
cent of world output is being exchanged today against less than 5 percent a
century ago, and this figure is rising rapidly.
The sheer size of today's global economy is a testament to the speed of
change: In 2005, world economic output total US$35 trillion--an amount
likely to double by 2030, assuming modest continued growth.
Faced with such a dramatic evolution, the issues that arise are whether it
is good or bad for humankind, whether it must be encouraged or, on the
contrary, curbed and, if so, by what means. Globalization may be judged by
many criteria, but the most important one is undoubtedly development in
all its forms and, in particular, poverty reduction. This is the theme of Ian
Goldin and Kenneth Reinert's fascinating book.
We are today at a crucial point in the history of our fight against poverty
in its various dimensions. Probably for the first time in history, the absolute
number of people living on less than $1 a day in the world has dropped,
from 1.5 billion in 1981 to 1.1 billion in 2002. It is true that the proportion
of people living in extreme poverty in the world has been falling more or less
ix
x Foreword
continuously since the beginning of the Industrial Revolution. But the pace
accelerated considerably over the past 20 years. During that period, the global
income poverty rate dropped by almost half. Much of this progress on the
global front was concentrated in Asia. By contrast, income poverty rose in
Sub-Saharan Africa, both in relative and absolute terms, a region somehow
left at the margin of several crucial aspects of globalization. Health gains in
the world have also been impressive and more widespread. Infant mortality
rates in poor countries are far lower than those of countries at the same
income level 25 years or 50 years ago, and life expectancy at birth increased
to 65 years in 2004. Unfortunately, there have also been major reversals of
progress, in particular the tragedy of HIV/AIDS in Africa. The developing
world has also made major strides in education--with the average number
of years of education completed among adults steadily increasing (though
it is still a meager five years on average) and the number of adults with no
schooling falling from half of the developing world's population to just over
one-third.
Although progress has been steady and in some instances rather dramatic,
global imbalances in the distribution of income and wealth are huge, and the
awareness of these imbalances grows as information flows ever more quickly
in tandem with globalization. People everywhere can compare themselves to
the richest developed societies and are anxious to reduce the yawning gaps
in income and consumption. The possibility that Africa will lag behind is a
particular concern.
Looking ahead, another source of concern is that many countries may
face widening inequality, thus partly muting the poverty-reducing effects of
growth and possibly sparking social tensions. Population growth, the pace of
urbanization, and educational opportunities influence how this plays out in
each country. Trade alone exerts no systematic effects on income distribu-
tion. The most important factors are the initial conditions of inequality and
the extent to which growth is driven by highly-skilled sectors of the economy.
The main contributor to global inequality within and between countries
is the widening difference in earning potential between skilled and unskilled
workers--between people and companies with technological skills and con-
nectivity needed to enhance productivity versus workers and enterprises
slowed by low educational levels, dated production techniques, and inhos-
pitable business climates.
We face a brief window of opportunity during which these global imbal-
ances can be tackled. The opportunity is to put into practice within countries
what we have learned about increasing development potential, reducing
poverty, and cushioning the impact of restructuring and globalization. Current
Foreword xi
trends in technology, economics, demographics, and even geopolitics should
make that possible.
In addition several other tasks urgently need to be tackled. In trade, devel-
oped countries must follow through on their commitments to give develop-
ing countries greater market access. In aid, donor countries must scale up
their assistance in ways commensurate with the Millennium Development
Goals, reinforcing and accelerating the mild progress of the past few years.
In governance, developing countries must continue to move toward greater
accountability, transparency, and efficiency. And all countries need to work
together to address such disasters as HIV/AIDS and climate change.
In this impressive volume, Ian Goldin and Kenneth Reinert provide a com-
prehensive introduction to key aspects of globalization--trade, finance, aid,
and migration--and their complex linkages with poverty and development.
To prepare a volume accessible to a large audience requires clarity and
synthesis. Too often, however, clarity and synthesis invite naive truisms and
open the door to ideological statements. Goldin and Reinert have success-
fully avoided both. Indeed, they provide readers with an understanding of
globalization that is rich in its complexity. Beginning with an overview of the
dimensions of poverty, Goldin and Reinert explain how trade can reduce
poverty by increasing labor-intensive production, human capital accumula-
tion, and technological learning; they examine how foreign direct invest-
ment and debt and equity instruments can help finance development; and
they consider how migration can allow workers and their families back
home to escape poverty through remittances.
At the same time, Goldin and Reinert observe that each of these aspects
of globalization can fail to reduce poverty or even harm development.
Trade without public investment, without safety nets, and without access to
developed-country markets diminishes or even negates the gains for the
poor. Volatile capital flows can cause financial crises. Aid can be ineffective
when governance is poor or when donors have geopolitical motives.
Migration can also involve brain drain, which can harm developing countries
and can even harm global efficiency if the positive externalities created by
skilled workers are large and are higher in poor countries than in rich ones.
This book also helps to shatter a false dichotomy that holds that policies
that favor the poor cannot be pro-market. There is an enormous set of pro-
poor and pro-market policies that allow for more equal market competition
among and within countries, and that ask that policy take account of exter-
nalities as much as possible.
Having a nuanced view of development is humbling and sometimes dis-
appointing. There is so much we do not know, and we must acknowledge
xii Foreword
our knowledge gaps. Yet, Goldin and Reinert show that our understanding
of development has substantially improved. And they strongly encourage us
to use that new knowledge to get the best out of globalization for develop-
ment and poverty reduction.
Fran�ois Bourguignon
Senior Vice President and Chief Economist
The World Bank
Acronyms and
Abbreviations
ADB Asian Development Bank
AERC African Economic Research Consortium
AFDB African Development Bank
AIDS Acquired Immune Deficiency Syndrome
ATC Agreement on Textiles and Clothing
BIS Bank for International Settlements
CAF Corporaci�n Andina de Fomento
CGE Computable General Equilibrium
CGIAR Consultative Group for International Agricultural
Research
CSO Civil Society Organization
c.i.f. cost insurance freight
DAC Development Assistance Committee (of OECD)
EBRD European Bank for Reconstruction and Development
EHK Euler Hermes Kreditversicherungs
EIB European Investment Bank
EPZ Export Processing Zone
EU European Union
FAO Food and Agriculture Organization (of the United
Nations)
FDI Foreign Direct Investment
FMO Netherlands Development Finance Company
f.o.b. free on board
G-8 Group of Eight
GATS General Agreement on Trade and Services
GATT General Agreement on Trade and Tariffs
GAVI Global Alliance for Vaccines and Immunizations
GDP Gross Domestic Product
xiii
xiv Acronyms and Abbreviations
GNI Gross National Income
GNP Gross National Product
GSP General System of Preferences
HIPC Heavily Indebted Poor Country
HIV/AIDS Human Immunodeficiency Virus/Acquired Immune
Deficiency Syndrome
HTME High Technology Manufactured Exports
IBRD International Bank for Reconstruction and Development
(of the World Bank Group)
ICSID International Centre for Settlement of Investment
Disputes
ICT Information and Communication Technologies
IDA International Development Association
(of the World Bank Group)
IDB Inter-American Development Bank
IF Integrated Framework
IFC International Finance Corporation
(of the World Bank Group)
IMF International Monetary Fund
IP intellectual property
IsDB Islamic Development Bank
ITC International Trade Centre
LDC Least-Developed Countries
KAM Knowledge Assessment Methodology
LIFE Legal Immigration Family Equity Act
LTME Low Technology Manufactured Exports
MDG Millennium Development Goals
MFA Multifiber Arrangement
MFI Micro Finance Institution
MIGA Multilateral Investment Guarantee Association
(of the World Bank Group)
MNE Multinational Enterprise
NAFTA North American Free Trade Agreement
NGO Nongovernmental Organization
OCP Onchocerciasis Control Programme
ODA Official Development Assistance
OECD Organisation for Economic Co-operation and Development
OEM Original Equipment Manufacturer
OPEC Organization of the Petroleum Exporting Countries
Acronyms and Abbreviations xv
OPIC Overseas Private Investment Corporation
POEA Philippine Overseas Employment Agency
POLO Philippine Overseas Labor Office
PPP Purchasing Power Parity
PRS Poverty Reduction Strategy
R&D Research and Development
SITC Standard Industrial Trade Classification
SSA Sub-Saharan Africa
TCBDB Trade Capacity Building Database
TDG TeleCommons Development Group
TRIM Trade-Related Investment Measures
TRIPS Trade-Related aspects of Individual Property Rights
UAE United Arab Emirates
UK United Kingdom
UN United Nations
UNAIDS United Nations Programme on HIV/AIDS
UNCTAD United Nations Conference on Trade and Development
UNDP United Nations Development Programme
UNHCR United Nations High Commissioner for Refugees
UNICEF United Nations Children's Fund
USA United States of America
USAID United States Agency for International Development
WHO World Health Organization
WIPO World Intellectual Property Organization
WTO World Trade Organization
Acknowledgments
M any people have supported us in writing this book, and to all our
deep thanks are due. Most important, Andrew Beath provided
outstanding research assistance. In addition to literature reviews and data col-
lection and analysis, he contributed to writing chapter 6 on Migration. It was
Dominique van der Mensbrugghe who introduced us, so we owe this happy
collaboration to his matchmaking. Sir Nicholas Stern's encouragement and
contributions to Ian's initial ideas for this book provided a vital springboard
for our work. Kemal Dervis, Minister Trevor Manuel, Professor Amartya Sen,
Sir Nicholas Stern, and Professor Joseph Stiglitz generously gave their time
and thoughts to provide comments on this book. Fran�ois Bourguignon
authored the insightful Foreword. We also are indebted to many other col-
leagues who also have provided very helpful material, comments, and support.
They include Amar Bhattacharya, Gerard Caprio, Jean-Jacques Dethier,
Desmond Dinan, Amy Heyman, Bernard Hoekman, Michael Klein, Danny
� �
Leipziger, David McKenzie, C ag lar �zden, John Page, Lant Pritchett, Dilip
Ratha, Martin Ravallion, William Rex, David Rivero, F. Halsey Rogers, Eric
Swanson, Zhen Kun Wang, L. Alan Winters, Xiao Ye, and Shengman Zhang.
Sophia Cox and Ginette Francois provided invaluable assistance with the for-
matting and organization of this text. The great professionalism of Santiago
Pombo-Bejarano, Nancy Lammers, and Andres Meneses, of the Office of the
Publisher at the World Bank, and Amanda Hamilton at Palgrave Macmillan,
turned the manuscript into a widely accessible product. Mary Fisk skillfully
managed the editorial and production processes. Joy le Blanc-Alston and Kris
Zedler, through their overall expertise and time management skills, ensured
that this project did not interfere with other activities. We would also like to
thank Meera Balarajan and Stephen McGroaty for their help in preparing the
xvii
xviii Acknowledgments
revised edition. As this project fell on top of our normal work responsibilities,
it is to our families that we are most grateful. Ian's wife Tessa, daughter Olivia,
and son Alex, and Ken's wife Gelaye and son Oda Telila once again demon-
strated their unstinting support and patience during the many evenings and
weekends that this project invaded.
The authors alone take responsibility for the contents of the book, which
does not necessarily reflect the views of our colleagues, the World Bank
Group, its management, executive directors, or member governments.
Ian Goldin
Ken Reinert
January 2007
About the Authors
Ian Goldin, PH.D. (OXFORD UNIVERSITY), is Director of the University of
Oxford James Martin 21st Century School and a Professorial Fellow at Balliol
College, University of Oxford. From 2003 to August 2006 he was Vice
President at the World Bank. Previously, he was the Director of Development
Policy at the World Bank. Prior to rejoining the Bank in February 2001,
Dr. Goldin spent five years as the Chief Executive and Managing Director
of the Development Bank of Southern Africa (DBSA) where he led the Bank
to become a principal financier of infrastructure and small business develop-
ment in Southern Africa. Before this, he worked as a Principal Economist at
the European Bank for Reconstruction and Development (EBRD) in London
and as Head of the Trade, Agriculture and Environment Program at the
OECD Development Center in Paris. Dr. Goldin has published 11 books and
numerous articles. His research and publications have focused on economic
policy, development, natural resources and the environment, and trade. His
better known books include: The Economics of Sustainable Development,
Open Economies, Economic Reform and Agricultural Development, and Trade
Liberalization--Global Economic Implications.
Kenneth Reinert, PH.D. (UNIVERSITY OF MARYLAND), is Associate
Professor of Public Policy at George Mason University, where he received a
Distinguished Teaching Award in 2003. He has held the positions of Senior
International Economist at the U.S. International Trade Commission and
Associate Professor of Economics at Kalamazoo College. Professor Reinert
has published widely in the areas of international trade, economic develop-
ment, and environmental policy. He co-edited Applied Methods for Trade
Policy Analysis: A Handbook (Cambridge University Press, 1997), authored
Windows on the World Economy: An Introduction to International Economics
(South-Western Thomson, 2005), and is currently co-editing the Princeton
Encyclopedia of the World Economy.
xix
1
Background and
Context
T he relationship between globalization and poverty is not well under-
stood. For many, globalization is held out as the only means by which
global poverty can be reduced. For others, globalization is seen as an impor-
tant cause of global poverty. Consider the following two quotations:
A world integrated through the market should be highly beneficial to the
vast majority of the world's inhabitants.
--Martin Wolf (2004)
While promoters of globalization proclaim that this model is the rising
tide that will lift all boats, citizen movements find that it is instead lifting
only yachts.
--International Forum on Globalization
To the knowledgeable global citizen, such disparate views are a cause of
some confusion and concern. In this book, we aim to resolve this confusion.
We want to provide an understanding of the main dimensions of economic
globalization and their impact on poverty and development. Although rooted
in rigorous inquiry, this is not narrowly an academic book. Our objective is
to inform the wider public and to provide a broad foundation for policy dis-
cussions on globalization and poverty.
Many claims about the relationship between globalization and poverty are
not well founded. By examining both the processes through which globaliza-
tion takes place and the effects that each of these processes can have on global
poverty alleviation, current discussions can be better informed. The processes
we examine in this book constitute the main global economic channels affect-
ing poverty: trade, finance, aid, migration, and ideas.1 By considering each of
these processes, confusion about globalization can, to some extent at least, be
1
2 Globalization for Development
resolved. To that end, this chapter introduces the five dimensions of global-
ization and considers the problem of global poverty, placing both globalization
and poverty in historical context. Our central message is that, with appropriate
national and global policies, globalization can be an important catalyst for alle-
viating global poverty. In the absence of these policies, however, this catalyst
role is diminished. In a few particular instances, globalization without cor-
rective policies can actually exacerbate certain dimensions of poverty. We
identify what actions are needed to produce positive global outcomes.
Globalization and Global Poverty
Globalization is an often-discussed but seldom-defined phenomenon. At a
broad level, globalization is an increase in the impact on human activities of
forces that span national boundaries. These activities can be economic, social,
cultural, political, technological, or even biological, as in the case of disease.
Additionally, all of these realms can interact. For example, HIV/AIDS is a
biological phenomenon, but it affects and is affected by economic, social, cul-
tural, political, and technological forces at global, regional, national, and
community levels. In this book, we focus primarily on economic activities,
referring to the other realms of globalization only tangentially.2 This no doubt
reflects our bias as economists, but also our observation that global poverty
is very much (but certainly not exclusively) an economic phenomenon. In
adopting this economic focus, we in no way wish to imply that social, cultural,
political, technological, and biological aspects of globalization are unimpor-
tant. They are important. But having cast our net widely already to include
multiple dimensions of economic globalization, we consider it unwise to cast
it even more broadly.
The changing natures and qualities of the five economic dimensions of
globalization characterize its process. These dimensions are
trade
finance
aid
migration
ideas.
Trade is the exchange of goods and services among countries. Finance
involves the exchange of assets or financial instruments among countries. Aid
involves the transfer of loans and grants among countries, as well as techni-
cal assistance for capacity building. Migration takes place when persons move
between countries either temporarily or permanently, to seek education and
Background and Context 3
KEY TERMS AND CONCEPTS
autarky foreign direct investment (FDI)
bond finance global public good
capacity building gross domestic product (GDP)
capital flows migration
commercial bank lending poverty
comparative advantage purchasing power parity dollars
equity portfolio investment
employment or to escape adverse political environments. Ideas are the broad-
est globalization phenomenon. They involve the generation and cross-border
transmission of intellectual constructs in areas such as technology, manage-
ment, or governance.
Dimensions of Poverty
For each of these five economic dimensions of globalization, the field of
investigation is very wide. We will narrow it significantly by considering only
those aspects that are most closely tied to issues of poverty alleviation. This
process of narrowing our scope requires a large element of judgment. In
choosing what to emphasize, we have reflected the issues and concerns of
development policy communities as well as our disciplinary backgrounds in
economics.
What do we mean by global poverty? Although we all have some concept of
what it is to be "poor," the notion of poverty is not as straightforward as
it might first appear. The reason is that poverty is not a one-dimensional
phenomenon. It is multi-dimensional. A number of different concepts and
measures of poverty relate to its various dimensions. Each of these dimen-
sions has the common characteristic of representing deprivation of an impor-
tant kind. The variety of poverty concepts in use in development policy
communities reflects the variety of relevant deprivations.3 The major meas-
ures of poverty we consider here are those that encompass:
income
health
education
empowerment
working conditions.
4 Globalization for Development
Income
The most common measure of poverty is known as income poverty, and it
derives from a conception of human well-being defined in terms of the con-
sumption of goods and services. In this approach, poverty is viewed as a lack
of goods consumption due to a lack of necessary income. At present, the most
widely accepted measure of income poverty is in terms of one or two U.S. dol-
lars per day, measured in constant (price adjusted), "purchasing power
parity" dollars.4 Individuals who exist on less than one dollar a day are known
as the "dollar poor" or the "extremely poor"; individuals who exist on less
than two dollars a day are known as the "poor."5 In this book, we use this
concept as one important indicator of global poverty.
Health
There is growing recognition that income poverty is not the only important
measure of deprivation.6 For example, poor health is now recognized as per-
haps the most central aspect of poverty. The fact that 6 million persons die
annually from AIDS, tuberculosis, and malaria illustrates this point, as do the
annual deaths of a roughly equal number of infants from largely preventable
causes such as diarrheal disease. Health deprivation characterizing poverty
can be assessed in terms of life expectances, infant and child mortality, and a
number of other health-related measures.
Education
Lack of education that results in limited literacy and numeracy is another
important deprivation. Indeed, lack of education is often an important cause
of deprivations in income and health. This dimension of poverty can be
assessed in terms of literacy rates, average years of schooling, or enrollment
rates. Gender disparities in education are an important and too-often-
observed component of educational deprivation and represent a key obstacle
to development.
Empowerment
Lack of what is sometimes called "empowerment" is a fourth important
dimension of poverty. This includes limits on individuals' abilities to enter
into and participate in social realms such as work and political processes
because of discrimination of various kinds. Gender disparities are an impor-
tant kind of empowerment deprivation and interact in detrimental ways with
consequences in health and educational deprivations. In many countries, for
example, women are socially restricted from entering the workforce or from
Background and Context 5
political participation. In some instances, they do not have the same legal
rights as men.7
Working Conditions
One important issue that does not always arise in discussions of poverty
concepts is working conditions. As emphasized by Bruton and Fairris (1999),
"Because a person fortunate enough to have a full-time job will spend at least
one half of his/her waking hours at work, it is incumbent on social scientists to
investigate the conditions necessary for the maintenance of working conditions
that are safe and pleasant and for the creation of jobs that contribute to indi-
vidual and social well-being" (p. 6). We will turn to these working-condition
issues at various junctures in this book, especially to considerations of forced
labor, health, and safety.8
Assessment of Dimensions of Poverty
Each of these dimensions of poverty can be assessed in absolute or in relative
terms.9 For example, income poverty can be assessed in terms of the numbers
of individuals living below an income level (absolute) or in terms of the lowest
20 percent of households ranked according to income (relative). Both
absolute and relative poverty are important for social outcomes. In this book,
however, we will place a greater emphasis on absolute poverty. With regard
to income poverty, we will emphasize the "dollar a day" or "extreme" poor
measure. With regard to other dimensions of poverty, we will emphasize illit-
eracy (including gender disparities) and infant mortality. The ways in which
globalization as described above plays a positive or negative role in such
poverty alleviation is our central concern here.
A Historical View
Both globalization and poverty have deep historical roots. Although in pop-
ular accounts globalization is a recent phenomenon, historians recognize
that, in some important respects, it is not new. The ever-increasing integra-
tion of people and societies around the world has been both a cause and an
effect of human evolution, proceeding more in fits and starts than in any sim-
ple, linear progression. Technological innovations, whether in the form of the
marine chronometer or modern fiber optics, have propelled surges in global-
ization; changes in policy, institutions, or cultural preferences have restrained
or even reversed it. In the 15th century, for instance, the Chinese emperor
Hung-hsi banned maritime expeditions, slowing down Asian globalization
considerably.10 Similarly, the proliferation of nation states and the imposition
6 Globalization for Development
of border controls in the early 20th century generated new obstacles to the
movement of goods, capital, persons, and ideas among the countries of the
world.
Stages of the Modern Era of Globalization
Economic historians date the modern era of globalization to approximately
1870. The period from 1870 to 1914 is often considered to be the birth of the
modern world economy, which, by some measures, was as integrated as it is
today. A description of this world by John Maynard Keynes can be found in
box 1.1. What historians have observed is that, from the point of view of cap-
ital flows (the predominately British foreign direct investment and portfolio
investment of the era), the late 1800s were an extraordinary time.11 The global
integration of capital markets was facilitated by advances in rail and ship
transportation and in telegraph communication. European colonial systems
were at their highest stages of development, and migration was at a historical
high point in relation to the global population of the time.
This first modern stage of globalization was followed by two additional
stages, one from the late 1940s to the mid-1970s and another from the mid-
1970s to the present. These, however, were preceded by World War I, the
Great Depression, and World War II. During this time, many aspects of glob-
alization were reversed as the world experienced increased conflict, national-
ism, and patterns of economic autarky. To some extent, then, the second and
third modern stages of globalization involved regaining lost levels of inter-
national integration.
The second modern stage of globalization began at the end of World War
II. It was accompanied by a global, economic regime developed by the Bret-
ton Woods Conference of 1944 establishing the International Monetary Fund
(IMF), what was to become the World Bank, and the General Agreement on
Tariffs and Trade (GATT) (see box 1.2). This stage of globalization involved
an increase in capital flows from the United States, as well as a U.S.-founded
production system that relied on exploiting economies of scale in manufac-
turing and the advance of U.S.-based multinational enterprises.12 This second
stage also involved some reduction of trade barriers under the auspices of
GATT. Developing countries were not highly involved in this liberalization,
however. In export products of interest to developing countries (agriculture,
textiles, and clothing), a system of nontariff barriers in rich countries evolved.
Also, a set of key developing countries, especially those in Latin America, pur-
sued import substitution industrialization with their own trade barriers.13
These developments, along with the Cold War, suppressed the integration of
many developing countries into the world trading system.
Background and Context 7
BOX 1.1 John Maynard Keynes on Globalization
Looking back on the end of the 19th century, and writing in 1919, John Maynard Keynes
described the vanishing world of the British economic empire as follows:
The inhabitant of London could order by telephone, sipping his morning tea in bed, the
various products of the whole earth, in such quantity as he might see fit, and reasonably
expect their early delivery upon his doorstep; he could at the same moment and by the
same means adventure his wealth in the natural resources and new enterprises of any
quarter of the world, and share, without exertion or even trouble, in their prospective fruits
and advantages; or he could decide to couple the security of his fortunes with the good
faith of the townspeople of any substantial municipality in any continent that fancy or
information might recommend. He could secure forthwith, if he wished it, cheap and com-
fortable means of transit to any country or climate without passport or other formality,
could despatch his servant to the neighbouring office of a bank for such supply of the pre-
cious metals as might seem convenient, and could then proceed abroad to foreign quar-
ters, without knowledge of their religion, language, or customs, bearing coined wealth
upon his person, and would consider himself greatly aggrieved and much surprised at the
least interference. But, most important of all, he regarded this state of affairs as normal,
certain, and permanent, except in the direction of further improvement, and any deviation
from it as aberrant, scandalous, and avoidable.
Source: Keynes 1920, pp. 11�12.
The third modern stage of globalization began in the late 1970s. This stage
followed the demise of monetary relationships developed at the Bretton
Woods Conference and involved the emergence of the newly industrialized
countries of East Asia, especially Japan, Taiwan (China), and the Republic of
Korea. Rapid technological progress, particularly in transportation, commu-
nication, and information technology, began to dramatically lower the costs
of moving goods, capital, people, and ideas across the globe. For example, as
noted by Frankel (2000), "Now fresh-cut flowers, perishable broccoli and
strawberries, live lobsters and even ice cream are sent between continents"
(pp. 2�3).14
Assembly systems in this latest stage of globalization were also significantly
modified into a new arrangement characterized by flexible manufacturing. In
flexible manufacturing systems, information technology supports computer-
aided production and relies less on economies of scale. In this stage, Japan
emerged as an important, new source of foreign direct investment (FDI):
between 1960 and 1995, Japan's share of global FDI increased from less than
8 Globalization for Development
BOX 1.2 International Agreements, Institutions, and Key Players
T
he Bretton Woods Conference was a gathering of world leaders that took place in 1944 in
Bretton Woods, New Hampshire, United States, with the aim of placing the international
economy on a sound footing after World War II. The conference resulted in the establish-
ment of the World Bank and the International Monetary Fund.
Institutions
The World Bank Group and the International Monetary Fund are sometimes referred to as the
Bretton Woods Institutions.
The five World Bank Group institutions are as follows:
The International Bank for Reconstruction and Development (IBRD) lends to govern-
ments of middle-income and creditworthy low-income countries.
The International Development Association (IDA) provides interest-free loans, called
credits, to governments of the poorest countries.
The International Finance Corporation (IFC) lends directly to the private sector in
developing countries.
The Multilateral Investment Guarantee Agency (MIGA) provides guarantees to inves-
tors in developing countries against losses caused by noncommercial risks.
The International Centre for Settlement of Investment Disputes (ICSID) provides
international facilities for conciliation and arbitration of investment disputes.
The International Monetary Fund is a subscription-based, global financial organization whose
purpose is to promote international monetary cooperation and the multilateral system of pay-
ments. It engages in four areas of activity: surveillance or monitoring, the dispensing of policy
advice, lending, and providing technical assistance.
Other international economic institutions include the following:
Nongovernmental Organizations (NGOs): Private, nonprofit organizations that pursue activi-
ties to relieve suffering, promote the interests of the poor, protect the environment, provide
basic social services, or undertake community development. NGOs often differ from other
organizations in the sense that they tend to operate independently from government, are
values-based, and are guided by the principles of altruism and voluntarism.
Organisation for Economic Co-operation and Development (OECD): An international organi-
zation, primarily of high-income countries, helping governments tackle the economic, social,
and governance challenges of a globalized society.
United Nations Development Programme (UNDP): Manages a "network" of development
activities undertaken by the United Nations in the areas of democratic governance, poverty
alleviation, crisis prevention and recovery, energy and the environment, and HIV/AIDS.
World Trade Organization (WTO): An international organization governing the system of rules
for global trade among its member nations. It is also involved in dispute settlement and com-
pliance monitoring related to international trade.
Sources: World Bank Group institutions: adapted from The International Bank for Reconstruction and Development 2003:
box 1.1; other institutions: World Health Organization 2001b.
Background and Context 9
1 percent to over 10 percent.15 The thawing of the Cold War, the entry of
China into the world economy, and a general reduction of trade barriers in
most developing countries beginning in the late 1980s, helped to accelerate
global integration during this phase.
Modern Globalization and Global Poverty
What has been the historical relationship between globalization and poverty
during these three stages? A partial view is found in figure 1.1. This figure
combines a single measure of globalization--exports as a percentage of world
gross domestic product (GDP), with a single measure of poverty--the num-
ber of dollar (extreme) poor people, in a time series from 1870 to 1998. What
is clear from this schematic is that, historically, globalization and global
poverty can be either positively related or negatively related to each other.
From 1870 though 1929 and the beginning of the Great Depression, global-
ization (trade) and global poverty increased together. However, the retreat
from globalization during the Great Depression and World War II was
accompanied by a continued increase in global poverty. This can be seen from
the 1950 data in figure 1.1 showing that, when exports as a percentage of GDP
had declined nearly back to the 1870 level, extreme poverty reached a peak of
approximately 1.4 billion persons (a billion is 1,000 million).
As seen in figure 1.1, the increase in globalization as measured by trade in
the second and third stages of modern globalization has been associated with
a gradual decline in extreme poverty to approximately 1.1 billion people.
During these stages, globalization and poverty have been negatively associ-
ated with each other, albeit mildly so. A key public policy challenge facing
humankind is to eliminate this still-prominent level of extreme poverty.
Understanding how to do this requires a deeper understanding of the links
between globalization and poverty.
The Globalization-Poverty Relationship
As mentioned above, globalization has the five primary economic dimensions
trade, finance, aid, migration, and ideas. Increases in these dimensions of
globalization, if managed in a way that supports development in all countries,
can help to alleviate global poverty under certain conditions. We investigate
these pathways and conditions in some detail later in this book. We also con-
sider some particular circumstances where dimensions of globalization can
aggravate some dimensions of poverty. Here we define and summarize the
five economic dimensions of the relationship between globalization and
poverty.
10 Globalization for Development
FIGURE 1.1 Trade and Extreme Poverty in Historical Perspective
30 1,600
Exports as a percentage of GDP
1,400
25
1,200
20
Millions of people
Dollar poor 1,000
Percent
15 800
600
10
400
5
200
0 0
1870 1910/ 1929 1950 1970 1998 2001
1913
Sources: Exports as a percentage of GDP from Ocampo and Martin (2003) based on Maddison (2001) and from World
Bank (2004d). Dollar poor data from Bourguignon and Morrisson (2002), and Chen and Ravallion (2004).
Trade
Trade is the exchange of both goods and services among the countries of the
world economy.16 The involvement of developing countries as exporters in
global trade has increased significantly since the mid-1980s, even in services
where their comparative advantage is typically seen as weak. For a variety of
reasons (not least the trade barriers placed by rich countries), the agricultural
exports of the developing world have been stagnant. The regional involve-
ment of developing countries in trade varies widely, with Africa's share of
world exports declining over time.
Increased international trade can help to alleviate poverty through job cre-
ation, increased competition, improvements in education and in health, and
technological learning. The impact of increasing trade openness depends crit-
ically on the relationship between trade reforms and other reforms and com-
plementary actions at the national and international levels. Increased exports
of petroleum and minerals often (but not always or necessarily) fail to support
these activities, as many developing countries have found. Many kinds of
manu-facturing, agricultural, and service exports, accompanied by comple-
mentary infrastructure and training policies, can support these activities, how-
ever. In addition, imports of many types--especially health-related imports
and imports embodying new technologies--are crucial for alleviating poverty.
Background and Context 11
The exports of developing countries face many kinds of protective barriers,
including tariffs, subsidies, quotas, standards and regulations, and increasing
security checks. Rich-world agricultural subsidies, for example, are twice as
large as the entire agricultural exports of all developing-country exports com-
bined and six times the value of foreign aid. These subsidies have exceeded
the entire GDP of Sub-Saharan Africa in recent years and reducing protection
is vital for more inclusive globalization. Conservative estimates suggest that
limited trade liberalization could reduce the number of poor people (those
who live on US$2 per day) by a minimum of 100 million.17
For any increase in market access for developing country exports to posi-
tively affect poor people, trade-related capacity building is necessary, partic-
ularly to support the diversification of exports away from standard primary
products. This is an important area where the trade and foreign aid dimen-
sions of globalization can complement each other. To protect the most vul-
nerable who can sometimes lose as a result of trade liberalization, social safety
nets and complementary antipoverty programs are crucial.18
Finance
Global finance in the form of capital flows involves the exchange of assets or
financial instruments among the countries of the world, either by private or
public agents. In this book, we distinguish among four types of capital flows:
foreign direct investment or FDI
equity portfolio investment
bond finance
commercial bank lending.
Foreign direct investment (FDI ) is defined here as the acquisition of part of
a foreign-based enterprise that exceeds a threshold of 10 percent, implying man-
agerial participation in the foreign enterprise. Equity portfolio investment is
similar to FDI in that it involves the ownership of shares in foreign enterprises.
It differs from FDI, however, in that the share holdings are too small to imply
managerial participation in the foreign enterprise. It is thus indirect rather than
direct investment, undertaken for portfolio reasons rather than for managerial
reasons. Its behavior can consequently differ substantially from that of FDI.
Bond finance (also called debt issuance) is a second kind of portfolio activ-
ity. It involves governments or firms issuing bonds to foreign investors. These
bonds can be issued in either the domestic currency or in foreign currencies,
and they carry a number of types of default risk. Both bond finance and equity
portfolio investments are held by domestic and international investors as a
way to manage wealth, and the entire range of portfolio behaviors apply to
12 Globalization for Development
both. Commercial bank lending is another form of debt, but it does not
involve a tradable asset as bond finance does.19
Private capital flows to developing countries have increased significantly
since the early 1990s, particularly in the case of FDI, which has displaced the
previously dominant commercial bank lending in importance. Equity port-
folio investment and bond finance flows to developing countries, however,
have been volatile since the 1997 Asian crisis, although both have recovered
somewhat in recent years. Official capital flows, reflecting the activities of cen-
tral banks, are a different story. Since 2000, the government and trade deficits
of the United States have involved that country importing over US$500 bil-
lion in recent years, structurally claiming the bulk of world savings, which is
provided in part by Asian central banks buying U.S. government debt. As a
result of these official transactions, the developing world has recently become
a net exporter of capital.
From the point of view of alleviating poverty, capital flows have both sig-
nificant promise and some particular dangers. Capital flows can help to mobi-
lize and deploy savings, develop the financial sector, and transfer technology.
They can also manage various types of risk and channel funds in line with the
performance of firms' managers. The financial markets involved in some
kinds of capital flows, however, are characterized by a number of imperfec-
tions that economists refer to as "market failures." In particular, information
is less than perfect in these markets, and this can cause significant volatility in
flow levels. Consequently, deepening and regulating these flows poses con-
siderable policy challenges.
Foreign direct investment can contribute to poverty alleviation when it
supports the generation of new employment, promotes competition, im-
proves the education and training of host-country workers, and transfers new
technology. These benefits are evident in a host of developing countries.
Unfortunately, FDI is highly concentrated, and many developing countries
receive little or no FDI inflows. FDI that establishes backward links to local
suppliers and advances best practices in terms of technology, employment,
and social conditions is more beneficial than FDI that remains a low-wage
enclave within the host country.
Equity portfolio investment, bond finance, and commercial bank lending
can help to alleviate poverty under effective exchange rate regimes and prop-
erly regulated and developed financial systems. Equity portfolio investment,
in particular, has been positively associated with growth through its support
of entrepreneurial activity.20 Bond finance and commercial bank lending can
leave developing countries vulnerable to crises that arise from the volatile
nature of portfolio investment. Such crises can increase poverty substantially,
as happened in Asia during the late 1990s.21 Properly managed, however,
Background and Context 13
bond finance and commercial bank lending can be an important part of
financial sector development. This aspect of economic globalization, then,
must be handled with care.
Aid
Aid is the transfer of funds in the form of some combination of loans or grants
and the provision of technical assistance or capacity building. The transfer of
funds can be in the form of bilateral aid between two countries or in the form
of multilateral aid that is channeled through organizations such as the World
Bank. Foreign aid remains a vital resource flow for many developing coun-
tries. It can finance investment in infrastructure and services, supplement
capabilities in health and education, and provide access to new ideas in the
realm of policy. These characteristics make it possible for aid to have a signif-
icant impact on global poverty alleviation. The motivations of foreign aid
donors have varied widely and include advancing geopolitical objectives,
stimulating economic development, ameliorating poverty and suffering, pro-
moting political outcomes, and ensuring civil stability and equitable gover-
nance. Given both these mixed objectives and the low quality of some
developing country governance systems, aid has not always been effective.
That said, with the end of the Cold War calculus of donors and a greater
emphasis on governance in the developing world, evidence that aid is more
effective now than ever before is continuing to emerge.22 Sustaining the posi-
tive impact of aid requires both increasing aid flows and using them better.
Despite the progress made in aid effectiveness, the share of the budgets that rich
countries have devoted to aid declined during the last few decades, going from
slightly over 0.35 percent of high-income countries' GDP to approximately
0.25 percent only to rise again to over 0.30 percent in 2005. Only 5 of the
22 high-income countries of the OECD's Development Assistance Committee
that have pledged 0.7 percent of their GDP to foreign aid have actually met this
goal as of 2005.23 Indeed, foreign aid has steadily remained at approximately one-
sixth of rich-world agricultural subsidies--subsidies that have been shown to
significantly worsen global poverty. Recent evidence of a pick-up in aid volumes
must be sustained if aid is to fulfill its potential in global poverty reduction.
Compared with private investment, and even with remittances, the value
of aid flows is and will remain small. Domestic investment in developing
countries is around US$1.5 trillion, much larger than aid levels that over the
past decade averaged around US$63 billion per year and foreign investment
of around US$200 billion. Recently, a renewed commitment to aid is evident
in sharp increases in aid levels and promises. As we show, what matters most
in foreign aid are the accompanying ideas, policies, and capacity building.
These can increase the overall domestic and foreign investment flows that cre-
14 Globalization for Development
ate jobs and drive sustainable growth and poverty alleviation. A persistent and
important challenge for foreign aid is assisting weak or even failed states.
These countries often vary widely in their problems, and approaches that
work in a "typical" low-income country might not be effective. Large-scale
financial transfers are unlikely to work well, and emphasis should be placed
on capacity building to facilitate change, as well as on a limited reform agenda,
stressing governance, basic health, educational services, and infrastructure.
Migration
We define migration as the temporary or permanent movement of persons
between countries to pursue employment or education (or both) or to escape
adverse political climates. In this book, we do not consider rural-urban and
other sorts of migration within countries. Migrants can be categorized into
permanent settlers, high- and low-skill expatriates, asylum seekers, refugees,
undocumented workers, visa-free migrants, and students. Migration has his-
torically been the most important means for poor people to escape poverty.
Indeed, by some estimates, 10 percent of the world's population permanently
relocated between 1870 and 1910 during the first phase of modern globaliza-
tion described above.24 This historical pattern has been greatly reduced by the
development of nation states; more recently, at the beginning of the 20th cen-
tury, it has been further reduced by the use of passports and a growing range
of mechanisms to identify and control individual movement. Consequently,
migration is much less free but is no less important for poverty alleviation.
In addition to the direct "escape from poverty" function, migrants also
provide significant remittance flows to their families in their home countries.
These remittance inflows, were approximately US$200 billion to developing
countries in 2006, and exceed inflows of FDI in some regions by substantial
amounts. On the other hand, migration also causes what is known as "brain
drain"--the loss of educated and high-skilled citizens to other countries. The
effective management of global migration flows is a difficult and controver-
sial, but very important, challenge for the world community.
Current migration restrictions give rise to criminal activity and the
exploitation of unsuspecting illegal migrants, often with tragic consequences.
Skill poaching by wealthy countries can also have detrimental effects, not least
in the health service area. As in the case of capital flows, migration must be
managed carefully--preferably through multilateral frameworks.
The dearth of empirical research on key dimensions of migration makes
forming policy on this subject particularly hazardous. However, there is one
largely unexploited way for migration to positively affect global poverty. This
is through the further development of the temporary movement of workers
Background and Context 15
in services trade.25 These labor-intensive exports of services through the tem-
porary movement of persons have the potential to allow developing countries
to benefit from global services trade in a manner similar to the developed
countries in other modes of service delivery, namely FDI in financial services
and the temporary movement of corporate personnel. Significant further
progress is necessary in this area.26
Ideas
Ideas are the most powerful influence on development. Ideas are the generation
and transmission of distinctive intellectual constructs in any field that can have
an impact on production systems, organizational and management practices,
governance practices, legal norms, and technological trends. One well-known
category of ideas is intellectual property, which can be thought of as an asset
defined by legal rights conferred on a product of invention or creation.27 Ideas
are not just commercial, however. For example, the notion of human rights that
need to be respected and protected by governments is an idea of paramount
importance. Additionally, flows of ideas across borders play an important role
in shaping policies, as well as the perceptions and reality of poverty. In this book,
we concentrate on ideas that shape economic activities rather than on those that
have primarily cultural or political content, although we are mindful that these
are distinctions mostly of convenience and need to be treated with care.
The evaluation and adaptation of ideas requires local capacity in the form of
both skills and institutions, as well as a culture of learning. Developing coun-
tries can bridge existing gaps in knowledge by acquiring, absorbing, and com-
municating knowledge.28 Openness to ideas has historically been and continues
to be an important way to alleviate poverty.29 Ideas can affect poverty through
a variety of mechanisms and can interact in important ways with all of the other
dimensions of economic globalization. More effective policy regimes, better
technological innovations, greater respect for human rights, and the improved
social status of women can all help the lives of poor people. The challenge in
harnessing ideas to alleviate poverty lies in adapting them to the many local
sociocultural contexts of the developing world. A full understanding of this
challenge is still in progress, but it is clear that supporting the exchange of ideas
and learning is vital to accelerating the beneficial impact of globalization.
The development community's understanding of the most effective way to
achieve development objectives has evolved over time with the accumulation
of evidence and experience. Approaches that appeared at the time to be both
correct and obvious have been undermined by experience and closer analysis.
This has seen the broadening and deepening of what is meant by "develop-
ment," from income to include health, opportunity, and rights. Recent years
16 Globalization for Development
have seen a greater recognition in the policy debate of the complementarities
between markets and governments. Clearly, experience shows that the private
market economy must be the engine of growth, but it shows also that a
vibrant private sector depends on well-functioning state institutions to build
a good investment climate and deliver basic services competently. Indeed, in
many crucial areas--such as health, education, and infrastructure--public-
private partnership is essential.
Areas for Action
History and the recent experiences of many countries have taught us that
global integration can indeed be a powerful force for reducing poverty and
empowering poor people. Poor people are less likely to remain poor in a
country that is exchanging its goods, services, and ideas with the rest of the
world. Yet, although participation in the global economy has generally been
a powerful force for reducing poverty, the reach and impact of globalization
remains uneven. In addition, the accelerated pace of globalization has been
associated with a rapid rise in global risks, which have outpaced the capacity
of global and national institutions to respond. The increasing global impact
of national policies, ranging from armaments and contributions to climate
change, points to the need for more effective global governance. If the glob-
alization train is to pull all citizens behind it, policies that ensure that the poor
people of the world share in its benefits are required.
In our concluding chapter, we draw together the many issues considered in
this book and provide a policy agenda designed to ensure that increased glob-
alization assists in alleviating poverty. Here we anticipate that more detailed
discussion by briefly distilling four basic areas for action to support positive
global outcomes. These are areas designed to accomplish the following:
to ensure that global trade negotiations allow more equitable access to
products of developing countries to the world market
to increase aid, assistance, and debt relief to countries that demonstrate
commitment to its effective use
to enhance the benefits of migration and mitigate its harmful effects
to support and encourage the development of global public goods to
benefit poor people.
Balanced Outcomes to Global Trade Negotiations
The first area for action is ensuring that global trade negotiations yield more bal-
anced outcomes. Rich countries must stop impeding the ability of poor coun-
tries to produce and trade a wide range of goods and services. Goods
Background and Context 17
produced by poor people face, on average, double the tariff barriers of those
produced in the most advanced countries. The practice of generously subsi-
dizing agricultural production, a practice that is widespread in many high-
income countries, has had a devastating impact on many poor producers,
denying them not just export markets but also hindering their capacity to sell
their produce in their own country. With around US$300 billion per year
devoted to agricultural protection alone, the rich countries' policies have cre-
ated a fundamentally unbalanced playing field. Current policies compound
the downward trend in commodity prices, increase instability, and under-
mine the potential for diversification into higher value added manufactured
products. Reforming the world trade system and ensuring more equitable
access for the products of poor countries is an essential step toward allowing
more of the world's people to enjoy the benefits of globalization.
Increase Aid, Assistance, and Debt Relief
The second area for action is the increased provision of aid, assistance, and debt
relief to countries that demonstrate a commitment to the effective and equi-
table use of the additional resources. As mentioned above, aid volumes have
declined during recent decades to approximately 0.25 percent of high-income
countries' GDP, despite the fact that donor countries are richer now than ever
before and that aid has never been more effectively used. With the ending of
the Cold War, aid has been increasingly allocated to countries able to use it
most effectively. Not surprisingly, the impact of aid on growth and poverty
reduction has more than doubled over recent years.30 Providing increased for-
eign assistance and implementing more rigorous schemes that monitor and
evaluate the effective use of that aid are thus critical to ensuring that the gains
provided by globalization are not erased by bad governance and ineffective
use of aid.
Foreign aid resource transfers are particularly important in the poorest
countries, and much higher levels of aid are urgently required for investments
in health, education, infrastructure, and for combating HIV/AIDS and other
diseases. These investments cannot be financed by domestic savings alone,
especially in countries that are currently crushed under burdens of debt and
escaping the ravages of past corruption and mismanagement.
Enhance the Benefits and Mitigate the Negative Effects of Migration
The third area for action is enhancing the benefits and mitigating the negative
effects of migration. Migration remains for many poor people the most effective
way to escape poverty. Recorded remittances of over US$150 billion are more
than twice the amount of annual foreign assistance. Whereas barely 20 percent
18 Globalization for Development
(averaging around US$10 billion over the past decade) of aid is transferred to
developing countries in the form of resource transfers, the entirety of remit-
tance flows represents real transfers. These flows could be increased if the trans-
actions costs were reduced from their current average of up to 15 percent of the
flows to around 1 percent, which is closer to the cost of transfers between rich
countries. While foreign aid goes to governments and FDI flows to a small
number of firms, remittances tend to flow directly to a large number of indi-
viduals and communities. The loss of skills associated with migration is a severe
problem, not least for poor regions such as Africa or the Caribbean, where it is
estimated that up to two-thirds of the educated doctors and teachers have left.
Positive flows include the ideas and investments that originate with these dias-
poras, as is evident in the pivotal role of Indian emigrants in the Bangalore
information technology boom. Addressing the problems of the current migra-
tion system and increasing its ability to provide real gains to poor people will
require a multilateral as well as bilateral commitment to effective migration
reform and management.
Support of Global Public Goods
The fourth area for action is support for what is commonly referred to as global
public goods.31 Foremost among these global public goods is the need for global
peace and stability. Conflicts lead to reverse development. Wars, big and small,
destroy the foundation of growth and development and have a particularly dev-
astating effect on poor people, especially poor children. Although many wars
have local origins, they feed off global flows--from the sale of commodities such
as diamonds and oil to the trade in arms and ammunition. Managing the wide
range of environmental side effects associated with domestic policies is also vital.
Chief among these environmental concerns are climate change and the loom-
ing water and energy crises, which will have increasing international dimen-
sions. How these crises are managed are among the biggest development
challenges facing our planet.
Another crucial global public good involves the management of science and
technology in favor of development. Combating diseases, not least HIV/AIDS
and malaria, as well as developing higher yield and stress-resistant crops can
be addressed only at the global level, and requires a pooling of resources and
the management of intellectual property and technology to overcome the
widening scientific and digital divides.
The Purpose of this Book
The purpose of this book is to provide an understanding of the main aspects
of economic globalization and their impact on poverty and development. By
Background and Context 19
examining these dimensions in some detail, we hope to resolve to some extent
the confusion about globalization represented in the quotations at the begin-
ning of this chapter. In our view, globalization can be managed so that its ben-
efits are more widely shared than they are today and so that its negative
impacts are identified and mitigated. Achieving these outcomes is a global,
national, and local responsibility. In the following chapters, we analyze the
dimensions of this responsibility.
Notes
1. Clearly, our coverage is not comprehensive. We do not examine questions of culture, peace, pol-
itics, natural disasters, and security, nor global environmental and health issues, except where they
are related to one of our primary areas of focus.
2. We are mindful of Gilpin's (2000) statement that "No . . . book . . . can do justice to either the
scope or the rapidity of the economic, political, and technological developments transforming
human affairs" (p. ix). For an effort complementary to ours, see World Commission on the Social
Dimension of Globalization (2004).
3. For a discussion of this variety, see chapter 4 of Sen (1999).
4. Purchasing power parity dollars adjust for differences in the cost of living among the countries of
the world. This adjustment is especially important because nontraded services tend to be less
expensive at low levels of income.
5. See Bourguignon and Morrisson (2002), Chen and Ravallion (2001), and Chen and Ravallion
(2004) on the extent of poverty.
6. Again, see chapter 4 of Sen (1999).
7. See Nussbaum (2000) for a powerful, book-length discussion of the lack of empowerment of
women in developing countries. Nussbaum notes the often-mentioned fact that "gender inequal-
ity is strongly correlated with poverty" (p. 3). See also World Bank (2005d) World Development
Report on Equity and Development, which stresses the importance of equity and opportunity.
8. To mention just one example, the International Institute of Tropical Agriculture has estimated
that well over 150,000 children are involved in hazardous labor in the cacao farms of West Africa,
including clearing brush with machetes and applying pesticides, as part of the region's export agri-
culture. See IITA (2002).
9. See, for example, Fields (2001).
10. Indeed, by 1500 in China, building ships with more than two masts was punishable by death.
11. See, for example, chapter 1 of James (1996), O'Rourke and Williamson (1999), and World Bank
(2002c).
12. This production system is known as "Fordism" or "managerial capitalism." To quote John and
others (1997), "American corporations consolidated into the position of world leaders across
almost the entire range of the advanced industries during the 1950s" (p. 40).
13. See Bruton (1998) for a review of import substitution industrialization.
14. With regard to declines in transportation costs, Frankel (2000) takes up the case of shipping costs.
He notes that "The margin for US trade fell from about 91/2 percent in the 1950s to about 6 per-
cent in the 1990s" (p. 10). Here Frankel measures shipping cost margins as the ratio of c.i.f. (cost
insurance freight) trade value to f.o.b. (free on board) trade value.
15. See Dicken (1998). This new production system is known as "Toyotism."
16. Goods (or merchandise) are tangible and can be stored over time in inventories, while services
are less tangible and cannot be stored. As is often remarked jokingly, you cannot drop a service
on your toe. Consequently, the production and consumption of a service happens more or less
simultaneously.
17. See World Bank (2003a).
20 Globalization for Development
18. This point is made by Winters, McCulloch, and McKay (2004).
19. Commercial bank loans, including interbank loans, can be short term or long term and can be
made with fixed or flexible interest rates. A single bank or a syndicate of banks can be involved in
any particular loan package.
20. See Rousseau and Wachtel (2000) for a discussion of how equity portfolio investment supports
entrepreneurial activity.
21. Eichengreen (2004) notes that an "average" or "typical" financial crisis can claim up to 9 percent
of GDP. Some of the worst crises, such as those in Argentina and Indonesia, reduced GDP by over
20 percent, declines greater than occurred in the United States during the Great Depression.
Suryahadi, Sumarto, and Pritchett (2003) estimate that, in Indonesia alone and at the peak of the
increase in poverty following the 1997 crisis, approximately 35 million persons were pushed into
absolute poverty.
22. See, in particular, Goldin, Rogers, and Stern (2002). The overall debate on aid effectiveness is
reviewed in Clemens, Radelet, and Bhavani (2004).
23. These countries are Denmark, Luxembourg, the Netherlands, Norway, and Sweden. See www.
oecd.org/dac/stats.
24. See World Bank (2002c).
25. In the parlance of trade policy, this is known as "Mode 4" service trade.
26. See Winters and others (2003).
27. See Maskus (2000). As defined by the World Trade Organization, intellectual property includes
copyrights, trademarks, geographical indications, industrial designs, patents, and layout designs
of integrated circuits.
28. The terms "acquiring," "absorbing," and "communicating" knowledge are from World Bank
(1999).
29. This is the main argument of Landes (1998). Landes' work, however, has come under some crit-
icism for overemphasizing the role of European ideas at the expense of ideas from other part of
the world.
30. Goldin, Rogers, and Stern (2002, p. 42). See also chapter 5, this volume.
31. See Kaul, Grunberg, and Stern (1999).
2
Globalization
and Poverty
T
he relationship between globalization and global poverty is complex. In
chapter 1, we distinguished among three stages of modern globalization:
the first stage between 1870 and 1914, ending with World War I
the second stage following the end of World War II and continuing to
the mid-1970s
the third stage from the mid-1970s to the present.
Global poverty rose during the first stage of globalization, but it continued to
rise during the retreat from globalization during World Wars I and II. Dur-
ing the third stage of globalization, there is some evidence that global poverty
finally leveled off somewhat and that extreme global poverty is now slowly
falling. Given these historical facts, it is difficult to make simple statements
about globalization and poverty: accurate statements about this relationship
are necessarily complex. In this chapter, we begin to unravel some of these
complexities, setting the stage for our investigation of the relationship be-
tween globalization and poverty in the remainder of this book.
We begin by considering the developing world, where global poverty is con-
centrated. We then take on particular aspects of global poverty itself. Finally,
we consider the five dimensions of globalization: trade, finance, aid, migration,
and ideas. Since we take up each of these topics separately in chapters 3
through 6, we concentrate here on comparisons among them.
The Developing World
Global poverty is concentrated in what is commonly referred to as the devel-
oping world. The countries of the developing world became distinct by the
19th century as their per capita incomes began to lag significantly behind
those of other parts of the world (figure 2.1). Although by 1820 per capita
21
22 Globalization for Development
FIGURE 2.1 Per Capita Income by World Region (1990 international dollars)
income in Western Europe was approximately double that of the rest of the
world, subsequently the increases in incomes in Western Europe and Japan
were far more rapid than they were in Latin American, Eastern Europe, and
the former USSR, Asia (excluding Japan), or in Africa. The exact causes of
these changes are still being debated and discussed by economic historians.
Indeed, in considering the nexus of change in Western Europe--Great Britain
in the late 18th century--Crafts (2001) notes
This was still an economy which . . . had many limitations, including
weak science and technology, small markets, and many attractive rent-
seeking opportunities for the talented. Indeed, a World Bank economist,
given a basic description of the late 18th century British economy with-
out knowing to which country it applied, might well conclude that here
was a case of very poor development prospects. (p. 313)
Maddison (2001) provides a contrasting perspective, noting Britain's
improvements in "banking, financial and fiscal institutions and agriculture"
as well as a "surge in industrial productivity" (p. 21). Such varying interpre-
tations of how Great Britain, the other countries of Western Europe, and
Japan began their revolutionary economic changes leave the processes not
fully explained. That the changes were indeed revolutionary, however, is not
Globalization and Poverty 23
KEY TERMS AND CONCEPTS
extremely poor overseas development assistance (ODA)
headcount index poor
gross national income (GNI) purchasing power parity dollars
low-income countries Standard International Trade
middle-income countries Classification (SITC)
in doubt. The absence of these changes in the developing world became one
of the main characteristics defining it.1
The early 19th century (the midpoint in figure 2.1) featured as a transition
between two waves of colonial expansion, the first beginning in 1400 and the
second ending with World War I in 1914. The concurrent second phase of colo-
nial expansion and the first phase of modern globalization has been described
as "the apex of . . . Western political, economic, military and cultural domi-
nance"2 in which 80 percent of the surface of the earth came under various Euro-
pean powers. This colonial history, too, began to define the developing world.
The Impact of an Expanding Population
The movement of the world economy through these historic changes was also
reflected in dramatic increases in population levels (figure 2.2). This involved
an increase in the absolute size of the developing world's population. From
1000 to 2000, the developing world added nearly 4.5 billion persons, while the
rest of the world added slightly over 1 billion. What is most apparent here is
the rapid expansion of the Asian region in total population. This took place
even with Asia's total share of world population declining from approximately
65 percent in the year 1000 to 57 percent in 2000. These large increases in the
absolute numbers of people in the developing world are part of its long-term
history and became apparent in the age structure of its population (figure
2.3). While populations of rich countries become older, those of the devel-
oping world become younger. Meeting the development and employment
needs of these young people remains a great challenge.
GDP Figures of the Developing World
The increase in the size of the developing world is not confined to population.
Large parts of the developing world are emerging in terms of gross domestic
product (GDP) as well. Consider figure 2.4.3 This figure plots GDP for four
regions as a percentage of total world GDP, both historically back to 1975 and
projected forward to 2015. The developing region, consisting of the 12 largest
24 Globalization for Development
FIGURE 2.2 The Growth of World Population
developing countries, accounted for only one-tenth of world GDP in 1975. It
is projected to account for one-fifth of world GDP in 2015, surpassing both
Japan and the largest four countries of the European Union. Thus it is evident
that at least some parts of the developing world are emerging as relatively eco-
nomically significant.
Low- and Middle-Income Countries
Today the developing world is divided into two sets of countries for analyti-
cal and statistical convenience. These are the low-income countries and the
middle-income countries. At the time of this writing and for data through
2002, low-income countries are those with a per capita income of less than
US$735, and middle-income countries are those with a per capita income
more than US$735 but less than US$9,076. The list of these two sets of coun-
tries is presented in the annex to this chapter.
Poverty
The goal of this book is to relate the globalization activities of trade, finance,
aid, migration, and ideas to global poverty and its alleviation. Recall from
chapter 1 that we can associate poverty with deprivations of income, health,
education, and empowerment. Recall also that, although relative deprivations
Globalization and Poverty 25
FIGURE 2.3 Population Age Distributions
are important, we have chosen to focus in this book on the more crucial issue
of absolute deprivations.4
Definition of "Poor"
The longest tracking of world poverty is provided by Bourguignon and Mor-
risson (2002). These estimates cover the 1820 to 1992 period and include both
26 Globalization for Development
FIGURE 2.4 Relative Economic Strength of Developing Countries, Historical
and Projected (percent of world GDP in constant US dollars)
the "poor" and the "extremely poor" (figure 2.5). The poor are defined as
those living on less than US$2 per day (in 1985 purchasing power parity dol-
lars), and their numbers increase steadily from just under 1 billion persons in
1820 to 2.8 billion persons in 1992. The extremely poor are defined as those
living on less than US$1 per day (in 1985 purchasing power parity dollars),
and their numbers have increased and decreased over time, hovering over
1 billion persons for the entire 20th century up to 1992.5 An example of what
poverty entails is given in box 2.1.
Poverty and Global Inequality
According to Bourguinon and Morrisson, the persistence of world poverty
over the long term has been associated with an increase in global inequality,
both within and among countries. They note
World economic growth since 1980 could have caused poverty to decline
dramatically, despite population growth, had the world distribution of
income remained unchanged. Had that been the case, the number of poor
people would have been 650 million in 1992 rather than 2.8 billion and
the number of extremely poor people 150 million instead of 1.3 billion.
Globalization and Poverty 27
FIGURE 2.5 The Historical Evolution of World Poverty (millions of persons)
BOX 2.1 The Experience of Being Poor
F
or approximately 45 years, until her recent retirement, Jayamma went every day
to the brick kiln and spent eight hours a day carrying bricks on her head, 500 to
700 bricks a day. . . . Jayamma balanced a plank on her head, stacked twenty
bricks at a time on the plank, and then walked rapidly, balancing the bricks by the
strength of her neck, to the kiln, where she then had to unload the bricks without
twisting her neck, handing them two by two to the man who loads the kiln. Men in
the brick industry typically do this sort of heavy labor for a while, and then graduate
to the skilled (but less arduous) tasks of brick molding and kiln loading, which they
can continue into middle and advanced ages. Those jobs pay up to twice as much,
though they are less dangerous and lighter. Women are never considered for these
promotions and are never permitted to learn the skills involved. . . . Nonetheless, they
cling to the work because it offers regular employment, unlike construction and agri-
culture; kilns also typically employ children workers, so Jayamma could take her chil-
dren to work with her. She feels she has a bad deal, but she doesn't see any way of
changing it.
Source: Nussbaum 2000, pp. 18�19.
28 Globalization for Development
Likewise, the leveling off in the number of extremely poor people since
1970 can be attributed to the stabilization of their relative position since
then. (p. 733)
More recent data on world poverty are provided by Chen and Ravallion
(2004).6 These estimates cover the 1981 to 2001 period and again include both
the poor and the extremely poor in terms of 1985 purchasing power parity
dollars (figure 2.6). These data provide two pieces of good news. With regard
to the number of poor, there has been a recent leveling off for the first time
since the early 19th century at approximately 2.7 billion persons, a figure that
nevertheless represents a policy challenge of enormous proportions. With
regard to the number of extremely poor, there has finally been some down-
ward movement to approximately 1.1 billion. As these authors note, most of
this decline occurred in the early 1980s and can be primarily attributed to
developments in China and, to a lesser extent, in India.7
The Composition of Poverty
The picture of poverty painted by figure 2.7 is improved somewhat when it is
considered in terms of what development economists term the headcount
index rather than the number of poor people. This is poverty as a percentage
FIGURE 2.6 The Recent Evolution of World Poverty (millions of persons)
Globalization and Poverty 29
FIGURE 2.7 Regional Incidence of Extreme Poverty (millions of persons)
of population. For the poor, the headcount index has fallen from approxi-
mately two-thirds of the developing world population in 1981 to approxi-
mately half in 2001. For the extremely poor, it has fallen from approximately
40 percent to approximately 20 percent. Thus, relative to significantly
expanding populations, poverty incidence as measured by the headcount
index has been steadily falling. This does not imply, however, that the absolute
numbers of poor and extremely poor people have fallen.
As the case of China illustrates, the regional composition of extreme poverty
matters. An examination of figure 2.7 reveals that extreme poverty is primarily
a South Asian and African phenomenon. In East Asia, the number of extreme
poor has been declining steadily and significantly since the early 1980s, pri-
marily due to changes in China. In South Asia, the number of extreme poor has
declined somewhat, with almost all of this smaller change being accounted for
by India. In Africa, extreme poverty has been steadily increasing, with the num-
ber of people in this group increasing by over 100 million since the early 1980s.
Poverty Indicators: Life Expectancy
As the various regions of the world diverged in per capita incomes, so they
diverged in life expectancy, low levels of which reflect deprivations in health
(figure 2.8). It is important to note that the historical evidence suggests that
30 Globalization for Development
FIGURE 2.8 Life Expectancy by World Region (years)
these changes in life expectancies were not driven entirely by the changes in
per capita incomes. Changes in science and public health had significant
impacts in their own right.8 As with the gains in per capita incomes, the gains
in life expectancies beginning in the early 19th century were historically un-
precedented. For example, Maddison's (2001) estimate of life expectancy in
both Roman Egypt at the dawn of the Common Era and 14th century Great
Britain are exactly the same: only 24 years.9 Even the slowest increases in life
expectancy in Africa since 1820 have more than doubled that millennial norm.
However, the substantial gap remaining between Africa and even the other
developing regions is a cause for great concern, especially because it reflects
high levels of infant and child mortality. Another major cause for concern is
the recent reversal in African life expectancy caused by HIV/AIDS.
Poverty Indicators: Health
Perhaps the most important indicator of health poverty is infant mortality, a
sad testament to the global failure to meet the most basic of needs.
Health Deprivation: Infant Mortality
Total infant mortality in 2004 was approximately 7 million, representing an
enormous annual tragedy. Examining recent trends in infant mortality (fig-
Globalization and Poverty 31
FIGURE 2.9 Infant Mortality
ure 2.9) leads to some important conclusions. First, as is evidenced by the case
of South Asia where annual infant mortality has declined by a million since
1970, it is possible to reduce infant mortality significantly even without sig-
nificantly reducing extreme income poverty. Second, as is evidenced by the
case of Sub-Saharan Africa, where annual infant mortality has increased by
nearly a million since 1970, increases in extreme income poverty can exacer-
bate infant mortality.10 Third, as is evidenced by the Middle East and North
Africa, it is possible to have significant infant mortality in the near absence of
extreme income poverty. Taken together, these cases indicate that the rela-
tionship between income poverty and health poverty is not as direct as one
might first assume.
Health Deprivation: Malnutrition
Health deprivation is not by any means limited to infant mortality. For exam-
ple, approximately 1 billion persons are malnourished; over 150 million of
these people are children. Annually, approximately 12 million infants are
born underweight, a condition that can have lifetime, deleterious conse-
quences such as lower IQ, cognitive disabilities, and reduced immune func-
32 Globalization for Development
FIGURE 2.10 Female Youth Literacy Relative to Male Youth Literacy
and Infant Mortality, 2003
tion.11 As noted by Streeten (1995), "Prolonged malnutrition among babies
and young children leads to decreased brain size and cell number, as well as
altered brain chemistry. . . . Children who suffer from severe malnutrition
show lags in motor activity, hearing, speech, social and personal behavior,
problem-solving ability, eye-hand coordination and categorization behavior,
even after rehabilitation" (p. 57). Health poverty, then, is both serious and
pervasive.
Health Deprivation: Implications of Female Education
Substantial evidence suggests that female education is positively associated
with infants' and children's abilities to escape mortality and malnourishment.
The mediating factors include hygiene, nutrition, and child-care practices.
This is a key reason for focusing attention and policy measures on female edu-
cation in developing countries.12 Consider the data shown in figure 2.10. This
figure plots female youth literacy as a percentage of male literacy using the
dark bars. These range from slightly over 50 percent in the case of Niger to
slightly over 100 percent in the case of Uruguay. There is thus a wide range of
Globalization and Poverty 33
outcomes in the poorer countries with regard to female youth literacy. This
is important in its own right but also has implications for infant and child
health poverty. The chart also plots infant mortality for these seven countries
using lighter bars, and we can see that infant mortality increases significantly
as female youth literacy decreases. For reasons such as these, the gender
aspects of health poverty matter a great deal.
A Global Imperative
Reducing extreme income poverty and extreme health poverty in the form
of infant mortality is a global imperative. It is also an economic imperative,
because, according to the research of the World Health Organization (2001b),
lower rates of infant mortality are associated with higher rates of economic
growth. Although the elements of globalization we consider in this book can
have significant effects in reducing infant mortality, we do not want to claim
too much for them, except perhaps to emphasize that ideas concerning the
social roles of girls and women can be powerful in their effects in this area.
Since the processes of globalization are both powerful and longstanding, it
is important to explore the wide-ranging ways they can be better harnessed
in the battle to improve poor people's lives, at least in this area of infant
mortality.
Trade and Foreign Direct Investment
Increases in international trade and foreign direct investment (FDI) are
potentially vital means to alleviate global poverty.13 Examining this possi-
bility requires an appreciation both of the kinds of trade and FDI the devel-
oping world engages in and of the way these activities have changed over
time. FDI is distinct from other capital flows (portfolio equity investment,
bond finance, and commercial bank lending, as well as aid and remittances)
in that it primarily reflects managerial rather than portfolio behavior. Trade
and FDI can be related to one another through what international econo-
mists and business strategists call intra-firm trade. This is trade that takes
place within multinational enterprises (MNEs), and it accounts for approx-
imately one-third of world trade.14 As developing countries integrate into
the world economy, they typically become increasingly involved with global
patterns of intra-firm trade. In addition, some FDI can generate exports
when the MNEs engage in foreign investment to build export capacity
abroad.
34 Globalization for Development
The Magnitude of Trade and FDI
For a sense of the magnitudes of trade and FDI consider figure 2.11, which
points out a number of important features of both exports and FDI inflows
for the developing world:
First, the exports and FDI inflows of the middle-income countries are
much larger than those of the low-income countries.
Second, exports are substantially higher than FDI inflows for both the
middle-income countries and the low-income countries.
Third, with the exception of investments in extractive industries, low-
income countries as a group receive practically no FDI inflows at all.
Fourth, the exports of the middle-income countries have increased
substantially faster than those of the low-income countries
Indeed, the increase of exports from the middle-income countries is one of
the recent success stories of the developing world and is not unrelated to the
recent improvements in poverty measures discussed above. Because nearly all
of Sub-Saharan Africa is composed of low-income countries, there is a
FIGURE 2.11 Trade and FDI for Low- and Middle-Income Countries
(millions of current US dollars)
Globalization and Poverty 35
regional dimension to some of these trends: aside from petroleum and min-
erals, Africa is largely left out of global export growth and FDI inflows,
although a few African countries have been able to break this mold and have
benefited from rapid growth in both investment and trade.15
Sectoral Structure of Exports
Examining the sectoral structure of developing-world exports, we learn three
things (figure 2.12).
First, increases in exports from the developing world have occurred
primarily in manufactured goods. Indeed, despite a few temporary
downturns, developing-country manufactured exports have been
steadily increasing since the mid-1980s.
Second, only relatively minor increases in primary (including agricul-
ture) exports have occurred since the mid-1980s.
Third, despite a common perception of developing countries as being
in "pre-service" stages of development, exports of commercial services
have increased faster than exports of primary goods.
FIGURE 2.12 Sectoral Composition of Developing Country Nominal Exports
36 Globalization for Development
Manufacturing Exports
The increases in developing country manufacturing exports and FDI inflows
reflect to some degree the increased integration of developing countries into
the flexible manufacturing systems of the third stage of modern globalization.
As described by Ocampo and and Martin (2003),
This was the first step toward the development of internationally inte-
grated production systems, in which production can be divided into vari-
ous stages (a process known as "the dismemberment of the value chain").
In such systems, the outsourcers in different countries can then specialize
in the production of certain components, in particular phases of the pro-
duction process, or in the assembly of specific models. (p. 4)
An increasing number of developing countries took this first step, despite
continued protectionism in areas such as textiles, clothing, and food prod-
ucts. Indeed, the increased involvement of some developing countries in the
global manufacturing system is perhaps the most important characteristic of
the third stage of globalization. It increasingly involved trade within narrowly
defined sectors (intra-industry trade) and, as mentioned above, even trade
within multinational firms themselves (intra-firm trade).
Agricultural Exports
The stagnation of developing countries' agricultural exports has had a number
of causes. Among these causes are the bias against agriculture in most develop-
ing countries; the protection against developing-country agricultural exports in
both developed and other developing countries; and the extensive subsidization
of agriculture in the developed countries, which undercuts successful agricul-
tural production in the developing world.16 This stagnation is an important
explanation of the continued stubbornness of rural poverty and of the limita-
tions to developing country participation in the world trading system.
Commercial Services Exports
Finally, the slow increase in commercial services represents the increased
involvement of developing countries in transportation, tourism, and business
services. Because the data on provision of these services are imperfectly col-
lected, the actual increase in commercial services over time might be even
larger than that illustrated in figure 2.12.
There is a tradition in development economics that emphasizes the role of
manufacturing in successful development trajectories. From this perspective,
Globalization and Poverty 37
the upward trajectory in the manufacturing exports of developing economies
is encouraging. However, there is a less well known concern with the poten-
tial of agriculture to contribute positively to development trajectories, and
there is some evidence to support this view in the case of East Asia.17 From
this perspective, as well as from the perspective of the numerous rural poor,
the stagnation of agricultural exports is less than encouraging. Rarely appre-
ciated is the potential role for service exports to transform economies, a
potential that can be significant.18 In light of this, it is important to recognize
the fact that even the low-income countries are active in this area.
Capital, Aid, and Remittance Flows
Capital flows, aid, and remittances are important channels through which
poorer countries can gain access to resources from abroad. Each of these
activities is identified by international and development economists as an
additional way to reduce global poverty, albeit with some disagreement.19 We
consider each of these globalization dimensions to gain a sense of their rela-
tive magnitudes.
The Role of FDI
If we consider recent trends in capital flows, aid, and remittances for devel-
oping countries, a number of important characteristics become visible (fig-
ure 2.13). Since the early 1990s, FDI has emerged as the most important
foreign resource flow for the developing world as a whole, surpassing for-
eign aid or official development assistance (ODA) by increasing amounts.
Despite some volatility in the 2000 to 2003 period, the long-term growth and
volume of these flows has been remarkable, inspiring much comment on the
possibility of private capital replacing aid. Recent data demonstrate a recov-
ery of FDI inflows in 2004. In part, these new flows are related to the
increased manufacturing exports of the developing world, because FDI has
been a vehicle for these countries to integrate into the global manufacturing
system.20
The Role of Portfolio Flows
Along with FDI, portfolio flows such as equities and bonds began to increase
significantly in the 1990s. In contrast to FDI, however, these flows have
proved to be volatile, dropping precipitously between 1997 and 2003. They
recovered significantly in 2003 and 2004, and recent data21 suggest that
portfolio flows will hold up well at least through 2005. The volatile nature of
38 Globalization for Development
FIGURE 2.13 Nominal Flows of Aid, FDI, Portfolio Investment,
and Remittances to Developing Countries
portfolio flows gives rise to the cautionary approach we take toward portfolio
capital in chapter 4 and is reflected in box 2.2 on "volatile widgets."22
The Role of Foreign Aid
In contrast to both FDI and portfolio flows, foreign aid or ODA is a histori-
cally recent flow. Aid increased slowly from the 1960s until around 1990.
Between 1990 and 2001, aid flows have stagnated, and as a share of rich coun-
tries incomes, or per capita requirements of poor people, declined precipi-
tously: from around 0.32 percent of gross national income (GNI) or US$35
per African in 1990, to 0.22 percent of GNI or US$17 per African in 2000.
More recently and as evident in Figure 2.13, the downward trend in aid has
been reversed with a growing number of countries committing to double
their aid budgets by 2010. Like other capital flows, aid has been concentrated
in a relatively small number of countries, although since the end of the Cold
War donors increasingly have directed their aid to countries that are more
effective at using the aid and those where most poor people live. The UN Mil-
lennium Declaration in 2000 marked the beginning of a renewed push for
Globalization and Poverty 39
BOX 2.2 Volatile Widgets in the 1990s
I
Y
magine landing on a planet that runs on widgets. ou are told that international trade in wid-
gets is highly unpredictable and volatile on this planet, for reasons that are poorly understood.
A small number of nations have access to imported widgets, while many others are completely
shut out even when they impose no apparent obstacles to trade. With some regularity, those
countries that have access to widgets get too much of a good thing, and their markets are flooded
with imported widgets. This allows them to go on a widget binge, which makes everyone pretty
happy for while. However, such binges are often interrupted by a sudden cutoff in supply, unre-
lated to any change in circumstances. The turnaround causes the affected economies to experi-
ence painful economic adjustments. For reasons equally poorly understood, when one country is
hit by a supply cutback in this fashion, many other countries experience similar shocks in quick
succession. Some years thereafter, a widget boom starts anew.
Substitute "international capital flows" for "widgets" above and the description fits today's
economy quite well. We have just gone through a lending boom-and-bust cycle in Asia that is
astounding in its magnitude. In 1996, five Asian countries (Indonesia, Malaysia, the Philippines,
the Republic of Korea, and Thailand) received net private capital inflows amounting to US$93 bil-
lion. One year later (in 1997), they experienced an estimated outflow of US$12.1 billion, a turn-
around in a single year of US$105 billion, amounting to more than 10 percent of the combined
GDP of these economies.
Source: Rodrik 1998a.
increased aid and for greater aid effectiveness. Recent years have seen consid-
erable progress toward increasing the impact of aid on the part of both the
recipients and donors. As we emphasize in chapter 5, both the quality and the
quantity of aid matter enormously for poor people, and the impact of aid is
not limited to its monetary value--the associated flow of ideas and capacity
building can also play a vital role.
The Role of Remittances
The remittance flows of global migrants have been characterized by a long-
term upward trajectory almost as significant as that of FDI, and the rate of
increase in remittances shifted upward even as FDI fell during the 2000 to
2003 period. Remittance flows to developing countries were approximately
US$200 billion in 2006 and are more important than both aid and portfolio
investments to the alleviation of poverty. They are the financial manifestation
of the international movement of persons. Their increase reflects the fact that
the world's foreign-born population has more than doubled since 1965 and
currently stands near 200 million persons.23 Increased remittance flows have
also responded to declines in money transfer costs that accompany global-
ization.24 The rapid increase in recorded remittances since 2001 may also be
40 Globalization for Development
due to increased scrutiny and recording of these flows and the inclusion of
previously unrecorded flows in the official data.
The country-specific nature of remittances can be appreciated from fig-
ure 2.14. This figure plots two measures of remittances. It plots data on 2001
per capita remittances in US dollars measured on the upper axis and indicated
with vertical bars. The countries are ranked by per capita remittances as a per-
centage of per capita GDP, which is measured on the lower axis and indicated
with a line. Remittances can be significant from both perspectives. For exam-
FIGURE 2.14 Foreign Remittances Per Capita and as a Percentage
of Per Capita GDP, 2003
Globalization and Poverty 41
ple, per capita remittances are over US$300 for El Salvador, Jamaica, Jordan,
Lebanon, and Tonga. Per capita remittances as a percentage of per capita GDP
range from approximately 40 percent to 10 percent. For the countries toward
the left end of the figure, remittances are a significant fraction of per capita
GDP. This indicates that the money sent home by migrants from these coun-
tries is a significant source of income compared with domestic production, so
it can have a significant impact on poverty.
The Role of Trade
Finally, each of the above flows (FDI, portfolio investment, foreign aid or
ODA, and remittances) is of a lesser order of magnitude than trade (see also
figure 2.11). That does not make these flows unimportant; it makes the trade
aspect of globalization especially important. Additionally, leveraging capital
and aid flows in creative ways for effective poverty alleviation becomes cru-
cial given their lower orders of magnitude.
Ideas
Ideas are the generation and transmission of distinctive intellectual constructs
in any field that can affect production systems, organizational and manage-
ment practices, governance practices, legal norms, and technological trends.
By their very nature, it is difficult to accurately compare idea flows to the other
kinds of flows considered here.
Ideas for Development
Given our concern with poverty, perhaps the most important set of ideas con-
nected to globalization is what Meier (2001) calls "ideas for development."
Meier notes that "ideas are fundamental to the future progress of develop-
ment" (p. 1). Ideas for development are always emerging, but if one looks
hard enough, there is an apparent middle ground among past ideological
divisions in development thinking.
Emerging Middle Ground
For example, there is now a better appreciation than in the past of the roles of
institutions, history, the public sector, and human welfare in development
processes. One recent idea in this realm is that of global public goods,
described in box 2.3. This emerging middle ground does not offer any sim-
ple, one-size-fits-all prescriptions. In some ways, we have arrived at a stage in
which "we know that we do not know" (Hoff and Stiglitz 2001), but there is
42 Globalization for Development
no small measure of ironic comfort in this. There is now intellectual room for
multiple, successful routes to development that involve large measures of
local learning and experimentation.
Human Rights
Another important idea relevant to reducing deprivation is that of human
rights, which has influenced governance practices and legal norms in signifi-
cant ways. This idea, which is coincident with the second and third stages of
modern globalization, is a positive example of what Ocampo and Martin
(2003) call the "globalization of values."25 With its roots in the Universal Dec-
laration of Human Rights (adopted 1948), it is perhaps the International
Covenant on Civil and Political Rights (adopted 1966) that has been the most
influential. This covenant prohibited torture, slavery, forced labor, and arbi-
trary arrest. The notion of human rights has been essential in promoting the
place of human security (as opposed to national security) as a modern con-
cept.26 It is also relevant to issues of global poverty in its focus on shortfalls in
basic needs.27
BOX 2.3 The Idea of Global Public Goods
O
ne recent idea in international economic policy that is relevant to our investigation of
globalization is that of global public goods. A public good is a desired object that has
some particular features setting it apart from private goods. First, its consumption is
"nonrival" in that more than one person can consume it at the same time. Second, its benefits are
"nonexcludable" in that people cannot be easily prevented from claiming them. For example,
road safety is a well-known local public good, evident from the fact that we do not privately pur-
chase traffic lights.
A global public good is a public good the benefits of which accrue more or less globally, ben-
efiting persons in most countries. Examples include the multilateral trading system, international
peacekeeping, disarmament agreements, disease eradication, and measures to prevent global
warming. As noted by Kaul, Grunberg, and Stern (1999), the "concept of global public goods is
crucial to effective public policy under conditions of increasing economic openness and inter-
dependence among countries" (p. 9).
Because the benefits of global public goods are spread around the world, no single nation has
the incentive to provide them. Unlike local public goods, the absence of a global government
leads to their underprovision. Consequently, international cooperation is crucial. As these authors
remark, "In today's rapidly globalizing world, peoples' well-being depends on striking a careful
balance not only between private and public goods but also between domestic, regional and
global public goods" (p. 16). Achieving the cooperation among countries to provide global public
goods is a significant and ongoing challenge.
Source: Kaul, Grunberg, and Stern 1999.
Globalization and Poverty 43
Role of Ideas in Globalization
The flow of ideas can be closely related to other dimensions of globalization.
For example, behind trade, finance, aid, and migration there can be impor-
tant relationships that assist in learning, and in transmitting and adapting
ideas. As will be discussed at various junctures in the chapters that follow,
long-term poverty alleviation involves learning of various kinds. For exam-
ple, learning is involved in the positive transmission of technological change
from exporting and FDI inflows. Without the learning relationships for trans-
mitting ideas, these technological changes cannot easily take place. In the case
of aid, Pomerantz (2004) emphasizes that "the quality of the relationship
may, in fact, be more important in influencing policy directions and ensur-
ing successful outcomes, than the money itself" (p. 8).
Ways to Measure the Flow of Ideas
Ideas can be imagined as a current flowing through channels created by trade,
capital flows, aid, and migration. However, it is not easy to accurately mea-
sure idea flows as we do the other globalization flows considered here. Instead,
we can assess the capacity for global idea flows. One measure of capacity is
telecommunications connectedness, depicted in figure 2.15. Whether mea-
sured in terms of telephone mainlines, mobile phones, or Internet usage, the
low-income countries of the world are at a significant disadvantage compared
with the middle-income countries, and at even more of a disadvantage com-
pared with the high-income countries. For example, mobile phone usage in
the low-income countries is less than 15 percent that of the middle-income
countries. This lack of connectedness reflects a lack of infrastructure available
to poor people that would enable them to share in the global exchange of
ideas, methods, and technology.28
Summary
What do we learn from the information presented in this chapter?
First, and most important, global poverty is a widespread phenomenon
(even in its extreme form) that has finally shown some recent trend
toward leveling off and even declining somewhat.
Second, a ranking of the various dimensions of globalization in terms of
US dollar value flow volumes appears to be trade, foreign direct invest-
ment, remittances (reflecting migration), other capital flows, and aid.
Third, the impact of globalization as measured through our economic
dimensions are highly uneven--the low-income countries are much
less involved in trade and FDI activities, for example, than middle-
income countries.
44 Globalization for Development
FIGURE 2.15 Communication Access, 2004 (per 1,000 people)
Fourth, ideas permeate all the other globalization activities, supporting
to greater and lesser degrees crucial learning processes that are impor-
tant to long-run poverty reduction. In fact, poverty is, to an important
extent, a poverty of learning, and any improvement in the way global-
ization benefits poor people will involve supporting poor peoples'
learning in multiple realms.
We will begin to examine in detail each of our globalization dimensions and
their links to global poverty in chapters 3 through 7. These examinations,
along with that of this and the previous chapter, will lead us to a set of policy
recommendations we present in chapter 8. This last chapter recognizes that
global poverty in all its dimensions requires adequate policy responses from
national and world communities.
Annex: Low- and Middle-Income Countries, 2004
Low-Income Countries
Afghanistan, Angola, Bangladesh, Benin, Bhutan, Burkina Faso, Burundi,
Cambodia, Cameroon, Central African Republic, Chad, Comoros, Demo-
cratic Republic of Congo, Republic of Congo, C�te d'Ivoire, Equatorial
Globalization and Poverty 45
Guinea, Eritrea, Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Haiti,
India, Kenya, Democratic Republic of Korea, Kyrgyz Republic, the Lao People's
Democratic Republic, Lesotho, Liberia, Madagascar, Malawi, Mali, Maurita-
nia, Moldova, Mongolia, Mozambique, Myanmar, Nepal, Nicaragua, Niger,
Nigeria, Pakistan, Papua New Guinea, Rwanda, S�o Tom� and Principe, Sene-
gal, Sierra Leone, Solomon Islands, Somalia, Sudan, Tajikistan, Tanzania,
Timor-Leste, Togo, Uganda, Uzbekistan, Vietnam, the Republic of Yemen,
Zambia, Zimbabwe.
Middle-Income Countries
Albania, Algeria, American Samoa, Antigua and Barbuda, Argentina, Armenia,
Azerbaijan, Barbados, Belarus, Belize, Bolivia, Bosnia and Herzegovina,
Botswana, Brazil, Bulgaria, Cape Verde, Chile, China, Colombia, Costa Rica,
Croatia, Cuba, Czech Republic, Djibouti, Dominica, Dominican Republic,
Ecuador, Arab Republic of Egypt, El Salvador, Estonia, Fiji, Gabon, Georgia,
Grenada, Guatemala, Guyana, Honduras, Hungary, Indonesia, Islamic Repub-
lic of Iran, Iraq, Jamaica, Jordan, Kazakhstan, Kiribati, Latvia, Lebanon, Lithua-
nia, FYR Macedonia, Malaysia, Maldives, Marshall Islands, Mauritius, Mayotte,
Mexico, Federated States of Micronesia, Morocco, Northern Mariana Islands,
Oman, Palau, Panama, Paraguay, Peru, Philippines, Poland, Romania, Russian
Federation, Samoa, Saudi Arabia, Serbia and Montenegro, Seychelles, Slovak
Republic, South Africa, Sri Lanka, St. Kitts and Nevis, St. Lucia, St. Vincent and
the Grenadines, Suriname, Swaziland, Syrian Arab Republic, Thailand, Tonga,
Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Ukraine, Uruguay, Van-
uatu, R�publica Bolivariana de Venezuela, West Bank and Gaza.
Notes
1. These revolutionary changes in economic development eventually gave rise to significant "rever-
sals of fortune" over time. For example, in the mid-1950s, Southeast Asia and Africa had the same
levels of per capita income. By the late 1990s, Southeast Asia's per capita income was approxi-
mately five times that of Africa. See Francois (2000).
2. See Szirmai (2005, p. 51).
3. We are grateful to William Rex, Lead Corporate Strategy Officer, World Bank, Washington, DC,
for assistance with the data in figure 2.4.
4. As Streeten (1995) notes, "Some authors regard all poverty as relative, but this is surely confus-
ing inequality--an evil, but a different evil--with poverty. Everyone in a society can be equally
starving, and we would not want to say that they are not poor" (pp. 32�33). Various measures of
inequality or relative income deprivation are expertly reviewed by Ravallion (2004b). A histori-
cal view is given by O'Rourke (2002).
5. Recall from chapter 1 that purchasing power parity dollars adjust for differences in the cost of liv-
ing among the countries of the world, and that this adjustment is especially important because
nontraded services tend to be less expensive at low levels of income.
6. See also Chen and Ravallion (2001) for an earlier set of estimates.
46 Globalization for Development
7. Ravallion (2004b) notes that the sharp drop in poverty in China in the early 1980s was due to
the de-collectivization of agriculture after Premier Deng's reforms started in 1978 (p. 7).
8. As Crafts (2001) notes, "any index of living standards that gives substantial weight to life
expectancy will make the developing countries of the recent past look much better in welfare com-
parisons with the leading countries of 1870 than does a judgment based simply on real GDP per
capita" (p. 325). See also Preston (1975).
9. See table 1-4 of Maddison (2001).
10. As noted by Sen (1999), "the problem of premature mortality is enormously sharper in Africa
than in India" (p. 102).
11. See Behrman, Alderman, and Hoddinott (2004).
12. For example, in their study of parental education and health in Brazil, Kassouf and Senauer (1996)
concluded, "Some 25% of preschool children with mothers who had less than 4 years of school-
ing suffered from severe or moderate stunting (of growth). This figure would fall to only 15% if
these mothers had a primary education of at least 4 but less than 8 years, and only 3% if these
mothers had a secondary education of at least 11 years of schooling. Although not as strong as the
effect of maternal education, . . . improved paternal education would also lead to substantial
reductions in child malnutrition" (p. 832). See also Schultz (2002).
13. See Dollar and Kraay (2004), for example. An alternative view is given in Rodr�guez and Rodrik
(2001).
14. An introduction to intra-firm trade is provided in chapter 10 of Reinert (2005).
15. A notable exception to this is South Africa.
16. See, for example, Krueger, Schiff, and Valdes (1988) and Schiff and Valdes (1995).
17. See Brown and Goldin (1992), Park and Johnston (1995), Reinert (1998), and Martin and Mitra
(2001). From different perspectives, each of these sources treats the agricultural sector as poten-
tially dynamic, something that has not always been well appreciated.
18. See Francois and Reinert (1996).
19. See, for example, World Bank (2002a and 2002b).
20. See Feenstra (1998), who referred to the integration of trade and disintegration of production in
the global economy in an early article on out-sourcing. Less emphasized in this and other articles
is the process of "in-sourcing."
21. See, for example, Institute of International Finance (2005).
22. On the volatility of portfolio capital, see Obstfeld (1998) and Eichengreen (1999, 2004).
23. See World Bank (2005f ).
24. For the case of migrants from Latin America, see Lapper (2004).
25. Negative or deleterious examples of the globalization of values certainly do exist as well, such as
the undermining of diversity through blind, cultural homogenization.
26. See, for example, Axworthy (2001). He notes, "The international discourse on human security is
beginning to effect change on the institutions and practice of global governance. . . . Globalization
has made individual human suffering an irrevocable universal concern" (p. 20). The contention
that the human rights idea is merely "Western" has been shown to be false. See, for example, chap-
ter 10 of Sen (1999) and chapter 1 of Nussbaum (2000).
27. See, for example, Pogge (1999).
28. The World Bank's World Development Indicators estimate a 2002 waiting list for telephone main-
lines of over 4.5 million persons in the low-income countries, reflecting an unfilled demand for
these services. Tom Friedman (2005) illustrates how communication, transport, and other tech-
nological advances have produced new opportunities for those countries or firms that are able to
capture the benefits of these developments.
3
Trade
I nternational trade is potentially a powerful force for poverty reduction.
Trade can contribute to poverty alleviation by expanding markets, creat-
ing jobs, promoting competition, raising productivity, and providing new
ideas and technologies, each of which has the potential for increasing the real
incomes of poor people. We emphasize the word "potential" because the link
between trade and poverty alleviation is not automatic.1 Indeed, as the recent
histories of a number of countries demonstrate, it would be a mistake to rely
on trade liberalization alone to reduce poverty. A more comprehensive
approach is needed--one that addresses multiple economic and social chal-
lenges simultaneously and that emphasizes the expansion of poor people's
capabilities, especially in the areas of health and education.2 Such an approach
also needs to address the business climate, infrastructure, and other barriers
that prevent potential importers and exporters from benefiting from the
opportunities afforded by more open markets. Trade has a vital role to play,
and we explore this in the present chapter.
As we emphasize below, improving market access for developing countries
is a priority. This would yield benefits that far exceed those of additional aid or
debt relief. Additional aid to enhance trade is, however, a vital complement to
ensure that low-income countries take advantage of increased access to markets.
International Trade and Its Impact on Poverty
As has been long recognized by international economists, international trade
is a means of expanding markets, and market expansion can generate employ-
ment and incomes for poor people. In many discussions of globalization,
comparisons have been made between the wages of workers in poor-country
export industries and the wages of workers in developed countries. In these
comparisons, the wages of workers in developing countries' export industries
47
48 Globalization for Development
often appear to be very low. Consequently, globalization has often been iden-
tified as worsening poverty. However, comparison between what people may
have earned before and after trade opportunities became available is perhaps
more relevant. From a poverty perspective, this comparison could be between
the wages of export sector workers and agricultural day laborers, both in the
same developing country. Often the alternative of work as an agricultural day
laborer is much worse than the work of an export sector worker. It is precisely
this type of income comparison that draws workers into export industries.3
Export Activity
It must also be kept in mind that not all export activity is equal from the point
of view of raising the incomes of poor people. The export sector can best help
to alleviate poverty when it supports labor-intensive production, human capi-
tal accumulation (both education and health), or technological learning. These
characteristics were often present in the successful East Asian export expansion
of recent decades. Their weakness in other countries' export expansions helps
to explain why export expansions have not always done as much as could be
done to help poor people. In addition, the incomes of poor individuals depend
on buoyant and sustainable export incomes, which in turn depend on export
prices. Export activity with declining export prices, a characteristic of many
primary commodities, does not lend itself to sustain poverty alleviation.
Competition
International trade is also a means of promoting competition, and in many
instances, this can help poor people. Increased competition lowers the real costs
of both consumption and production. For example, domestic monopolies
charge monopoly prices that can be significantly higher than competitive prices.
The competition introduced by imports erodes the market power of firms that
at times dominate markets and undermine consumer choice. These "procom-
petitive effects" of trade can make tight household budgets go farther and lower
costs of production, for example, through lowering the costs of fertilizer or fuel.
Consumers also suffer when they have to pay artificially high prices for food or
clothing products. It is estimated that in the European Union, Japan, and the
United States, consumers pay over US$1,000 more for their food than would
be the case if trade barriers were reduced. This harms poor people in rich and
poor countries alike. Lower production costs can have knock-on employment
effects advantageous to poor individuals by lowering nonwage costs in labor-
intensive production activities. Procompetitive effects can also arise in the case
of monopsony (single-buyer) power.4 In this case, sellers (small farmers, for
example) to the previously monopsonistic buyer are able to obtain higher prices
for their goods as the buying power of the single-buyer is eroded.
Trade 49
KEY TERMS AND CONCEPTS
Export Processing Zones (EPZs) primary commodities
high-technology manufactured real (price adjusted) wages
exports (HTME) tariffs
maquiladora export sector tariff escalation
market expansion tariff protection
monopsony trade liberalization
multinational enterprises (MNEs) value chains
openness ratio
Productivity Increases: Exports
For export activities to support poverty alleviation in a sustained manner, it
helps if those activities lend themselves to technological upgrading and asso-
ciated learning processes. There is some evidence that international trade can
promote productivity in a country, and it is possible that productivity increases
can in turn support the incomes of poor people. Neither of these processes is
automatic, however. It is not the case that exports of all types or in all coun-
tries generate positive productivity effects, but there is evidence that this is the
case in certain instances. The export process can place the exporting firms in
direct contact with discerning international customers, thus facilitating up-
grading processes. There is no consensus among international economists on
the extent of these upgrading effects, but they nonetheless remain an impor-
tant possibility that has been active in sectors such as the Indian software
industry.5
Productivity Increases: Imports
Productivity increases can occur because of imports as well as exports. In this
case, the process is typically related to the imports of new machinery that
embody more advanced technologies than the machinery they replace in the
importing country. Again the issue arises as to the extent to which this upgrad-
ing supports the incomes of poor people. For example, as Chile and Costa
Rica liberalized their trading regimes, firms imported more physical capital
(machines) to remain competitive. Embodied in these machines was a newer
technology level that demanded relatively more skilled workers than the old
technology that had been in use. Consequently, as trade was liberalized, the
unskilled workers lost in terms of relative wages, while workers who were more
highly skilled gained. Because poor people are almost always unskilled, these
particular changes worked against them.6 As discussed by de Ferranti and others
(2002) in the context of Latin America, this is one of a number of reasons why
50 Globalization for Development
upgrading skills is crucial for trade (and for foreign direct investment [FDI],
discussed in chapter 4) to have a positive impact on poverty.
Access to Foreign Markets
For positive effects of trade to occur, developing countries need access to for-
eign markets. Unfortunately, as has been very well documented by both trade
economists and development organizations, the high-income countries of the
world maintain their greatest protective measures in exactly the same markets
that are most important for the developing world: agriculture, food processing,
and labor-intensive manufactures. In addition, there is substantial evidence of
what trade economists call tariff escalation, where high-income countries
increase the level of protection along with the degree of processing of a prod-
uct, resisting diversification up and down value chains that are so important to
development processes.7 In many cases, lack of market access hurts poor indi-
viduals both directly by reducing employment opportunities and indirectly by
contributing to declining export prices, particularly for primary commodities.8
Impact on Health and Safety
International trade can have direct health and safety effects on poor individu-
als, which can be beneficial or detrimental. Perhaps most important, improv-
ing the health outcomes of poor people usually involves imports of medicines
and medical products. It is simply not possible for small developing countries
to produce the entire range of even some of the more basic medical supplies,
much less more advanced medical equipment and pharmaceuticals. It is also the
case that many developing counties import (legally or illegally) large amounts
of weaponry and export sexual services, both of which can have dramatically
negative outcomes for the health and safety of poor individuals.9 In addition,
the production processes of some export industries can adversely affect the
health of workers in those industries, and a small but important amount of
trade involves hazardous waste dumping. We will address both the positive
and the negative impacts of trade on health and safety in this chapter.
Characteristics of Developing-Country Trade
Before we begin our analysis of the relationship between trade and poverty
alleviation, let's recall a few relevant characteristics of developing-country
trade from chapter 2.
First, total trade flows (for example, total exports) of developing coun-
tries are substantially larger than inflows of FDI, portfolio investment,
and foreign aid receipts. Even the largest of these (FDI) is only approxi-
Trade 51
mately one-fifth the size of exports. Trade is therefore of utmost
importance for developing countries as a whole.
Second, for low-income countries (but not for middle-income coun-
tries), we need to modify the first statement somewhat. For these coun-
tries, aid sometimes reaches the value of a third of their exports. Relative
to exports, aid is more important than FDI for these poorer countries.
Third, manufactured exports are increasingly important for develop-
ing countries, both low- and middle income, although agricultural
exports are more important for low-income countries than for
middle-income ones.
Fourth, commercial service exports are important for all developing
countries, especially when compared with agricultural exports.
These are a few important characteristics of trade that we will keep in mind
as we investigate its role in global poverty alleviation. We begin with the mar-
ket expansion effects of trade.
Market Expansion
The development NGO Oxfam (2002a) has rightly noted that "History makes
a mockery of the claim that trade cannot work for the poor" and that "Export
success can play a key role in poverty reduction" (p. 8). Some in the anti-
globalization movement would deny such claims, while many pro-globalist
observers would claim that these processes are automatic. Here we take an
intermediate view, observing that export expansion has the potential for in-
creasing the real incomes of poor people.
Role of Trade in Alleviating Poverty
In discussions of the more high-tech aspects of globalization, it is often for-
gotten that 70 percent of the world's "dollar poor" (those consuming below
US$1 per day at 1985 purchasing power parity levels) reside in rural areas.10
For this reason, poverty alleviation cannot ignore rural development, and the
potential role that trade can play in poverty alleviation depends in large measure
on the possibility of supporting rural incomes, either through farm or nonfarm
activities. One such example can be found in Vietnam's rice sector.
Supporting Rural Incomes: Vietnam's Rice Sector
In the case of Vietnam, this support of rural areas has occurred, at least to some
degree. As a result of a package of reforms in the late 1980s that included grad-
ual trade liberalization, Vietnam turned from a rice importer to a rice exporter
despite the role of this crop as the country's main staple food. Vietnam is now
one of the largest rice exporters in the world.
52 Globalization for Development
This trade-based market expansion in Vietnam supported household in-
comes because of the widespread participation of small farms in Vietnam's rice
sector. Indeed, rice is grown by two-thirds of Vietnam's households. Rice exports
increased the incomes of these small farms and, because rice production is labor
intensive in Vietnam, increased demand for rural labor.11 Thus, Vietnam's rice
exports have indeed supported rural incomes, helped to alleviate poverty, and
even improved nutrition and reduced child labor.12 The key here is the involve-
ment of labor-intensive, smallholder farmers; such success has been noted
in other countries such as Uganda, where smallholder agriculture has been
supported by export market expansion. Where export expansion supports
large-scale, capital-intensive agriculture, and where land ownership is highly
concentrated, these poverty alleviation effects are weaker. Finally, it is important
to note that Vietnam's trade liberalization has not been orthodox. For example,
it has employed an export quota (maximum exports) to ensure that domestic
rice prices do not rise too much to the detriment of consumption. This has been
important for the rural poor for whom the bulk of caloric intake is from rice.
Supporting Manufacturing Incomes: Bangladesh's Clothing Industry
Although rural incomes are most often central to large-scale poverty allevia-
tion, supporting goals of poverty alleviation is not confined to agriculture.
Indeed, labor-intensive manufacturing has been an important part of poverty-
alleviating trade expansions in much of the developing world. This was the
case in the famed export expansion of East Asian countries, and it has also
been seen in more recent cases such as Bangladesh's clothing exports. In
Bangladesh's case, poverty reduction during the 1990s was quite dramatic
and, although changes in the nontradable sector were a significant factor in
this reduction, clothing exports also played an important role. Nearly 2 mil-
lion Bangladeshis work in the clothing sector's nearly 3,000 factories. Oxfam's
(2002a) description of this sector illustrates the point that wage comparisons
must be relevant to the workers themselves to be truly useful:
Most of the (clothing) workforce consists of young women, many of whom
have migrated from desperately poor rural areas. The wages earned by
these women are exceptionally low by international standards, and barely
above the national poverty line. Yet their daily wage rates are around twice
as high as those paid for agricultural labourers, and higher than could be
earned on construction sites. Employment conditions in the export zones
are scandalously poor, with women denied even the most basic rights. Yet
for most women working in the garments sector, their employment offers a
higher quality of life than might otherwise be possible. (p. 56)
Trade 53
Although it is true that the wages in the Bangladesh garment sector are barely
US$2 per day, this labor-intensive employment has provided an opportunity
to leave worse conditions in rural and urban poverty. To be blunt, it has been
a difference between poverty and extreme poverty. Indeed, using survey data
from 1990 and 1997, Zohir (2001), Kabeer (2004), and Kabeer and Mahmud
(2004) provide evidence that work in the garment sector has had a number of
beneficial effects on women workers in Bangladesh. These include first-time
access to cash income, support of families in rural areas through remittances,
support of siblings' education, and increased household status. Zohir's con-
clusion is that "employment in the garment industry has definitely empow-
ered women, increased their mobility and expanded their individual choice"
(p. 67).13 Similar evidence in five additional countries of the way exports can
support women's incomes is provided by Nordas (2003), who concludes that
export industries in Mauritius, Mexico, Peru, the Philippines, and Sri Lanka
are more likely to employ women than men and that they also tend to increase
women's wages relative to men's.
Promise of Technological Upgrading
While labor-intensive manufacturing offers an important way to support the
incomes of poor people, its long-run promise lies in the potential for techno-
logical upgrading. Without technological upgrading, it is likely that the econ-
omy will not contribute to long-term poverty alleviation. We will consider
this process in the section on productivity. First, however, we consider the
issue of competition.
Competition
International economists have begun to understand the ways that inter-
national trade can promote competition in developing countries. In many
instances, increased competition can help poor people by lowering the real costs
of household consumption and production. As mentioned earlier, a domes-
tic firm with market power can raise prices above competitive levels, and
import competition can erode this market power.
What trade economists call the "procompetitive effects" of trade does have
the potential to help the poor in some instances.14 Procompetitive effects can
also occur in the case of monopsony (single-buyer) power. Here, sellers (small
farmers, for example) to the monopsony buyer are able to obtain higher prices
for their goods as the buying power of the monopsonist is eroded. We give
examples of each of these possibilities here.
54 Globalization for Development
Procompetitive Effects: Grameen Bank's Village Phone Program in Bangladesh
The Grameen Bank's Village Phone Program demonstrates how imported tech-
nologies, when introduced in the context of a well-thought-out and targeted
policy framework, can make a dramatic difference in the lives of the poorest
of the poor. Before this program, Bangladesh had one of the lowest telephone
penetration rates in the world: only 1.5 percent of households had access to a
telephone. Although the lack of a functioning telecommunications service
posed serious frustrations for all Bangladeshis, it was particularly costly for
the country's farmers and local producers. For these individuals, the lack of
telecommunication service imposed serious costs by denying them critical
access to the price information necessary to make efficient production deci-
sions and to negotiate with middlemen and marketers on a fair basis.
In 1997, the Grameen Bank, Bangladesh's renowned village-based micro-
credit organization, launched the Village Phone Program. The program pro-
vided selected female members of Grameen Bank's peer-based microcredit
networks with loans of taka 12,000 (US$200) to purchase an imported
cellular handset and mobile service subscription. The women were then
trained on the use and marketing of mobile phone technology, enabling them
to earn money while helping their fellow villagers gain access to information
at a fraction of what it had previously cost them.15
As of late 2003, Grameen Phone estimated that the Village Phone Program
was providing 50 million people living in remote rural areas with access to tele-
communications facilities. Critically, the advent of village phones has drama-
tically improved the profitability of small farmers. Farmers in villages with
village phone programs, for instance, receive 70 to 75 percent of the retail
price, compared with 65 to 70 percent received by farmers in villages without
phones.16 Participants also reported that village phones have significantly
helped facilitate the regular delivery of inputs at low cost, reduced the risk of
new diseases infecting poultry or livestock, and have offered immeasurable
assistance in averting the adverse effects of natural calamities and crime.17 Thus,
the combination of imported technology with an antipoverty policy frame-
work has improved competition in a manner that has been quite beneficial for
poor individuals. By vesting control of this new technology in the hands of
poor female villagers, the Grameen Bank program represented a dramatic
change in economic tradition for Bangladesh, where local elites had ordinarily
introduced new innovations and reaped large profits as a consequence.
Procompetitive Effects: Cotton Farmers in Zimbabwe
Examples of procompetitive effects that support the poor can be found in
other areas. For instance, there is some evidence that trade liberalization in
Trade 55
Zimbabwe during the early 1990s eroded the monopsony buying power of the
national cotton marketing board and thereby supported the entry, output,
and incomes of smaller cotton producers.18 Following trade liberalization,
additional cotton buyers emerged, including one owned by the cotton farm-
ers themselves. This particular buyer became involved in providing extension
services to smallholder cotton farmers that previously were not available. Also
during this period in Zimbabwe, there was entry of over 3,000 new, small-
scale hammer mills in the maize processing sector, employing thousands of new
workers and leading to an increase in the consumption of hammer-milled
maize meal.19
Assessing Effects of Procompetitive Trade
Examples such as these indicate that, under certain circumstances at least,
poor people can take advantage of increased competition that can result from
international trade. Assessing such effects is an emerging area of inquiry.
Nevertheless, we are convinced that such effects matter for poor people. It also
must be recognized, however, that there are circumstances where certain
kinds of liberalization that accompany trade liberalization episodes can actu-
ally be anticompetitive (for example, some kinds of privatization where new
monopolies are created) and hurt the poor. It is necessary to keep an eye on
competitiveness issues to fully assess the impact of trade on poverty.
Productivity
There is an insight from the field of the microeconomics of labor markets that
has important implications for poverty alleviation. This insight is that long-
term increases in real (price adjusted) wages require long-term increases in
productivity. As noted by UNCTAD (2004), "sustained poverty reduction
occurs through the efficient development and utilization of productive capac-
ities in a manner in which the working age population becomes more and
more fully and productively employed" (p. 90, emphasis added). There is some
evidence that international trade can promote productivity in a country, and
that productivity increases can in turn support the incomes of poor people.
The link between trade and productivity improvements is a potential one and
is not automatic. It can be related to both imports and exports.20
Trade and Productivity: Import Side
On the import side, trade allows countries to import ideas and capital goods
(such as machinery) embodying the new technologies that make productiv-
ity increases possible. New technologies, however, require a learning process
56 Globalization for Development
both to master them and to adapt them to local conditions. As described by
Rodrigo (2001), "Learning takes place when unit variable cost in production
declines with cumulative output as workers, supervisors and managers build
up skills around a specific production process" (p. 88). Without learning,
technological improvements are usually impossible.
Trade and Productivity: Export Side
On the export side, foreign market access supports the learning process.
Again, as described by Rodrigo (2001), "By opening up a channel to the world
market, trade . . . serves to promote specialization and sustain production
tempos of goods in which learning effects are embodied; if constrained by
domestic market size alone along with associated domestic business cycle
uncertainty of demand, firms would be less willing to make the investments
needed to capture gains from learning" (p. 90). Thus, openness to trade, both
import and export, can support technological upgrading via learning.21 For
this process to occur, trade needs to support human capital accumulation
upon which learning depends.22 It also, as Friedman (2005) vividly highlights,
requires openness to ideas, which we discuss in chapter 7.
Trade and Productivity: Importance of Learning
Productivity increases can occur in agriculture, manufacturing, and services.
They are not, as often supposed, limited to manufacturing alone.23 As dis-
cussed in chapter 2, trade in agriculture, manufacturing, and services are all
important for the low- and middle-income countries of the world, and trade-
induced learning processes can operate across all three of these sectors in the
developing world. That said, evidence on learning and technological upgrad-
ing is more readily available for the manufacturing sector, so it is worth con-
sidering this sector as an example of the way that trade-induced learning can
support real incomes over the long term.
In the realm of manufacturing, the importance of learning is reflected in the
observation of Lall and Teubal (1998) that, for developing countries, mastering
existing technologies is more important than innovating new technologies. The
learning process in manufacturing is characterized by these authors as "con-
stant, intensive and purposive" and requires the external support of education
and training that is technology specific. This indicates that complementary edu-
cation policies of the public sector are important for trade-supported produc-
tivity gains. Trade alone is not sufficient. One example of this is the initiative of
the Costa Rican government to supply schools with computer technologies in
support of a hoped-for emergence of an export-oriented computer products
sector. This effort proved to be successful.
Trade 57
FIGURE 3.1 Low- and High-Technology Manufactured Exports
of Some Developing Countries, 2003 (millions of US dollars)
China
Malaysia
Mexico
Philippines
Thailand
Hungary
Czech Rep.
Russian Fed.
Indonesia
Brazil
India
Costa Rica
LTME
Poland
HTME
South Africa
Turkey
0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 500,000
US$ millions
Source: World Bank 2006a.
Note: LTME is low-technology manufactured exports; HTME is high-technology manufactured exports.
Empirical Evidence of Successful Learning
The empirical evidence on the manufacturing sector suggests that successful
learning is not as widespread as one would hope.24 Note the evidence pre-
sented in figure 3.1. This figure considers the sophistication of manufactured
exports for a set of low- and middle-income countries for the year 2003.
These 15 countries account for 97 percent of reported high-technology man-
ufactured exports (HTME) from the low- and middle-income countries.
High-technology manufacturing exports are highly concentrated in the devel-
oping world. Even within the 15 countries reported in this figure, the bulk of
high-technology exports are concentrated at the top of the list: in China,
Malaysia, Mexico, the Philippines, and Thailand. As emphasized by Lall
(1998),
The nature of learning varies greatly by country, depending on initial
capabilities, the efficacy of markets and institutions, and the policies
undertaken to improve them. Some countries lack the skill and technical
base to engage in modern manufactured exports, except for the simplest
58 Globalization for Development
ones (low quality garments or toys) where foreign investors bring in the
technology and provide the (minimal) training needed; some can tackle
the manufacture of complex products (automobiles); and some can
manage the design and development of new technologies in advanced
products. Their capability differences determine the nature and
dynamism of comparative advantage. (p. 66)
Learning and Skill Levels
Indeed, one can distinguish (as Lall [1998] does) between the basic learning that
is required to export low-technology manufactured exports and the deep learn-
ing that is required to export high-technology manufactured exports. The
required complementary education and training policies differ in these two
instances. As Lall points out, "In early stages of industrialization, when skill
needs are fairly low and general, the correct policy is functional support for
schooling and basic vocational training. In later stages, with more complex
activities and functions, skill needs grow more demanding, diverse, and specific
to particular technologies" (p. 68). Beginning the process of basic learning, sup-
ported by functional educational advances, and then transitioning into deep
learning, supported by more specific educational advances, are both important
but not easy to achieve, especially when educational resources are scarce. But it
is essential, as the long-run support of real incomes depends on countries' abil-
ities to do this.25
Learning for High-Technology Manufacture Exports:
The Maquiladora Export Sector
The deep learning process that supports high-technology manufacture exports
is important because there is some evidence that low-technology manufac-
turing exports can fail to deliver long-term real wage increases. It is becom-
ing clear that not all manufacturing activity supports productivity increases
from technological learning over the long term. The country in figure 3.1 with
the third-highest level of high-technology manufacturing exports is Mexico.
However, as can be seen in that figure, the bulk of its manufacturing exports
are low-technology in nature. In the case of assembly or maquiladora export
sector of Mexico, there are limits to productivity increases despite the genera-
tion of over 1 million jobs. For example, figure 3.2 plots imported inputs, value
added, and wages as a percentage of gross production value for a quarter of a
century in Mexico. As can be seen in this figure, imported intermediate prod-
ucts as a percentage of production value has been on a steady rise, while value
added and wages as a percent of production value have been on a steady
Trade 59
FIGURE 3.2 Some Characteristics of the Maquiladora Industry in Mexico
90
80 Imported inputs
Percentage of gross production value
70
60
50
40
30 Value added
20
10 Wages
0
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Source: Buitelaar and Padilla P�rez 2000.
decline. Why does this matter? There is a great deal of evidence that long-term
productivity in exporting activities in support of long-term increases in real
wages relies on manufacturing export activities being integrated into the local
economy via sourcing of local inputs and local value added. Just the opposite
appears to have occurred in the Mexican maquila sector.
Inward FDI
The manufacturing exports of developing countries are often the result of
inward FDI. This is an important link between two realms of globalization we
examine in this book: trade and FDI. From the point of view of poverty allevi-
ation, the question becomes: how can the FDI-export process support domes-
tic learning and upgrading, leading to productivity and real wage gains? One
way of maximizing the benefits of FDI in the areas of employment and tech-
nology is by facilitating the use of local suppliers on the part of the foreign
multinational enterprises (MNE) by developing backward links. The increased
role of MNEs in an economy without significant backward links results in
"enclaves," which have little connection to the rest of the economy and little
contribution beyond direct employment effects. Traditionally, the way to
avoid enclave FDI was through local content requirements, but with the advent
of the WTO in 1995, such requirements for local inputs became illegal.26
60 Globalization for Development
The key policy question for developing countries is how to foster backward
links between foreign MNEs and potential local suppliers. The link promo-
tion process involves many players, including the government, the foreign
MNEs, the local suppliers, professional organizations, commercial organiza-
tions, and academic institutions. The key role of the government is one of
coordination, attempting to bridge the "information gaps" among the players.
We will address this issue in more detail in chapter 4 on capital flows.
Mauritius: Example of Trade-Supported Productivity Increase
The most well known group of countries that have pursued trade-supported
productivity increases for long-term poverty reduction is East Asia.27 How-
ever, another notable example is the African country of Mauritius. As de-
scribed by Subramanian and Roy (2003), Mauritius pursued a trade strategy
that supported productivity and income gains throughout the 1980s and 1990s.
Indeed, a very high openness ratio (the sum of imports and exports as a per-
centage of GDP) helps explain the fact that productivity gains of Mauritius in
the 1990s nearly reached those of East Asia in the late 1980s to early 1990s.
Export processing zones (EPZ) helped in this endeavor (box 3.1). However,
as these authors note, this process of trade-supported productivity gains
"would probably not have been a success, or at least not to the same extent,
without the policies of Mauritius's trading partners, which played an impor-
tant role in ensuring the profitability of the export sector" (p. 223). Indeed,
BOX 3.1 Export Processing Zones
O
ne means by which developing countries have tried to promote the upgrading of their
exports is through the use of export processing zones (EPZs). EPZs are areas of developing
countries in which multinational enterprises (MNEs) can locate and in which they typically
enjoy, in return for exporting the whole of their output, favorable treatment in the areas of infrastruc-
ture, taxation, tariffs on imported intermediate goods, and labor costs. EPZs have been used in many
developing countries around the world. Indeed, some estimates suggest that there are over 500 EPZs
in over 70 host countries. In most cases, EPZs involve relatively labor-intensive, "light" manufacturing
such as textiles, clothing, footwear, and electronics and involve only basic learning. A number of stud-
ies have tried to assess EPZs from a benefit and cost framework. These studies show that in many
(but not all) cases, the benefits do outweigh the costs. For example, Jayanthakumaran (2003)
assessed EPZs in China, Indonesia, Malaysia, the Philippines, the Republic of Korea, and Sri Lanka. He
concluded that the EPZs were an important source of employment in all six of these countries. Also, in
all but the Philippines, the benefits outweighed the costs. In the case of the Philippines, the infrastruc-
ture costs incurred in setting up the EPZ were too high for a net positive benefit. Thus, one cannot
make general statements on the success of EPZs. They need to be examined on a case-by-case basis.
Sources: Johansson and Nilsson 1997; Schrank 2001; and Jayanthakumaran 2003.
Trade 61
at least 90 percent of Mauritian exports were accounted for by preferential
market access for sugar, textiles, and clothing in the European Union and the
United States. Unfortunately, most low- and middle-income countries can-
not count on such market access. This is the problem we turn to next.
Market Access
Poverty-alleviating trade requires market access for developing-country
products, whether in agriculture, manufacturing, or services. Unfortunately,
poor people face substantially more trade protection than the nonpoor.
Products from developing countries face at least five hurdles in gaining
access to foreign markets:
tariffs
subsidies
quotas
standards and regulations
security checks.
Tariffs
Tariffs are taxes on imports, imposed to various degrees by all countries of
the world. They have the effect of reducing import levels and raising the price
of the imported good within the importing country.
Tariff Levels
Poor people face higher tariffs than the nonpoor. For example, for 1998, the
World Bank (2002b) compared the effective tariffs faced by poor people and by
the nonpoor.28 The results were that poor people face effective tariffs that are more
than twice as high as those faced by the nonpoor, an average of 14 percent as
opposed to 6 percent. Poor people also face significant tariff peaks in products
of export interest to them, where the tariffs are several times the average rate and
can range to over 100 percent.29 There is thus a significant bias in the world trad-
ing system against poor people, the more than 2 billion individuals (a billion is
1,000 million) living on less that US$2 per day. These are the people who should
be supported, not undermined, by trade policies. As it is, the global tariff system
represents a regressive tax on poor people. This is true both for developing coun-
tries, where poor people on average face double the barriers, and rich countries,
where poor people are most affected by the high cost of food and clothing.
Tariff Escalation
Tariff levels faced by poor people are only one part of tariff protection. The
rich countries of the world also engage in policies known to trade policy
62 Globalization for Development
FIGURE 3.3 Tariff Escalation on Developing-Country Exports to Developed Countries
(percent)
7
6 Bound tariff
5
4
Percent
3
2
1
0
Raw Semi Final Raw Semi Final Raw Semi Final
All industrial Tropical Natural resources
Products
Source: Laird 2002.
experts as tariff escalation. This means that the rich countries increase their
protection with the level of processing or value added in a product. This type
of protection, depicted as overall averages in figure 3.3, occurs in food, textiles
and clothing, footwear, and wood products--all sectors in which the devel-
oping world has the most interest in exporting labor-intensive goods. For
example, UNCTAD (2000) has shown that "effective protection doubles in the
United States and Canada from the stage of leather industry to that of footwear
production" (p. 10). To take another example, the tariff on cocoa beans in the
European Union is 1 percent, but the tariff on chocolate is 30 percent.30 The
problem with tariff escalation is that it prevents developing countries from cap-
turing more value added domestically and from vertically diversifying their
exports. It also inhibits basic and deep learning processes required for long-term
productivity gains, as discussed in the previous section.
Subsidies
Unequal tariff protection is only one component of limited market access for
developing countries. Data from the Organisation for Economic Co-operation
and Development (OECD) indicate that, since 1986, total support to OECD
agriculture has ranged between US$300 billion and US$375 billion, depend-
Trade 63
FIGURE 3.4 OECD Agricultural Subsidies
600
500
SSA GDP
400 OECD Ag Sub
US$ billions
300
200 Low Mid Prim Exp
100
ODA
0
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Sources: OECD www.oecd.org/dataoecd; World Bank, World Development Indicators.
ing on the year. The bulk of this expenditure has been in the United States, the
European Union, and Japan. These data are illustrated in figure 3.4. The solid
line is total OECD agricultural subsidies between 1986 and 2004, the years for
which these data are available. The dashed line is the nominal GDP of Sub-
Saharan Africa (SSA). For most of the past 20 years, the OECD spent more per
year on agricultural subsidies than the entire GDP of Sub-Saharan Africa. The
dotted line shows the primary exports of both low- and middle-income coun-
tries. Until recent years, OECD agricultural subsidies were larger than the pri-
mary exports of developing countries. Finally, the bottom dashed and dotted
line is official development assistance (ODA). The OECD tends to spend on
agricultural subsidies nearly five times the amount spent on ODA.
The information contained in figure 3.4 leads to one important conclu-
sion. In the overall "subsidy war" of global agricultural trade, developing coun-
tries simply do not have anywhere near enough resources to compete. The notion
that one could somehow create a level playing field by equally applying dis-
tortions is misguided. The only solution to the subsidy problem is that they
be reduced. This is not to suggest that rich OECD countries do not have the
right to look after their own rural areas, but when this is done, it should be in
64 Globalization for Development
a nondistortionary manner. Such policies could be in the form of income sub-
sidies and conservation-specific support. Indeed, from the point of view of
either environmental or small-farmer considerations, most agricultural sub-
sidies are harmful. For example, 70 percent of the nitrogen oxide pollution in
the European Union is due to agriculture. And although people imagine that
EU agricultural subsidies support the goat farmers and other small farmers of
Provence, all but a small fraction of the subsidies in the European Union and
the United States are captured by large farmers. Protectionism in the Euro-
pean Union, Japan and the United States has a regressive impact because cit-
izens pay on average about US$1000 more per year for their food and textile
products than they would if developing countries could have open access to
their markets. Protectionism hurts poor people in both rich and poor coun-
tries.31 The detrimental impacts of subsidies and protectionism in developed
countries, however, pale in comparison with their effects on the poor in devel-
oping countries.
Quotas
Throughout the period following the end of World War II and the liberaliza-
tion of (some kinds) of trade under the auspices of GATT and WTO, devel-
oping countries have faced extensive quota protection in developed-country
markets for their agricultural, textile, and clothing exports. These quota sys-
tems evolved beginning in the early 1960s and continued in full force through
the end of the Uruguay Round in 1994. In the case of agriculture, these quo-
tas were finally replaced by (equally protective) tariffs. In the case of textiles
and clothing, the quotas were phased out by 2005, although there have been
calls for their extension through 2007. The developing world has suffered
through 40 years of extensive quota protection in the very sectors where their
comparative advantage tends to be strongest. The case of textiles and cloth-
ing is briefly described in box 3.2.
Standards and Regulations
Increasing evidence suggests that developing countries face challenges in
gaining market access due to standards and regulations. It is important to rec-
ognize that, whereas tariffs and quotas are in almost all cases welfare worsen-
ing for the country imposing them, this is not the case with standards and
regulations, which have important public goods characteristics. As such, they
should not be condemned in general. However, there is growing evidence
that, in some cases at least, standards and regulations constitute important
nontariff measures.
Trade 65
BOX 3.2 Textile and Clothing Protection
T
rade protection in the textile and clothing sectors has a long history. It began in the late
1950s when Hong Kong (China), India, Japan, and Pakistan agreed to "voluntary" export
restraints for cotton textile products. In 1961, the United States introduced protective quotas
in cotton textile trade under the GATT-sponsored Short-Term Arrangement Regarding Interna-
tional Trade in Cotton Textiles (STA). In 1962, the STA was replaced by the Long-Term Arrange-
ment Regarding International Trade in Cotton Textiles (LTA), expanding quota coverage. The LTA
was renewed in 1967 and in 1970. In 1974, the Arrangement Regarding International Trade in
Textiles or the Multifiber Arrangement (MFA) expanded quota coverage beyond cotton textiles.
The MFA was renewed in 1977, in 1981, in 1986, and in 1991. The last extension was through
1994. By some estimates, the MFA cost the developing world about 20 million jobs in lost exports.
In April 1994, the Uruguay Round of multilateral trade negotiations concluded with the signing
of the Marrakesh Agreement Establishing the WTO. Developing-country concerns about the textile
sector were addressed in the Agreement on Textiles and Clothing (ATC), which composed one
component of the Agreement. The ATC was designed to facilitate the re-integration of the textiles
and clothing sector into GATT principles for the first time since 1962. This integration was to take
place in four stages, concluding with the complete integration of textiles and clothing trade into
the GATT at the end of 2004.
Even with the removal of quotas beginning in 2005, textile and clothing protection will remain
significant. On average, rich-country tariffs on these products are three times the average tariffs on
manufacturing goods, with tariff peaks of up to 40 percent. These tariffs can have perverse effects.
For example, as noted by Oxfam (2004b), "In 2001, exports from Bangladesh to the United States
generated $331 million in tariff revenue for the U.S. Treasury; in the same year, net U.S. aid to
Bangladesh was just $87 million" (p. 1). In addition to these high tariffs, both the United States and
the European Union often employ overly restrictive rules of origin in preferential and regional
trade agreements, safeguard actions, and unjustified antidumping and antisubsidy duties.
Sources: Reinert 2000; Kim, Reinert, and Rodrigo 2002; and Oxfam 2004b.
EU Food Standards
Consider the case of EU food standards. Otsuki, Wilson, and Sewadeh (2001)
have examined EU standards for aflatoxin (toxic compounds produced by
molds) in food exports from Africa. These authors estimated that these stan-
dards, which would reduce EU health risks by less than 2 deaths per billion
per year, would decrease African exports of cereals, dried fruits, and nuts by
64 percent ($US 670 million). EU food standards are currently being tight-
ened to include stringent reporting requirements of developing-country
farmers. As reported by Wallace (2004), "new food safety regulations [are]
due to come into force in the European Union in 2005. These will make it
mandatory for all fruit and vegetable products arriving in the EU to be traceable
at all stages of production, processing and distribution" (p. 16). EU assistance to
66 Globalization for Development
help farmers meet these new, stringent standards that involve tracing pro-
duction back to the seed is reported to be "inadequate." Consequently, many
developing-country farmers risk being closed out of this important market.32
An additional problem is that the standards are applied in a discriminatory
fashion and require specialized skills and equipment beyond the capability of
most of the low-income countries.
Facing Rising Standards and Increasing Regulations
If developing countries are to face increases in standards and regulations in
rich-country markets, they need to be assisted with capacity building in the
areas where standards are applied. We take up capacity building issues below.33
Security Checks
Since the attacks in the United States in September 2001, the exports of some
developing countries have been subject to increased surveillance and security
checks. For some developing countries, such as Pakistan, this has had a neg-
ative impact on sustained market access because imports into developed
countries have been sourced from other countries seen as more secure.
Because countries perceived to be insecure tend to be low-income, there are
negative impacts on poverty of these increased security measures.
Trade Protectionism: Costs for Developing Countries
What are the costs of trade protectionism for the developing world? A number
of studies have tried to assess this. To take one example, van der Mensbrugghe
(2006) has considered the impact of a Doha Bound trade liberalization sce-
nario. The welfare gains to developing countries of this liberalization scenario
are estimated to be over US$86 billion.34 This is approximately the current
annual value of foreign aid. The number of individuals moved out of poverty
(US$2 of income per day) due to this trade liberalization exceeds 65 mil-
lion. Less rigorous calculations by Oxfam (2002a) conclude that more than
100 million persons can be moved out of poverty by increased trade. Both
studies conclude that a significant part of this poverty reduction would occur
in Sub-Saharan Africa. Thus, a very conservative estimate of the costs of pro-
tectionism to the developing world would be an additional 60 to 100 million
persons moved out of poverty--a significant number.
The Primary Product Problem
If the exports of developing countries are to support the incomes of their poor
residents, the incomes generated by those exports must increase over time.
Trade 67
Export incomes can increase in three ways: increases in export quality, in-
creases in export quantities, and increases in export prices. Many developing
countries depend on the exports of a small number of natural-resource-based
goods known as primary commodities. Examples are aluminum, coffee,
leather, rubber, and sugar. By their very nature, primary commodities are char-
acterized by low levels of value added and limited room for quality improve-
ment. Unfortunately, they are also characterized by a century-long downward
trend in export prices.
Commodity Prices
Consider figure 3.5, which presents data on primary commodity prices dur-
ing the 20th century. Seventeen of the 24 primary commodities in this figure
experienced declines, most of them of significant magnitude. In addition, and
as reported in Ocampo and Parra (2003), an overall index of food products
fell by 50 percent, an index of nonfood products fell by 15 percent, an index
of metals fell by 7 percent, and the well-known Economist commodity price
index fell by 60 percent.35 Evidence suggests that the period since 1980 has
been characterized by particularly steep price declines.
Commodity Price Declines
Declines in commodity prices can be disastrous for the very poor. As noted
by UNCTAD (2004), "the major sin of omission in the current international
approach to poverty reduction is the failure to tackle the link between com-
modity dependence and extreme poverty" (p. xii). For example, recent de-
clines in coffee prices to a 30-year low (not recorded in figure 3.5) have caused
death from malnutrition in Guatemala where such tragedies had been
thought to have been a thing of the past. In Ethiopia, where coffee accounts
for approximately one-half of export revenues, coffee farmers have been
forced to shift to the production of chat, a stimulant used in the region around
the Red Sea. Overall, Oxfam (2002b) estimates that the livelihoods of 25 mil-
lion coffee farmers are under threat due to these recent declines in coffee
prices.
Impact of Protectionist Policies
It is very difficult for developing countries to overcome these secular trends
in commodity prices. However, the protectionist policies of the rich world
make it more difficult than it needs to be.
First, the agricultural subsidies discussed above contribute to declines
in world prices for these goods.
68 Globalization for Development
FIGURE 3.5 Primary Commodity Prices in the 20th Century
(percent change in price, 1900�2000)
Rubber
Wool
Aluminum
Rice
Cotton
Sugar
Leather
Cacao
Maize
Tea
Lead
Copper
Wheat
Jute
Silver
Bananas
Palm oil
Zinc
Tin
Coffee
Tobacco
Beef
Timber
Lamb
�100 0 100 200 300 400 500
Percent change in price
Source: Ocampo and Parra 2003.
Second, tariff escalation makes it difficult for developing counties to
escape primary product traps by vertically diversifying their exports
along value chains toward greater value added to commodities (for
example, from cacao to chocolate).
Third, manufactures protection of the type described above (for exam-
ple, in textiles and clothing) tends to concentrate developing countries
in primary commodities, limiting horizontal diversification out of pri-
mary community exports, thereby exacerbating commodity price
declines and contributing to the instability of export revenues.
Trade 69
Finally, limited market access increases the uncertainty developing coun-
tries face with regard to future protection levels as does the unpredictable
management of quotas and phyto-sanitary and other non-tariff barriers;
this reduces investor confidence in both primary and non-traditional
productive sectors.36
For these reasons, protection levels are doubly damaging to the world's poor.
Impact of Foreign Aid
It is also necessary for foreign aid to take into account the limited prospects for
primary commodities. Hard thinking about realistic alternatives to rural devel-
opment must yield alternative routes to support incomes of the poor over the
long term. This is no easy task. Until such alternatives are found, the promo-
tion of "fair trade" commodities that ensure the maximum value for develop-
ing-country producers and help develop niche markets can play a useful role
in mitigating the negative effects of price declines in some important cases.37
Trade-Related Capacity Building
Market access for developing country exports is an important step in allowing
for poverty-reducing international trade. However, market access must be
combined with efforts to promote export capacity in low- and middle-income
countries. These capacity constraints are multidimensional and include infra-
structure, market information, skills, and credit. For example, the promotion
of capacity can assist "an Algerian diplomat to negotiate his country's WTO
accession, and an Indonesian civil servant to prepare a legislative proposal on
copyrights, or a Mali exporter to understand business implications of the WTO
Agreement on Textiles" (Kostecki 2001, p. 4). In the past, efforts to relax these
constraints occurred under what was known as trade-related technical assistance.
However, more recent appreciation of capacity constraints has motivated a
change of focus to what is now known as trade-related capacity building. There
is also a recognition that trade-related capacity building relies, at least to some
significant extent, on outside assistance, making this an issue of foreign aid.
Aid and Trade: A Complementary Relationship
Most discussions of aid and trade view them as substitutes for one another,
with trade being the favored of the two. It is indeed true that, from a poverty-
alleviation standpoint, trade can play a much larger and sustained role than
aid. That said, however, it is important to appreciate the potential comple-
mentary relationship between aid and trade, what is sometimes called "aid for
70 Globalization for Development
trade."38 Indeed, trade policy experts now recognize that, without such assis-
tance, developing countries will not be able to exploit the market access that
is available to them.39
Needs of Developing Countries: Capacity Building
If aid for trade is conceived of as trade-related capacity building that is respon-
sive to developing countries' needs, can we say something about what those
needs are, at least in general terms? In international forums of various kinds,
the developing countries have requested assistance in the following areas:
Better representation in international organizations related to trade
such as the WTO.
Improving infrastructure such as roads, ports, and customs to facilitate
exports.
Upgrading negotiating capacities of trade ministries, including training
in WTO legal matters and accession processes.
Efforts to promote diversification of exports to escape the primary
product problems described above.
Upgrading systems to meet the increasing standards and regulations in
developed-country exports markets.
Developing information systems regarding potential export markets.
Efforts to meets some of these needs in the case of the least-developed coun-
tries in the form of the Integrated Framework are described in box 3.3.
Promises of the Developed Countries and the WTO
It is fair to say that, while making onerous demand on the developing world
to meet strenuous WTO commitments, the developed world has not met its
promises to provide trade-related capacity building.40 Some initiatives have been
ongoing, including the Advisory Centre on WTO Law, the Swiss-funded Agency
for International Trade Information and Cooperation, and the Canadian-
funded Centre for Trade Policy and Law, and the International Trade Centre's
World Tr@de Net. Despite these initiatives, evidence suggests that the major
players in trade policy formation have a long way to go in providing adequate
trade-related capacity building. The review of Kostecki (2001), for example,
suggests that greater emphasis must be placed on genuine needs assessment and
beneficiary orientation, sufficient funding, escaping bureaucratic restrictions
through arm's-length delivery organizations, and a reevaluation of the profes-
sional qualifications of capacity-building staff. There has been progress in this
area, but much remains to be done if trade-related capacity building is to fulfill
its promise.
Trade 71
BOX 3.3 The Integrated Framework
O
ne example of trade-related capacity building that focuses on the least-developed countries
(LDCs) is the Integrated Framework or IF. The roots of the IF lie in the 1996 Singapore Min-
isterial Meeting of the WTO, which adopted a plan of action for the least-developed coun-
tries. This plan of action called for "closer cooperation between the WTO and other multilateral
agencies assisting least-developed countries" in trade-related matters. Subsequently, a consensus
emerged that the WTO should work with the International Monetary Fund (IMF), the World Bank,
the United Nations Conference on Trade and Development (UNCTAD), the International Trade
Centre (ITC), and the United Nations Development Programme (UNDP) in the Integrated Frame-
work. The precipitating event in this consensus was a high-level meeting on least-developed coun-
tries, convened by the WTO in October 1997.
Originally, the IF planned to address trade-related capacity building needs through a twofold
process of needs assessment and round table discussion. Despite early enthusiasm and 40 com-
pleted needs assessments, by the end of 1999, only five roundtables had been held (Bangladesh,
The Gambia, Haiti, Tanzania, and Uganda), only one of which had been considered to be success-
ful (Uganda).
Representatives of the six IF agencies met in New York in July 2001 and issued a joint com-
muniqu� suggesting a redesign of the IF. The "new IF" involved LDCs in "mainstreaming" trade
into their development policies through a "trade integration chapter" that was to be included in
their Poverty Reduction Strategy Papers (PRSPs) submitted to the World Bank and IMF. Addi-
tionally, three of the six IF agencies agreed to take lead roles: the World Bank as lead agency
for "mainstreaming," the WTO as secretariat, and the UNDP as manager of an IF Trust Fund
(IFTF).
LDCs chosen to participate in the IF engage in a process known as "diagnostic trade integra-
tion studies" or DTIS. This process consists of five components: a review and analysis of the coun-
try's economic and export performance; an assessment of the country's macroeconomic and
investment climate; an assessment of the international policy environment and specific con-
straints that exports from each country face in world markets; an analysis of key labor-intensive
sectors where there is a potential for output and export expansion; and a "propoor trade integra-
tion strategy," with proposed policy reforms and action plans.
Support of the IF process by the IFSC was reaffirmed in July 2003. Diagnostic studies have
been undertaken in 21 countries with a further 16 in the pipeline. Financial commitments to the
process continued to grow to reach US$13 million by 2005. The IF donors have summed up some
of the most important goals of trade-related capacity building as follows: "We stand ready to help
developing countries and LDCs engage in the multilateral trading system. Removing supply-side
constraints to trade is important in generating a response to market access opportunities. We will
step up assistance on trade-related infrastructure, private sector development and institution
building to help countries to expand their export base." To achieve this end, it has been estimated
that a further US$200 to US$400 would be required in IF grants.
Source: The Integrated Framework for Trade-Related Technical Assistance to Least-Developed Countries, http://www.
integratedframework.org/.
72 Globalization for Development
FIGURE 3.6 Arms Imports Per Capita, 2003
Jordan
Libya
Latvia
Estonia
Czech Republic
Chile
Poland
Turkey
Malaysia
Oman
Egypt, Arab Rep.
Iran, Islamic Rep.
Algeria
Croatia
Botswana
Kazakhstan
Cote d'lvoire
Sudan
Ethiopia
India
0 10 20 30 40 50 60 70
1990 US$ per capita
Source: World Bank 2006a.
Health and Safety
We mentioned in the introduction that, to help poor people, trade activities
need to support forming human capital in the forms of education, training,
and health. There are cases in which trade activities (both imports and
exports) can actually undermine human capital by compromising the health
and safety of the poor. In the case of imports, a notable example is arms,
which can have disastrous impacts on the safety of citizens in the importing
country. Another example is imports of toxic waste. In the case of exports,
some production processes can compromise the health of the workers pro-
ducing the exported products.
Trade in Arms
Despite the pressing human-development needs of poor countries, arms can
compose a large part of low- and middle-income country imports. It is not
unusual for arms to constitute 10 percent of developing country imports. As
is evident in Figure 3.6, the top 20 developing-country arms importers on a
per-capita basis include some of the poorest countries in the world. Civil con-
flicts and other forms of violence in poor countries have been estimated to
result in an annual loss of at least a half million lives; conflict tends to result
Trade 73
in development in reverse.41 Approaches to regulate the global arms trade to
conflict zones therefore require serious consideration.42
Trade in Hazardous Waste
Similar health and safety issues can arise through the imports of hazardous
waste, which can cause serious environmental effects as well.43 These harmful
effects can be long term as well as immediate and can impose economic costs.
Importing hazardous waste into poor countries is motivated by lower disposal
costs in those countries, as well as by growing opposition to disposal in rich
countries. In contrast to the case of arms trade, however, there is already a mul-
tilateral agreement governing hazardous waste trade--the Basel Convention
on the Control of Trans-boundary Movements in Hazardous Wastes and their
Disposal. This was signed in 1989 and entered into force in 1992. Although the
Basel Convention has not been without controversies and disagreements, it has
nevertheless been important in controlling hazardous waste trade, and it is in
the process of improving compliance efforts with a central office and staff.44
Similar efforts need to be made in the area of arms trade.
Export Production Processes and Health
There are cases in which the export production processes compromise the
health of workers.
The export of Nemagon, an insecticide used in banana production, is a case
in point.45 This insecticide was banned in 1979 in the United States because it
causes skin diseases, sterility, and birth defects. Despite this, it was used in
Central American banana production through the 1980s and, in some cases,
through the mid-1990s. Banana workers in Central America began to report
many severe symptoms, including anencephaly, a malformation in which
conceived fetuses fail to develop brains. This issue is still current. In 2004, over
1,000 affected Nicaraguan workers marched to their capital city, Managua, to
demand compensation, and similar concerns were voiced in Honduras and
in some cut flower export industries of Colombia and Ecuador, again involv-
ing the use of insecticides. In Ecuador, for example, Thomson (2003) reports
that "studies that the International Labour Organization published in 1999
and the Catholic University issued here last year showed that women in the
industry had more miscarriages than average and that more than 60 percent
of all workers suffered headaches, nausea, blurred vision or fatigue."
The health threat of pesticides that do not meet international standards in
both export and domestic industries is an issue that has gained the attention
of the World Health Organization (WHO). According to its estimates (2001a),
nearly one-third of the pesticides marketed in developing countries do not meet
74 Globalization for Development
international standards. These "frequently contain hazardous substances and
impurities that have already been banned or severely restricted elsewhere" or
"the active ingredient concentrations are outside internationally accepted tol-
erance limits." The WHO calls upon all governments and international and
regional organizations to adopt the World Health Organization/Food and
Agricultural Organization pesticide specifications to help alleviate these health
threats. Again, greater multilateral efforts are needed.
Cost of Generating Income: Health and Safety Compromised
In all these cases, a similar issue arises. Although trade activities typically gen-
erate incomes and other potential benefits for poor people, health and safety
may be compromised, sometimes seriously. From a development perspective,
this is a trade-off to be avoided if at all possible. The alleviation of income
deprivation by increasing health deprivation is not an escape from income
poverty but an exacerbation of health deprivation. In these instances, trade
cannot be claimed to be fully alleviating poverty.
Illegal Trade
As Mois�s Naim (2005) has highlighted, increased globalization has been asso-
ciated with an escalation of illicit trade. Increased trade and movement of peo-
ple, together with technological advances in financial markets, communication
and transport, have been exploited by criminals to what Naim warns are
unprecedented levels. He estimates that money laundering exceeds US$1 billion
per year; the illegal drug trade US$800 billion; counterfeiting US$400 billion; ille-
gal arms sales US$10 billion; cross-border human trafficking US$10 billion; and
cross-border sales of art US$3 billion. These figures suggest that illegal flows
account for as much as 20 percent of trade. Naim emphasizes the interconnected
nature of illegal flows (for example, the money laundering of drug sales), and of
legal and illegal flows (for example, drugs concealed in shipping containers). The
challenge is to control illicit flows while preserving the underlying benefits of
increased trade and globalization. The need for enhanced security and regula-
tion carries the risk of adding considerable friction to the movement, not only
of goods and services, but also of financial flows and migration.
Conclusions
The link between trade and poverty alleviation is not automatic. However,
trade has been a powerful force for poverty alleviation in a number of ways.
Exports can expand markets, helping to generate incomes for the poor. Both
imports and exports can promote competition, lowering consumption and
Trade 75
production costs in the face of monopoly (single seller) power, and raising
prices for suppliers in the case of monopsony (single buyer) power. Both im-
ports and exports can support productivity improvements through access to
new machinery and contact with discerning international customers. Imports
are also important for health aspects of human development, because many
medical supplies need to be imported to combat deprivations of health.
Trade Protectionism: A Barrier to Alleviating Poverty
The possibility of exports helping to alleviate poverty is significantly curtailed
by trade protectionism in rich countries. This occurs in the form of tariffs, sub-
sidies, quotas, standards, and regulations. Even conservative estimates of the
potential gains from reducing protectionism in rich countries are many times
the size of annual foreign aid flows. Rich-country protectionism poses a sig-
nificant barrier to poverty alleviation, not to mention the overall participation
of the developing world in the global economy.
Commodity Price Declines
Developing countries relying on the export of primary commodities have
suffered from a century-long decline in primary commodity prices that con-
tinues to this day. Although export diversification is one way to lessen the
effects of such commodity price declines, the impact of these secular trends is
exacerbated by rich-country protectionism. Agricultural subsidies and tariff
escalation are particularly pernicious in this regard.
Capacity Building
For trade to benefit poor people, increases in market access for developing
countries must be combined with trade-related capacity building. These
capacity-building efforts are often prerequisites for developing countries to
overcome supply constraints, and this is an area where trade and aid act as
positive complements. As new thinking in development policy stresses, capac-
ity building should be beneficiary-driven and partnership-based, strive to
develop local capacities and skills, and place trade issues in a broader devel-
opment perspective.46 These include considerations of the broader business
and investment environment (the "software"--including questions of health,
education, governance, and corruption) as well as the physical infrastructure
(the "hardware"--including roads, power, water, and ports). Both these
broad areas of action are vital for governments and aid agencies alike.
Trade: Impact on Health and Safety of the Poor
In some cases, trade can have a very direct and negative impact on the health
and safety of the poor. This occurs with imports of arms and toxic waste and
76 Globalization for Development
also with production processes of exports that compromise the health of
workers. In each of these cases, concrete, multilateral steps need to be taken
to ensure that trade does not compromise poverty reduction and human
development but supports it.
Trade Liberalization
We have shown in this chapter that trade reform in both rich and developing
countries has a vital role to play in ensuring that globalization benefits the poor.
The movement of economies toward more trade-oriented profiles typically
involves processes of trade liberalization, often under the auspices of the WTO,
the World Bank, the IMF, or regional trade agreements. As emphasized by Har-
rison, Rutherford, and Tarr (2003); Winters, McCulloch, and McKay (2004);
and UNCTAD (2004), the transition costs associated with these reforms can be
significant and may actually worsen poverty for some classes of households. For
this reason, as developing countries consider the role that increased trade can
play in poverty alleviation, they need to guard against the real possibility of
increasing the poverty of some groups. Safety nets (social protection), comple-
mentary antipoverty programs, and direct compensation might be necessary to
achieve poverty-alleviating transitions.47 Again, trade reform is vital but should
be placed within a comprehensive approach to overcoming poverty.
Notes
1. The fact that the trade�poverty alleviation link is not automatic has also been stressed by UNCTAD
(2004) in the case of the least-developed countries.
2. In this chapter, we are in broad agreement with the assessment of Oxfam (2002a), that "In itself,
trade is not inherently opposed to the interests of poor people. International trade can be a force
for good, or for bad. . . . The outcomes are not pre-determined. They are shaped by the way in
which international trade relations are managed, and by national policies" (p. 28).
3. To make this observation is not to downplay the exploitation that can often occur in export sec-
tors, such as 14-hour days. Labor standards do matter. But it is decidedly not the case that
exploitation is absent from agricultural day labor. We will discuss these issues in more detail, espe-
cially health and safety concerns.
4. Readers are probably familiar with the notion of a monopolist--a single seller in a market that can
increase the price of its product above the competitive level to the detriment of buyers in the mar-
ket. A monopsonist is a single buyer in a market that can lower the price of the product it purchases
below the competitive level to the detriment of sellers in the market.
5. See Kapur and Ramamurti (2001), for example. These authors show that the large and fast-growing
software market within the United States with its sophisticated software buyers has contributed
significantly to the competitiveness of the Indian software sector. The remaining issue, however,
is the extent to which the expansion of incomes generated by the Indian software industry sup-
ports the incomes of poor Indians. In this instance the answer might be "only a little."
6. See Cragg and Epelbaum (1996), chapter 5 of de Ferranti and others (2002), Gindling and Rob-
bins (2001), and Robbins and Gindling (1999). For the case of South Africa, see Edwards (2004).
More generally, Winters, McCulloch, and McKay (2004) note that "trade liberalization may be
accompanied by skill-biased technical change, which can mean the skilled labor may benefit rel-
ative to unskilled labor" (p. 75).
Trade 77
7. A value chain is a series of value-added processes involved in the production of a good or service.
8. To be fair, there are also market access issues between developing countries that are becoming
increasingly important as what international economists call "South-South trade" increases. See,
for example, World Bank (2002b) and Laird (2002).
9. See, for example, Reinert (2004).
10. See, for example, Lipton (2005).
11. Minot and Goletti (2000) report that "Rice production in Vietnam is characterized by small irri-
gated farms, multiple cropping, labor-intensive practices, and growing use of inorganic fertilizer,
though there are substantial regional differences" (p. xi). Average farm size is only 0.25 hectares.
12. See Minot and Goletti (1998, and 2000) as well as chapter 2 of Oxfam (2002a). The latter does
note that "the advances (in Vietnam) have been unevenly distributed, and many of the poorest
producers lack access to the marketing infrastructure and productive resources needed to take
advantage of export opportunities" (p. 53). Similar conclusions are provided by Jenkins (2004).
On the impact on child labor, see Edmonds and Pavcnik (2002).
13. Zohir (2001) did raise concerns about the effect of garment-sector work on women's health and
the increased risk of harassment. We take up health and safety issues in their own right later in
the chapter.
14. On the procompetitive effects of trade, see Markusen (1981).
15. A 2000 study by the TeleCommons Development Group (TDG) of Canada found that "the con-
sumer surplus from a single phone call to Dhaka, a call that replaces the physical trip to the city,
ranges from 2.64 percent to 9.8 percent of the mean monthly household income. The cost of a
trip to the city ranges from 2 to 8 times the cost of a single phone call, meaning real savings for
poor rural people of between 132 to 490 Taka (USD 2.70 to USD 10) for individual calls"
(Grameen Phone, www.grameenphone.com).
16. See Bayes, von Braun, and Akhter (1999).
17. Again, see Bayes, von Braun, and Akhter (1999).
18. See Winters (2000) and Poulton and others (2004). Recent economic setbacks in Zimbabwe have
dramatically erased gains associate with trade liberalization.
19. See Winters (2000) and Jayne and others (1995).
20. For a review of the evidence on trade liberalization and productivity, see Winters, McCulloch, and
McKay (2004).
21. As emphasized by Bruton (1998), "For the development objective, the main role of exports is its
possible contribution to the acquisition of new technical knowledge and consequent increase in
productivity through contact with foreign importers combined with the pressures of strong com-
petition" (p. 924). The same can be said of imports. There is a tradition in international economic
policy of claiming a great deal for exports in terms of resulting productivity gains. For a critical
review of this tradition, see chapter 2 of Rodrik (1999).
22. As emphasized by Szirmai (2005), "the most important contribution of education is indeed `learn-
ing to learn' " (p. 221).
23. On the presence of productivity increases in agriculture, see Martin and Mitra (2001). On the role
of services in supporting productivity increases in manufacturing, see Francois and Reinert (1996).
24. See, for example, Lall (1998).
25. It is important to emphasize that basic education is only a necessary but not a sufficient condi-
tion for learning. Indeed, measures of human capital such as average years of schooling explain
very little of the variation among developing countries in either low-technology manufacturing
exports or high-technology manufacturing exports.
26. The equivalent of local content requirements is still included in government procurement, how-
ever. One example is the South African government's agreement for military aircraft with Airbus.
See Odell (2004).
27. See, for just one example, Rodrigo (2001).
28. The assumption here is that poor people earn their incomes from labor-intensive merchandise
production, while the nonpoor earn their incomes across the full array of economic activities. The
"poor" are defined as those living on less than US$2 per day. See chapter 2.
78 Globalization for Development
29. This point is made by Laird (2002), among others.
30. See US Foreign Agricultural Service (2003).
31. See Messerlin (2001); Goldin and Winters (1995); and www.oecd.org/statisticsdata.
32. See also Barnes (2004).
33. For a further discussion of standards and regulations issues, see Wilson (2002). This author notes
that "relatively little is known about the cost impacts of differing product standards and how they
affect exporters in developing countries" (p. 436).
34. This figure includes "static" gains only; "dynamic" gains that reflect growth effects are much
higher. These dynamic gains reflect alleged productivity gains that are the result of increased
exports. However, the magnitude of these dynamic gains is uncertain.
35. For the century and a half between 1850 and 2003, The Economist's commodity price index fell by
80 percent. See The Economist (2004a).
36. Francois and Martin (2002) note that foreign market access security "serves to reduce uncertainty
for foreign investors about the ability of an economy to link itself with the global economy and
hence to generate returns that can ultimately be repatriated" (p. 545).
37. See Raynolds (2000) and references therein. The "fair trade" designation is the responsibility of
the Fairtrade Labelling Organizations International (FLO). While we support the goals of this
effort with respect to maximizing the incomes of poor people, we do not embrace some of its gen-
eral, antimarket statements.
38. The subject of aid for trade actually overlaps with two other chapters of this book: chapter 5 on
aid and chapter 7 on ideas. Aid for trade and trade-related capacity building are development ideas
that are effected through foreign aid.
39. One example is the generalized system of preferences (GSP) granted the least-developed countries
(LDCs) by the developed world. As observed by Inama (2002), "Almost 30 years of experience with
trade preferences, and particularly with the GSP schemes, have largely demonstrated that the mere
granting of duty-free market access to a wide range of LDCs' products does not automatically
ensure that the trade preferences will be effectively utilized by beneficiary countries" (p. 114).
40. As noted by Kostecki (2001), "Most of the WTO provisions calling for . . . technical assistance are
`best endeavour' promises which are not binding on donor countries" (pp. 11�12).
41. Former World Bank president James Wolfensohn (2002), for example, highlighted that "the
world's leading industrial nations provide nearly 90 percent of the multibillion dollar arms
trade--arms that are contributing to the very conflicts that all of us profess to deplore, and that
we must spend additional monies to suppress" (p. 12).
42. The Commission for Africa (2005) and the United Kingdom Foreign Secretary have recently high-
lighted the need for further progress in this area, as have organizations such as Oxfam, Amnesty Inter-
national, and the International Action Network on Small Arms. See, for example, www.iansa.org.
43. Krueger (2001) writes that "Hazardous waste can range from materials contaminated with diox-
ins and heavy metals, such as mercury, cadmium, or lead, to organic wastes. The waste may take
many forms, from barrels of liquid waste to sludge, old computer parts, used batteries, or incin-
erator ash" (p. 43).
44. For a concise but detailed review of the Basel Convention, see Krueger (2001).
45. Nemagon is derived from debromochloropropane (DBCP) and kills a nematode that damages
banana production.
46. See World Bank (2005d and e), and UNCTAD (2004).
47. As Winters, McCulloch, and McKay (2004) note, "Such polices are likely to be desirable even in
the absence of trade reform, but they might become more important if trade reforms do have
important adjustment effects on the poor or near poor. . . . (I)t is preferable for there to be a care-
ful analysis of each country's circumstances so that appropriate `flanking' mechanisms can be
derived to accompany the liberalization" (pp. 107�108).
4
Finance
G lobal financial flows are an important resource for developing coun-
tries. These capital flows augment domestic savings and can con-
tribute to investment, growth, financial sector development, technology
transfer, and poverty reduction. These possibilities are reflected in the long-
standing view in international economics that capital flows are beneficial in
almost all circumstances. This view is backed by evidence suggesting that
the growth gains from capital flows are of the same order of magnitude as
the growth gains from trade.1 However, there is also evidence that capital
flows may entail potential costs that are both larger than in the case of trade
and tend to be disproportionately carried by poor people.2 Additionally, it
has become clear that not all capital flows are the same in their benefit and
cost characteristics. For these reasons, a careful assessment of the impact of
capital flows on global poverty does not lend itself to across-the-board state-
ments. Rather, the cost and benefit characteristics of distinct types of capi-
tal flows must be considered in some detail.
Capital Flows and Balance of Payments
From a macroeconomic standpoint, capital flows are activities that influence
the "capital account" of countries' balance of payments involving the exchange
of assets, whereas trade activities influence the "current account" of the bal-
ance of payments where no assets are exchanged. Both of these components
of the balance of payments accounts record transactions between each
country and the rest of the world. The assets exchanged on the capital account
of the balance of payments consist of various financial objects with mone-
tary values that can change over time in the portfolios of both individuals
and firms.3
79
80 Globalization for Development
Capital Flows: Classifications
There are a number of legitimate ways to classify capital flows and various
subcomponents of the capital account. In this chapter, we will distinguish
among four types:
foreign direct investment
equity portfolio investment
bond finance
commercial bank lending.
Foreign Direct Investment
Foreign direct investment (FDI) is the acquisition of shares by a firm in a
foreign-based enterprise that exceeds a threshold of 10 percent, implying man-
agerial participation in the foreign enterprise.4 FDI is one means of effecting
services trade, such as when a bank uses a foreign subsidiary to provide finan-
cial services abroad, but is also important in the production of merchandise.
Under the right conditions, FDI can generate direct and indirect increases in
employment, promote competition, improve the training of host-country
workers, and transfer technology from developed to developing countries. It
may also subject workers to unsafe working conditions, compromise the nat-
ural environment, and increase the dominance of foreign culture over host-
country cultures.5
Equity Portfolio Investment
Equity portfolio investment is similar to FDI in that it involves the ownership
of shares in foreign countries. It differs from FDI in that the share holdings are
too small to imply managerial participation over the foreign enterprise. It is thus
indirect investment, rather than direct investment. Because equity portfolio
investment is undertaken for portfolio reasons rather than managerial reasons,
the behavior of investors can be quite different than with FDI. To generalize,
equity portfolio investment tends to be motivated by a shorter time horizon
than FDI's horizon and is subject to the portfolio considerations of investors.
Bond Finance
Bond finance or debt issuance is a second kind of portfolio activity. In a bond
finance transaction, the government or firms in developing countries issue
bonds to foreign investors. These bonds can be issued in either the domestic
currency or in foreign currencies, and can involve different kinds of default
risks. Bond portfolio investment has in common with equity portfolio invest-
ment that both are held along with equities in international portfolios. Port-
Finance 81
KEY TERMS AND CONCEPTS
absorptive capacity equity portfolio investment
backward links flight capital
balance of payments foreign direct investment (FDI)
bond finance market failure
capital account microfinance institutions (MFIs)
commercial bank lending technology transfer
contagion
folio considerations and their relatively short-term characteristics are there-
fore important to both. Indeed, they are often combined in simple balance of
payments accounts under the heading of "portfolio investment."
Commercial Bank Lending
Commercial bank lending is another form of debt. Unlike bond finance, it
does not involve a tradable asset.6 Commercial bank loans can be short-term
or long-term loans, can be made with fixed or flexible interest rates, and can
take the form of inter-bank loans. A single bank or a syndicate of banks can
be involved in any particular loan package. As we discuss in this chapter, com-
mercial bank lending can potentially play a role in financial crises.
Impact of Capital Flows
Although FDI can affect poor people directly by generating employment and
transferring technology, much of the potential impact of other capital flows
on poverty is indirect, taking place through the broad process of financial
development. For this reason, before taking up the individual categories of
capital flows and their potential impacts on poor people in the rest of this
chapter, we consider both the recent trends in capital flows to the developing
world and the overall process of financial development.
Recent Trends
To understand the role of capital flows in the economies of developing coun-
tries, as well as their implications for poor people, we need to look at their
evolution over time. In chapter 2, we noted the volatile nature of debt and
equity relative to FDI. Here we distinguish among four types of capital flows:
FDI, equity portfolio investment, bond portfolio investment, and commer-
cial bank lending.
82 Globalization for Development
Capital Flows to Low-Income Countries
When we consider these flows for the low-income countries (figure 4.1), a
number of important observations can be made.
Commercial Bank Lending as Primary Source
First, until the 1990s, commercial bank lending was the primary source of for-
eign capital for the low-income countries, although it declined significantly
after the 1982 debt crisis. On a net basis, bank lending remained positive dur-
ing the 1990s but then became negative in 1998 after the Asian financial crisis
(box 4.1). This reflected the drastic decline in access to commercial bank funds
suffered by the low-income countries and their continued payments of old
commercial bank debt. This net outflow continued until 2003, when com-
mercial bank lending again became positive, but it reappeared in 2004.
Increase in Significance of FDI
Second, although FDI comprised a significant portion of total capital inflows
to the low-income countries in the 1970s, it became even more significant in
the 1990s, far exceeding commercial bank lending. Despite its stagnation after
FIGURE 4.1 Net Private Capital Flows to Low-Income Countries, 1970�2004
35,000
FDI
30,000 Commercial bank lending
Bond finance
25,000 Equity portfolio
Current US$ billions
20,000
15,000
10,000
5,000
0
-5,000
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Source: World Bank 2006a.
Finance 83
BOX 4.1 Financial Crises
B
alance of payments, debt, and financial crises have plagued the developing world with detri-
mental impacts for poor people. One notable crisis of the 1980s was that of Mexico. The
decade of the 1980s began with a significant increase in real interest rates and a significant
decline in non-oil commodity prices. These increased borrowing costs and reduced export rev-
enues for many developing countries, including Mexico. In August 1982, in the face of capital flight,
the Mexican government announced that it would stop servicing its foreign currency debt. Sub-
sequently, both Argentina and Brazil entered into similar debt and balance of payments crises.
Despite the efforts of the International Monetary Fund to effectively address these crises, inter-
national commercial banks began to withdraw credit from many of the developing countries of the
world, and the debt crisis became global. Within a few years of the outbreak of these crises, the phe-
nomenon of net capital outflows appeared in which the capital account payments of debtor countries
exceeded their capital account receipts. Poverty increased substantially, and much of the developing
world, particularly Latin America and Africa, entered what came to be known as the lost decade.
Mexico underwent a second crisis in late 1994 and early 1995, and this was soon followed
by the "Asian crisis." Beginning in July 1997, crises struck Thailand, Indonesia, the Republic of
Korea, and Malaysia, and in August 1998, a crisis also hit Russia. In each of these cases, sharp
depreciations of the currencies resulted. Subsequent crises hit Brazil in 1999 and Argentina in
2001, bringing the crisis process back to Latin America again.
Eichengreen (1999) makes a distinction between "low-tech" debt and balance of payments
crises such as those of the 1980s and "high-tech" financial crises of the 1990s. According to
Eichengreen, the following features distinguish the latter, more recent crises: 1. Financial firms
have significant exposures in real estate and equities; 2. Capital accounts are liberalized to allow
firms (including banks) to take on short-term foreign debt, including debt denominated in foreign
currencies; 3. Banks are less than fully regulated and supervised as the countries involved liberal-
ize financial markets and capital accounts; and 4. Firms (including banks) do not adequately
hedge their foreign exchange exposures, resulting in vulnerable financial positions. Policy makers
need to be aware of each of these potential causes to better mitigate the risks poor people suffer
when hit by the effects of crises.
Source: Authors.
the 1997 Asian crisis, FDI remains the most important source of foreign cap-
ital flows for the poorest nations of the world, increasing in the 2001 to 2004
period. As we will see in this chapter, however, these FDI flows are both small
relative to the total population of the low-income countries and very unevenly
distributed among them.
Unreliability of Portfolio Investment
Third, portfolio investment in the form of bonds and equities has been a sig-
nificant although somewhat fickle source of resources for the low-income
84 Globalization for Development
countries. These investments provided substantial positive net flows for a few
years in the 1990s, and took on a negative value after the Asian crisis. As noted
by Prasad and others (2003), "FDI flows are the least volatile of the different
categories of private capital flows to developing countries. . . . Portfolio flows
tend to be far more volatile and prone to abrupt reversals than FDI" (p. 16).
This was indeed the case for the low-income countries after the Asian crisis,
but their net portfolio equity inflows recovered substantially in 2003 and 2004.
Capital Flows to Middle-Income Countries
Capital flows to the middle-income countries (figure 4.2) have behaved some-
what differently than those to the low-income countries. Again, in the early
years, commercial bank lending was the most important source of foreign
capital. This type of lending was reduced after the 1982 Mexican crisis, and
FDI began to replace it in the late 1980s. As with the low-income countries,
despite some stagnation after the 1997 Asian crisis, FDI currently dwarfs all
other sources of capital flows to the middle-income countries. Commercial
bank lending and portfolio bond and equity flows were important during the
FIGURE 4.2 Net Private Capital Flows to Middle-Income Countries, 1970�2004
350,000
300,000
250,000
Current US$ billions
200,000
150,000
100,000
50,000
0
-50,000
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
FDI Commercial bank lending Bond finance Equity portfolio
Source: World Bank 2006a.
Finance 85
1990s.7 Portfolio bond flows held up better after the Asian crisis than they did
in the low-income countries, and these flows recovered substantially begin-
ning in 2003; in the low-income countries equity investment is currently more
important. However, on a net basis for the middle-income countries, currently
none of these three, nondirect capital flows is large compared with FDI.8
Reasons for Increase in Capital Flows
What explains the significant increase in capital flows to the developing world
beginning in the 1990s? Analysts such as Calvo, Leiderman, and Reinhart
(1996) and de la Torre and Schmukler (2004) typically divide explanations into
internal or "pull" factors and external or "push" factors. Internal factors in-
cluded improved relationships between developing countries and their credi-
tors, the pursuit of more sound fiscal and monetary policies, capital account
liberalization, and the privatization of state-owned assets.9 External factors
included the decline in world interest rates that made assets in developing coun-
tries relatively more attractive for portfolio investments, recessions in major
developed countries, and a growing integration of world capital markets. This
last external factor involved the increased participation of global financial
firms in developing-country markets and the increased role of institutional
investors. As such, trade in financial services supported expansions in capital
flows, with the trade and capital flow dimensions of globalization interacting
to support the expansion in private capital flows. All of these factors changed the
global capital flow regime in significant ways.
Capital Flows as a Percentage of GDP
It is useful to consider the recent history of total capital flows to the developing
countries as a percentage of GDP for both low- and middle-income countries
(figure 4.3). Until the 1990s, these ranged between 1 and 2 percent of GDP.
During the 1990s, for the reasons just described, these values increased to a
maximum of just over 2 percent and 5 percent of GDP for the low- and middle-
income countries, respectively. The flows fell precipitously as a percentage of
GDP for the middle-income countries after the 1997 Asian crisis, however. Pri-
vate capital flows are therefore relatively small as a percentage of developing
country GDP and somewhat volatile. Over the last three decades, capital flows
have increased slightly as a percentage of GDP for the developing world.
Summary of Evolution of Capital Flows
To summarize, before the late 1980s, commercial bank lending was an impor-
tant source of foreign capital. Since then, however, FDI has become the most
important capital flow for both the low- and middle-income countries. To a
86 Globalization for Development
FIGURE 4.3 Net Private Capital Flows to Low- and Middle-Income Countries
as a Percentage of GDP, 1970�2004
6.00
5.00
Middle income
4.00
Percent
3.00
2.00
1.00
Low income
0.00
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Source: World Bank 2006a.
significant extent, this reflected mergers and acquisitions in response to the
privatization that began in the late 1980s. FDI has become somewhat stagnant
for both low- and middle-income countries in recent years. However, as noted
by Mody (2004), "during a period when portfolio flows boomed and then
crashed, FDI remained a resilient form of external finance" (p. 1218). Com-
mercial bank lending and portfolio bond and equity flows experienced some-
thing of a renaissance during the early 1990s, but they are not currently
significant sources of capital for the developing world. When these flows have
been significant, they have been more volatile than FDI flows.10
Financial Development
A basic, theoretical insight in the field of international finance suggests that
flows of capital from developed to developing countries can improve welfare
for the countries' populations.11 Developing countries can receive net inflows
of capital and invest it at relatively high rates of return, the capital being sup-
plied from developed countries where rates of return are relatively low. This
Finance 87
reflects the fact that, at early stages of development, the need for capital is high,
while domestic saving is low. As development proceeds, the need for capital
slowly declines and domestic saving slowly increases. This theoretical frame-
work is highly idealized, however, and a number of intervening factors inhibit
capital flows from developed to developing countries. These include political
risk, default risk, differences in levels of human capital and technology, and
differences in institutional quality.12 In addition, as first pointed out by Hymer
(1976), rate of return analysis is wholly insufficient to explain FDI flows.13
The Developing World as Exporter of Capital
Since 2000, the idealized flow of funds has been turned on its head. Due in
large part to a current account deficit in the United States that has exceeded
5 percent of its GDP, and reflecting the high level of savings of central banks
in developing countries, the developing world is now an exporter of capital to
the developed world rather than an importer. Chinese official reserves alone
exceed US$850 billion. For rich countries as a whole, for example, global cap-
ital imports exceeded US$300 billion in 2004. The United States actually
imported approximately US$650 billion in 2004, with capital exports of Japan,
the European Union, and other high-income countries making up the $350
billion difference.14 Most of these developing-country capital exporters are
in East Asia and the Middle East. What is worrying about this situation is that
U.S. capital imports failed to decline as much as would normally be expected
in the 2001�2 recession. This indicates that the United States is structurally
rather than cyclically claiming the bulk of the world's savings, the opposite of
what we would desire from a development or poverty-alleviation standpoint.
Estimates and forecasts of the Institute of International Finance (2005) indi-
cate that this situation will persist. Addressing fiscal imbalances in the United
States is, therefore, of key importance to poverty-alleviating capital flows.
Financial Markets: Global and Domestic Capital Flows
Financial markets, both global and domestic, are an important component of
economic development and poverty alleviation. Capital flows can support
savings mobilization and deployment, financial sector development, and tech-
nology transfer. They also have the potential to manage various types of risk
and to monitor the performance of firms' managers. Empirically, there is some
evidence that financial sector development helps to explain economic growth.15
It appears that this growth effect occurs primarily through increasing pro-
ductivity and reducing external finance costs rather than through increases in
savings. As the World Bank (2001) notes, "Rigorous and diverse economet-
ric evidence shows that the contribution of finance to long-term growth is
88 Globalization for Development
achieved by improving the economy's total factor productivity, rather than on
the rate of capital accumulation" (p. 6).16 The growth effects of financial sector
development appear to be important for both banking and equity markets.17
Impact of Global Capital Flows
Global capital flows are only one aspect of financial sector development, and
the flows themselves are not always taken into account in growth investiga-
tions. There is evidence that not all types of capital flows have the same impact
on growth. For example, capital inflows in the form of equity portfolio invest-
ment appear to be more beneficial than both bond finance and commercial
bank lending.18 More generally, there is widespread agreement that financial
globalization via capital flows can make effective financial development more
challenging by increasing both benefits and risks.19 General, across-the-board
statements about the role of capital flows in financial development are thus
difficult to support.
The Importance of Domestic Savings
It is also important to view capital flows in the context of domestic capital
mobilization. As we saw in figures 4.1 and 4.2, the most important type of
capital inflow into developing countries is FDI. However, on average, FDI is
but a small portion of total domestic investment (and savings) in low- and
middle-income countries. For these countries in 2002, it was less than 6 percent
and 11 percent of total domestic investment, respectively. Therefore, increases
in the capital flow dimension of economic globalization have in no way less-
ened the importance of domestic investment, domestic savings, and the domes-
tic environment influencing them.
Flight Capital
Residents of low- and middle-income countries hold a great deal of their wealth
in the form of flight capital, which are assets held abroad because of poor
domestic investment opportunities and high domestic risks. Estimates of the
magnitude of flight capital vary and, because such flows are not always offi-
cially recorded, must be regarded with some caution. They suggest, however,
that approximately 40 percent of the private wealth of Africa and the Middle
East is held by its residents outside of these regions, and that the figure for
Latin America is approximately 10 percent.20 Consequently, any significant
improvement in the investment and financial climates of these developing
regions could result in a substantial repatriation of resources. Not all resources
for development and poverty alleviation need to come from foreign sources--
it would be possible for repatriated wealth to provide a substantial portion of
a country's resources.
Finance 89
Financial Market Failures
The financial markets involved in equity portfolio investment, bond finance,
and commercial bank lending are characterized by a number of imperfections,
which economists call market failures. In normal circumstances, these imper-
fections contribute to a certain amount of market volatility. Under certain cir-
cumstances that are not fully understood, they can lead to full-blown financial
crises of the kind experienced in Mexico (1994�5), Asia (1997), Russia (1998),
Brazil (1999), and Argentina (2001) (see box 4.1).21 It is important to under-
stand these market imperfections to appreciate the effects of these three types
of capital flows on poor people.
Asymmetry of Information in Financial Markets
Financial markets do not operate with full information. By their very nature
(which involves the exchange of assets), financial markets have an important
intertemporal component, and no market participant possesses perfect infor-
mation about the future. Consequently, financial markets inherently involve
an intertemporal "leap in the dark" of one sort or another. There is often an
asymmetry in the information available to borrowers and lenders in which
borrowers have more information about their creditworthiness than lenders.22
Such asymmetries in information can lead to market failure in which changes
in expectations cause swift changes in behavior, despite the lack of change in
fundamental economic conditions. This can be pernicious because lender con-
fidence consequently tends to be "pro-cyclical," remaining strong in business
upturns but suddenly evaporating during downturns of various sorts. Attempts
to overcome certain market failures in microfinance to better provide financial
services to poor people are described in box 4.2.
Credit Rating Agencies
Credit rating agencies provide information to potential investors in capital mar-
kets. Their ratings are closely scrutinized by investors, and achieving "investment-
grade" status is an important milestone for governments, public utilities, and
corporate entities seeking to raise money in international markets. Extending
the reach of credit rating agencies to include a growing number of developing
countries has helped to widen information about these markets.
Credit rating agencies play a vital role in overcoming information asymme-
tries in financial markets, but the fact that they only partially extend across
middle-income countries and are virtually absent from low-income countries
means that their limitations need to be recognized. Their ratings also are not
predictive in nature: countries and companies that have performed well in
ratings have succumbed to crises and failure. Credit rating agencies enhance
information flows, and this may even at times exacerbate herding in markets.
90 Globalization for Development
BOX 4.2 Targeting Poor People: Commercial Microfinance
F
rom the point of view of alleviating poverty, some of the informational imperfections of
financial markets make it difficult for commercial financial corporations to assess the credit-
worthiness of poor borrowers, including poor entrepreneurs. These imperfections or barri-
ers include physical remoteness, the lack of tangible assets to serve as collateral, the lack of
property rights, and the cost of contracting. All of these factors tend to exclude poor people from
basic financial services.
What are now called microfinance institutions (MFIs) have evolved over the last few
decades to fill these gaps in commercial finance. An MFI is an organization that provides financial
services of any kind to the poor. At present, they provide such services to poor individuals, includ-
ing entrepreneurs. MFIs overcome financial market imperfections through group lending prac-
tices in which a borrower's associates become co-signers to the loan. Along with group lending,
MFIs use a number of other mechanisms to facilitate effective credit provision. These include cre-
ative incentives such as progressive lending, tailored repayment schedules, collateral substitutes,
and a focus on women who typically have significantly better repayment rates. In addition, MFIs
are beginning to offer noncredit financial services such as savings arrangements to poor people.
The question on the minds of many in the MFI community is whether these institutions will
be able to move in large numbers in the direction of commercialization. The steps in this process
include an increasingly business-oriented approach, achieving operational and financial self-
sufficiency, the increased use of commercial funding sources, and operating as for-profit
institutions.
The difficult challenge in making the transition to increased commercialization is not losing
sight of the central mission of serving poor populations. There is thus a tension between commer-
cialization and "mission drift." This has been a central problem for MFIs pursuing commercial
status, such as BURO Tangail (BT) in Bangladesh, and Bank Rakyat's Micro-business Division in
Indonesia. Evidence presented in Morduch (1999) suggests that most MFIs will have difficulty in
making this transition, but those that do will have contributed significantly to the design of
poverty-alleviating finance, no small achievement.
Despite some skepticism, steps have indeed been taken in the direction of commercial micro-
finance. In 2001, a number of aid organizations and MFIs launched AFRICAP, a commercial MFI
facility in Africa. AFRICAP is a for-profit equity investment company incorporated in Mauritius and
operating out of Dakar, Senegal. It invests in leading African MFIs and is capitalized at US$13 mil-
lion. Commercial banks are also beginning to investigate microfinance. For example, in 2004,
Deutsche Bank launched a commercial microfinance facility based on its previous experience with
MFIs. The facility will serve MFIs in Africa, South Asia, and Latin America using local commercial
banks as intermediaries. This lending facility is funded at a level of US$60 million. Time will tell
whether these initiatives prove to be successful. Given the importance of the credit constraint for
small firms and entrepreneurs, and the central role in job creation and poverty reduction, it is
essential that policy makers at the national and global levels focus their attention on developing
vibrant microfinance institutions.
Sources: Charitonenko and Campion undated; Morduch 1999; and World Bank 2001.
Finance 91
They perform a vital function, but are no panacea for asymmetry of information
in the markets.
Role of Government Failure in Financial Market Failure
The market failure of financial markets is compounded by government fail-
ure in that necessary attempts to regulate financial markets can at times
make matters worse. Like other financial market participants, governments
also suffer from imperfect information, and their attempts to offer support
in times of crisis can provide an incentive for excessively risky behavior in
financial markets, something that economists call "moral hazard." Both
market failure and government failure characterize markets in equities, bonds,
and bank lending, and they can complicate hoped-for effects of poverty alle-
viation. For example, market failure and government failure in financial
markets combine in certain circumstances to generate a behavior known as
contagion. This is where problems with regard to one financial instrument
or country spread to other financial instruments or countries. The key con-
tributing factor is attempts by market participants to maintain liquidity.
Role of Foreign Short-Term Lending in Financial Market Failure
Imperfections in financial markets appear to be particularly problematic
when commercial banks in developing countries are given access to short-
term, foreign lending sources.23 The resulting problems have three causes:
First, systems of financial intermediation in developing countries tend
to rely heavily on the banking sector, because other types of financial
intermediation are typically underdeveloped.
Second, developing countries have been encouraged to liberalize
domestic financial markets, sometimes before systems of prudential
bank regulation and management are put in place.
Third, developing countries have sometimes prematurely liberalized
their capital accounts, on which most of the private capital flows exam-
ined in this chapter take place.24
Consequently, and as will be discussed below, care must be taken in manag-
ing evolving banking systems and their access to international capital flows.
Impact of Market Failure on Poor People
What is the implication of market failure for poor people? Financial crises
are devastating to poor people and should therefore be avoided if at all pos-
sible. Poor people are particularly vulnerable to crises because they do not
have the savings or safety nets to protect themselves from the income losses
that are an inherent part of these events. It is common to consider the costs
92 Globalization for Development
of crises in terms of the percentage of GDP lost in a particular country or
region. For example, Eichengreen (2004) estimates the cost of an average
crisis to be approximately 9 percent of GDP for the country in question. In
the case of the Asian crisis, Dobson and Hufbauer (2001) estimated the cost
to the region at up to 1.5 percent of GDP, but World Bank estimates suggest
that it involved 20 million persons falling back into poverty and 1 million
children being withdrawn from school.25 Even this estimate may understate
the impact. More recent estimates by Suryahadi, Sumarto, and Pritchett
(2003), suggest that, in Indonesia alone and at the peak of the increase in
poverty, approximately 35 million persons were pushed into absolute
poverty. During the Argentine crisis of 2001, close to one-fourth of the pop-
ulation became extremely poor, while one-half of the population fell below the
national poverty line.26 Changes in poverty of these magnitudes matter a
great deal.27 As recognized by Eichengreen (2004),
To remind oneself of the immediacy of these effects, it is only necessary to
observe that Indonesia and Argentina experienced larger falls in output
and real incomes than that suffered by the United States in the Great
Depression, an event that produced a revolution in social and economic
policy. This is another way of saying that the social impact of financial
crises can be enormous. (pp. 9�10)
Financial Sector Reforms
Given these potentially severe poverty effects, caution is warranted. Although
there is not complete agreement among those who have examined these
issues, there is some evidence that the sequence and timing of financial sector
reforms can mitigate financial turmoil and, thereby, prevent negative effects
on poor people. As mentioned above, the liberalization of financial markets
can strengthen the development process in the long run. However, financial
liberalization without the proper surveillance capability may destabilize local
financial sectors, real economies, and domestic political environments.28 There
are many examples where excessive liquidity associated with booms and mar-
ket overconfidence were followed by excessive pessimism and capital flow
reversals. In all of these outcomes, poor people suffer the most. Careful finan-
cial sector development should therefore be combined with carefully-targeted
safety nets to protect poor people.29
Foreign Direct Investment
Foreign direct investment can have positive effects on poverty by creating
employment, improving technology and human capital, and promoting com-
Finance 93
FIGURE 4.4 Global Shares of Population, PPP GDP, and FDI, 2004
70
66
Low income
60 Middle income
55
High income
50 47
40 37 36
Percent
31
30
20
16
9
10
3
0
Population GDP FDI
Source: World Bank, World Development Indicators 2006a.
petition. While much of FDI contributes in this way, at times it may adversely
affect certain dimensions of poverty through unsafe working conditions and
environmental destruction. Nevertheless, if we were to identify the most
promising category of capital flows from the point of view of poverty allevia-
tion, FDI would be it.
FDI Recipient Countries
Global flows of FDI are highly concentrated, with the low-income countries
being dramatically uninvolved as FDI recipients (figure 4.4). In 2004, for exam-
ple, the low-income countries accounted for 37 percent of global popula-
tion, only 9 percent of global GDP, and a mere 3 percent of global FDI. The
middle-income countries are much more active as FDI recipients. In 2004,
these countries accounted for 47 percent of global population, 36 percent of
global GDP, and 31 percent of global FDI. The bulk of global FDI (66 per-
cent in 2004) goes to the high-income countries of the world. As Dobson and
Hufbauer (2001) put it, "the vast bulk of FDI represents investment made by
one rich country in another rich country" (p. 33).
The lack of involvement on the part of low-income countries as FDI hosts is
a major impediment to poverty alleviation. Even the fact that the low-income
94 Globalization for Development
countries received only 2 percent of FDI in 2004 vastly understates the problem,
because this 2 percent of the total flows is highly concentrated among these poor
countries. Just two countries--India and Vietnam--receive nearly one-half of
this 2 percent, for example. For most of the low-income countries, access to FDI
has remained elusive. Growth is essentially driven by domestic investment to an
even greater extent than when FDI is present. Foreign aid in support of growth
is important to these countries, a fact that we will return to in chapter 5.
Multinational Enterprises
Many developing countries lack access to the technologies available in devel-
oped countries. Since multinational enterprises (MNEs) account for approx-
imately three-fourths of worldwide civilian research and development,
hosting MNEs from developed countries is, potentially, one important way
to gain access to that technology. There are two problems with this idealized
scenario, however. First, MNEs will employ the technology that most suits
their strategic needs, not necessarily the development needs of host countries.
For example, MNEs can employ processes that are much more capital inten-
sive than host-country employment considerations may want.30 Second,
there is a strong tendency for MNEs to conduct their research and develop-
ment in their home bases rather than in host countries.31 Consequently, there
are limits to the transfer of new technologies to host countries; as we show
below, there is considerable scope for enhancing the benefits of foreign
investment.
Potential Benefits of MNEs to Host Country: Technology Transfer
Despite these limitations, there is evidence that, in some important cases, MNEs
do transfer technology and establish significant relationships with host-country
suppliers by what economists call backward links. Moran (2001), for example,
reviewed the evidence in the automotive, computer, and electronics sectors.
He summarizes his conclusion as follows:32
Foreign investors whose local operations comprise an integral part of the
parent's global or regional sourcing network introduce state-of-the-art
technology and business practices into the host economy both via the
investment that the parent makes in the performance of its own sub-
sidiary and via the supervision that the parent and subsidiary exercise
over the performance of local suppliers. (p. 24)
Benefits from Local Source Inputs
If the foreign MNE begins to source inputs locally rather than importing
them, the host country can gain a number of important benefits:
Finance 95
BOX 4.3 Creating Links
T
he World Trade Organization includes an Agreement on Trade-Related Investment Mea-
sures (TRIMs) that prohibits domestic content, trade balancing, foreign exchange balancing,
and domestic sales requirements placed on the MNEs hosted by WTO members. Indeed,
many international economic policy experts are now calling for policies that would go beyond
TRIMs to require the abandonment of all policies that discriminate between domestic and foreign
firms. In this changed policy context, how can developing countries use policies to obtain the
most benefits from FDI?
New thinking suggests that local content requirements should be replaced by efforts to sup-
port local suppliers in their efforts to secure contracts with foreign MNEs. The backward linkage
promotion process involves many players, including the government, foreign MNEs, local suppli-
ers, professional organizations, commercial organizations, and academic institutions. The key role
of the government is that of coordinator, attempting to bridge the "information gaps" among the
players. The government can do this in a number of different ways:
First, in the realm of information, attempts can be made to provide a matching service between
MNEs and local suppliers. This can be done by inviting the relevant players to link-promotion
forums.
Second, in the realm of technology, efforts can be made to provide support in standards formation,
materials testing, and patent registration. Providing support in these areas has been part of the func-
tion of the Singapore Institute of Standards and Industrial Research. In addition, foreign MNEs can
be invited to be involved in programs designed to upgrade local suppliers' technological capabilities.
Third, in human resources development, efforts can be made to provide technical training and
managerial training.
Finally, in the area of finance, obstacles to access on the part of small firms can be removed. This
has been one of the functions of the Korean Technology Banking Corporation, for example.
Efforts in these and other areas typically must be coordinated by a lead agency. In the cases of
Costa Rica, Ireland, and Singapore, the Costa Rican Investment Board, an Irish National Linkage
Program, and the Singapore Economic Development Board have played this role. Other develop-
ing countries can learn from these experiences.
Sources: Battat, Frank, and Shen 1996; UNCTAD 2001; and Reinert 2005.
Employment can increase because the sourced inputs represent new
production.
Production technologies can be better adapted to local conditions
because suppliers are more likely to employ labor-intensive processes.
The MNE can transfer state-of-the-art business practices and tech-
nologies to the local suppliers.
It is possible that the local suppliers can coalesce into a spatial cluster
that supports innovation and upgrading.33
The policies required to support such links are considered in box 4.3.
96 Globalization for Development
Taking Japanese MNEs in Thailand as an example of creating links, Moran
(2001) reports
As for the impact of foreign investors on local Thai firms, the Japanese
assemblers took an active role in organizing "cooperation clubs" of the kind
that were characteristic of supplier relations in the home country to assist
with quality control, cost reduction, scheduling and delivery, and product
improvement. Within the first 10 years after the turn toward offshore
sourcing by the Japanese parents, some 150 local firms qualified for origi-
nal equipment manufacturer (OEM) status. . . . An additional 200 to
250 Thai firms received replacement equipments manufacturer (REM)
certification. These suppliers, like the foreign affiliates themselves, were able
to capture economies of scale, and to use different and more sophisticated
production techniques, than local firms elsewhere in Asia. (pp. 17�18)
Benefits from Spillover Effects
Another avenue through which MNEs can positively affect host economies
is through "spillovers" to other sectors of these economies. For example,
FDI in the automotive sector might benefit production in the machine tools
sector. Indeed, there is a presumption in much of the literature on FDI that
MNEs provide positive spillovers in the form of upgrading technology to
domestic firms in the host country. This line of thinking goes back to Caves
(1974) who tested this possibility for Canada and Australia. The evidence
to date suggests that such spillovers do occur in some circumstances and can
be significant.34 However, in the words of Blomstr�m and Sj�holm (1999),
they are not "guaranteed, automatic, or free." For example, Haddad and
Harrison (1993) and Kokko, Tansini, and Zejan (1996) failed to find such
effects for Morocco and Uruguay, respectively. Aitken and Harrison (1999)
also failed to find such positive spillovers for the case of Venezuela. Indeed,
their evidence suggests the presence of negative spillovers due to market-
stealing effects. Blomstr�m and Sj�holm (1999) find positive spillovers in
the case of Indonesia, attributing them to the increased competition that FDI
brings. Haskel, Pereira, and Slaughter (2002) found positive spillovers in
the United Kingdom, but such evidence might not apply to the developing
country context.
Factors that Determine Spillover Effects
What determines whether positive technology spillovers will occur? Many
factors are involved, and these include host country policies, MNE behavior,
and industry characteristics.
Finance 97
Learning and Education
One key factor is the capacity of local firms to absorb foreign technologies.
Blomstr�m and Kokko (2003) suggest that learning is a key capacity that is
responsive to various host country policies, and evidence presented in Tsang,
Nguyen, and Erramilli (2004) in the case of Vietnam supports this view.
Because learning is so important, a lack of human capital in the form of skills
and education tends to prevent the generation of positive spillovers. For
example, Kokko (1994) found evidence of these learning barriers in Mexico
in that spillovers were negatively related to the productivity gaps between
MNEs and domestic firms. Additionally, Kokko and Blomstr�m (1995)
found evidence that the technology transfers of U.S. MNEs have been posi-
tively affected by levels of education in host countries.
Wages
There is some evidence that MNEs offer higher wages than domestic firms.
This is the conclusion of te Velde and Morrissey (2003) based on evidence
from five African countries. This effect is more predominant for skilled than
unskilled workers. In the long run, wages depend on education and training
levels, and there is some evidence that MNEs will engage in important train-
ing activities. This appears to be more likely when MNEs are large, operate in
competitive environments, and are export oriented.35 As with the wage effects,
however, training is more likely to be directed toward skilled than toward
unskilled workers.36 In a way similar to that of international trade (discussed
in chapter 3), then, FDI can have differential effects that are positive for skilled
workers but that exclude unskilled workers. This can result in what te Velde
(2001) refers to as the "low-income low-skill trap."
Avoiding the Low-Income, Low-Skill Trap
Basic education and skills development have a major role in making the most
of FDI for poverty alleviation.37 Even Singapore, the preeminent example of
free market development, has intervened in labor markets to avoid any pos-
sible low-income low-skill trap. As described by te Velde (2001),
The Skills Development Fund (SDF) in Singapore is an example of how
MNEs (and other firms) can be engaged in more training. The Produc-
tivity and Standards Board (PSB), responsible for the SDF, imposes a
1 percent levy on the payroll of employers for every worker earning less
than a pre-determined amount. This levy is distributed to firms that
send their low-paying employees to approved training courses. This has
had a significant impact on skill-upgrading in Singapore. (p. 24)
98 Globalization for Development
This is just one example of efforts to make the most of FDI to alleviate poverty.
Generalizing such processes throughout the developing world requires new
policy efforts along the lines of those outlined in box 4.3 for building a syner-
gistic relationship between skills development and FDI.
Costs of Hosting FDI
Hosting FDI is not without its potential costs.38 Concern has been raised about
the practice of transfer pricing. Transfer pricing involves the manipulation of the
prices of intrafirm trade by MNEs to reduce their global tax payments. In
the case of the United States, with more resources to martial against this prac-
tice than any other country, it has been estimated that annual losses in tax rev-
enue are on the order of US$50 billion.39 The solution to the transfer-pricing
problem is multifaceted and not straightforward, but it is clear that a multilat-
eral approach is the preferred solution.40 Such options include forming inter-
national guidelines and codes of conduct, using international standards of
invoicing and customs procedures, harmonizing global tax systems, negotiat-
ing and concluding international conventions, and establishing international
arbitration procedures. However, to make these options work, resources would
need to be provided for many developing countries for them to effectively com-
bat transfer-pricing abuses.
FDI and Poverty Alleviation: An Assessment
FDI is perhaps the most important capital flow from the point of view of poverty
alleviation. FDI can be a means of employment generation, especially when it
takes place in labor-intensive sectors. It can also be a means of technology and
management transfer, especially where effective backward links have been es-
tablished. This gain, and its potential to help poor people, involves learning
processes; these, in turn, require that minimal thresholds of human capital be
met. Without advances in education, training, and health, few long-term gains
from FDI take place. Advances in the investment climate and the environment
for doing business, both for foreign and domestic investors, are also vital. Pol-
icy makers have a role to play in facilitating investment by combating corrup-
tion, streamlining procedures, and investing in the physical and human
capacities that are the foundation for not only foreign but more importantly
for domestic investment (See World bank 2005e).
For FDI to have a greater role in poverty reduction, it is also necessary to
address the following issues. First, it is highly concentrated among developed
countries and just a handful of developing countries. Second, for extractive
industries (such as mining and petroleum), steps must be taken to ensure that
the FDI does indeed contribute to poverty alleviation, especially in the context
of weak governance mechanisms. Third, transfer pricing abuses may rob devel-
Finance 99
oping countries of the tax revenues they desperately need to make the very
investments required for FDI to contribute positively to poverty alleviation. We
return to some of these issues in chapter 8.
Equity Portfolio Investment
Evidence suggests that financial development has a positive impact on growth,
but not all types of financial activity and capital inflows have the same effects.
In particular, capital inflows in the form of equity portfolio investment might
be more beneficial than either bond finance or commercial bank lending.
Reisen and Soto (2001) have examined the impact of all four capital inflows
considered in this chapter on growth for a sample of 44 countries. They found
that FDI did indeed have a positive impact on economic growth. The most
positive growth impact, however, came from equity portfolio flows. Bond
finance, considered below, did not have any impact on growth; commercial
bank lending, also considered below, had a negative impact. These results sug-
gest that equity inflows, along with FDI, could play an especially positive role
in growth, development, and poverty alleviation.
Reasons for High Equity Portfolio Impact
Why can equity portfolio investment play a positive role in growth and devel-
opment, at least under some circumstances? Rousseau and Wachtel (2000)
summarize research on this question with four possibilities:
Equity portfolio inflows are an important source of funds for develop-
ing countries.
The development of equity markets helps to provide an exit mecha-
nism for venture capitalists, and this increases entrepreneurial activity.
Portfolio inflows assist developing countries to move from short-term
finance to longer-term finance. They also help to finance investment in
projects that have economies of scale.
The development of equity markets provides an informational mecha-
nism evaluating the performance of domestic firms and can help pro-
vide incentives to managers to perform well.
Some evidence suggests that institutional investors managing equity flows are
less likely than banks to engage in herd and contagion behavior, thus making
volatility less of an issue.41 However, under some circumstances, these herd
and contagion behaviors do indeed appear, especially for nonresident, foreign
investors who are at an informational disadvantage.42 The degree of recent
volatility in net inward portfolio equity flows to developing countries can be
seen in figure 4.5. The Asian crisis of 1997 had a significant, detrimental effect
100 Globalization for Development
FIGURE 4.5 Net Inward Portfolio Equity Flows to Developing Countries, 1995�2004
40,000
35,000
30,000
25,000
US$ billions
20,000
15,000
10,000
5,000
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: World Bank 2006a.
on these inflows, as did the 2001�2 recession (see box 4.1). Recovery began in
2003, supporting significant gains in emerging-market stock indices, and con-
tinued through 2004 despite equity market corrections. Estimates and fore-
casts from the Institute of International Finance (2005) indicate that portfolio
equity investment will maintain itself at least through 2005. More long term,
according to the World Bank (2004b), prospects for equity finance are positive,
although risks remain. As noted by World Bank (2005a), the increases in equity
flows during 2003 and 2004 were highly concentrated regionally in East Asia,
South Asia, and South Africa. The Latin America and Caribbean region actually
experienced a loss.
Role of Equity Market Prices
The evidence on the role of global integration on equity market prices, as
opposed to flows, is more mixed. For example, Asian equity markets recovered
values fairly quickly after the 1997 crisis. More to the point, as noted by the
World Bank (2001), "There is no clear theoretical presumption as to whether
local stock prices will be more or less volatile after integration into the world
market. Integration should insulate the prices from shocks that affect the non-
market wealth or savings behavior of local investors, but could expose them
Finance 101
more to fluctuations in world asset prices and to shifts in external investor
preferences" (p. 173). There appears to be no clear evidence that one or the
other of these two influences dominates in practice.43
Features of Developing-Country Equity Markets
In general, equity markets are underdeveloped in much of the developing
world. For example, nearly the entire net portfolio equity inflows into Sub-
Saharan Africa are accounted for by one country alone: South Africa. The
World Bank (2004b) summarized the features of developing-country equity
markets as follows:
Market capitalization as a share of GDP in low-income countries is
about one-sixth of that in high-income countries. Even in the middle-
income countries, the share is only about one-third of that in industrial
countries. Stock exchanges in developing countries also tend to lag tech-
nologically behind developed markets. Technology plays a major role in
the trading, clearance, and settlement processes; problems in those areas
can discourage sophisticated investors. Institutions that supervise and
support the operation of the stock exchange also tend to be weaker in
developing countries. (p. 95)
The example of the Nairobi Stock Exchange is taken up in box 4.4. Elsewhere
in Africa, the Johannesburg stock market has a capitalization that far exceeds
BOX 4.4 The Nairobi Stock Exchange
A
lthough equity exchange in Kenya has a history going back to the 1920s under British colo-
nial rule, the Nairobi Stock Exchange (NSE) came into being only in 1954. From its incep-
tion until 1991, it was a voluntary association registered under the Kenyan Societies Act. At
about the same time, the NSE came under the regulation of the Capital Markets Authority (CMA).
In 1995, exchange controls that limited foreign participation in the NSE were removed.
As with most other African stock exchanges, the NSE has some characteristics of a frontier
market. Its market capitalization peaked at approximately US$2 billion in 1998, and its value
traded peaked at only approximately US$100 million in 1997. The number of companies listed in
2002 was only 50, down from 57 a decade earlier. That said, there are institutional changes that
have strengthened the exchange, such as the implementation of an electronic central depository
system, the adoption of international accounting standards, and the establishment of a Capital
Markets Appeals Tribunal. All of these are valuable changes, but the exchange has some distance
to travel in fulfilling development promises.
Source: Ngugi, Murinde, and Green 2002; Nairobi Stock Exchange, Market Intelligence (Kenya) accessible at
http://www.mi.co.ke/economy_and_markets/markets/nse/rise_growth_of_nse.asp.
102 Globalization for Development
that of the rest of Africa. In many respects, it has become a model for emerg-
ing markets, but it too has suffered from the migration of some of the most
global listings to London and New York.
Development of Equity Markets
The development of equity markets in low- and middle-income countries is
more complex than it might first appear. This is because of the recent trends in
the globalization of financial services. Observers have pointed to a set of domes-
tic factors as particularly important in equity market development. These factors
include sound macroeconomic policies, minimal degrees of technology, legal
systems that protect shareholders, and open financial markets. However, as
pointed out by Claessens, Klingebiel, and Schmukler (2002), these are precisely
the factors that tend to promote the "migration" of equity exchange out of devel-
oping countries to the major exchanges in financial capitals of developed coun-
tries. This migration process complicates standard notions of equity market
development. Steil (2001) has argued that the way forward is to link local mar-
kets with global markets. However, medium-size firms with local information
needs might still benefit from some kind of domestic equity market. This is an
area that urgently requires the development of novel approaches.
The Promise of Portfolio Equity for Poverty Alleviation
Capital flows in the form of portfolio equity hold out some promise for poverty
alleviation. Along with FDI, these indirect equity investments appear to have a
positive impact on growth through a variety of mechanisms. Contagion and
herd behavior are less prevalent than they are with commercial bank lending,
and flows are expected to hold relatively steady in the near future. However, the
underdeveloped nature of equity markets in most developing countries and
some degree of market volatility are two obstacles associated with global equity
flows. Developing equity financing to ameliorate these obstacles is a long-term
priority for poor people, as these indirect investments can help to offset some of
the problems with other sources of flows. This development needs to proceed in
an open fashion that does not favor a narrow, investing elite with inside knowl-
edge, but rather offers an open system for all medium-size and large firms.
Debt: Bond Finance and Commercial Bank Lending
In the financial world, there are significant differences between portfolio
equity investment and debt. This shows up in the fact that, in bankruptcy,
debt is given priority over equity. This tends to support the preference for
debt over equity in markets, a preference that might well be misplaced from
Finance 103
FIGURE 4.6 Net Inward Debt Flows to Developing Countries, 1997�2004
60,000
50,000
40,000
30,000 Bond finance
US$ billions
20,000
10,000
0
-10,000
Commercial bank lending
-20,000
-30,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: World Bank 2006a.
the perspective of development and poverty alleviation. In this section, we
consider two types of debt: bond finance and commercial bank lending. The
main difference between these two forms of debt is that bonds are in the
form of tradable assets. This provides more flexibility to lenders than bank
lending.
Bond Finance
Net debt flows to the developing world have evolved markedly in recent years
(figure 4.6). Bond finance fell gradually between 1998 and 2001, and the 2003
to 2004 period showed substantial recovery in net flows to a level above the
1997 to 1998 period. That said, the World Bank (2004b, 2005a) identifies a
number of risks with regard to bond investment. These include interest rate
increases in high-income countries, which are already beginning at the time
of this writing and continued fiscal imbalances in some developed countries
such as the United States.44 The World Bank (2005a) warns that "The risk of
an abrupt increase in U.S. interest rates remains a serious concern. Large, sud-
den movements in long-term rates, in particular, could provoke a sharp
widening of emerging market bond spreads" (p. 21). This potential increase
in bond spreads could raise the cost of capital via bond finance for the devel-
104 Globalization for Development
oping world. At the time of writing, however, these spreads are at a historical
low, reflecting the strength of emerging markets' macroeconomic performance,
as well as the low yields offered by alternative investment classes. The height-
ened appetite for emerging markets has seen a growing number of develop-
ing countries accessing significant volumes of finance from the bond markets.
Traditional issuers, such as Mexico, have been able to extend the term of their
bond issuance up to 30 years. At the same time, corporate borrowing has
grown significantly and in 2004 accounted for about half of total emerging
market bond issuance. The long-dated sovereign bonds better match the assets
and liabilities of governments and build the benchmark yield curve (which plot
the yields of different maturities) Increased issuance in local currencies�such
as Panda (Chinese Renminbi), Peso (Mexico), Real (Brazil), and Rand (South
Africa) bonds�reduces the currency mismatch, which has been a major cause
of past financial instability. Meanwhile, greater corporate access has provided
a new and often lower cost of finance for emerging businesses. As the need for
sovereign borrowing by middle-income countries has declined--not least in
those Asian economies with large foreign exchange surpluses, corporate bor-
rowing has provided a welcome alternative for investors seeking relatively
high yields. Longer-dated offerings by their governments have enabled corpo-
rate issues in certain emerging markets to price their own longer-dated offer-
ings by reference to these government benchmarks. The challenge for policy
makers is to sustain and deepen this access and to broaden this access from the
handful of countries with investment-grade that has been able to benefit from
this widening access to capital markets. Enthusiasm for this asset class, however,
has in the past proved short-lived. Prudence and a balanced portfolio approach
thus remain necessary.
Commercial Bank Lending
Commercial bank lending fell precipitously in 1999 on a net basis and did not
recover until 2004 (figure 4.6). Commercial bank lending on a gross basis is
a different story (figure 4.7). As noted by the World Bank (2005a), despite
declines in net lending, commercial bank lending is still used by a wide variety
of developing countries: "Twice as many countries tapped this segment of the
debt markets in 2004 than the bond financing segment" (p. 20). The private or
corporate sector is emerging as an increasingly important borrower in this regard.
Above, we briefly analyzed some features of financial markets that give them
some important, "imperfect" characteristics. As mentioned, commercial bank
lending appears to be particularly prone to these imperfections. For example,
Dobson and Hufbauer (2001) note that "Bank lending may be more prone to
run than portfolio capital, because banks themselves are highly leveraged, and
Finance 105
FIGURE 4.7 Gross Inward Bank Lending, 1996�2004
180
160
140
120
US$ billions
100
80
60
40
20
0
1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: World Bank 2005a, 2006b.
they are relying on the borrower's balance sheet to ensure repayment" (p. 47).
The World Bank (2001) also notes that "Incentives are key to limiting undue
risk-taking and fraudulent behavior in the management and supervision of
financial intermediaries--especially banks that are prone to costly failure" (p. 3).
Before the Asian crisis, such an assessment might have been seen as exagger-
ated. Indeed, the precrisis data examined by Sarno and Taylor (1999) provided
a relatively sanguine conclusion about commercial bank lending. Subsequent
events, however, showed otherwise. Much of the debt involved in the Asian
crisis was composed of short-term, interbank loans, and, as we saw in figures
4.1 and 4.2, net commercial bank lending flows quickly became negative for
both the low- and middle-income countries after 1997. Indeed, Goldstein,
Kaminsky, and Reinhart (2000) include short-term capital flows (most of
which are interbank commercial lending) as a significant predictor of future
financial crises based on a broad sample of countries.
Supporting the Development of Banking Sectors
What can be done to support the safe development of banking sectors in devel-
oping countries? Some of the necessary steps can be thought of in terms of
information, institutions, and incentives. For information, it is important for
106 Globalization for Development
banks to embrace internationally sanctioned accounting and auditing proce-
dures and to make the results of these assessments available to the public. For
institutions or the rules of the "banking game," risk management practices
(both credit and currency) must be sufficiently stringent and prudential regu-
lation systems must be well developed. For currency risk, the World Bank
(2004b) notes that "particular care should be taken to ensure that foreign-
currency liabilities are appropriately hedged" (p. 30).45 These information and
institutional safeguards are no small task, and they inevitably cannot be achieved
in the short term.46 Consequently, these safeguards should be buttressed with in-
centive measures in the form of market-friendly taxes on banking capital in-
flows. For example, Eichengreen (1999) argues that "banks borrowing abroad
should be required to put up additional noninterest-bearing reserves with the
central bank" (p. 117). Such taxes on short-term capital inflows have been
applied by Chile and others to prevent destabilizing episodes of overborrowing.47
Debt Flows Compared with Equity Flows
Debt flows in the form of bond finance and commercial bank lending appear
to have different properties than equity flows in the form of FDI and portfolio
equity investment. They are more prone to the imperfect behaviors that char-
acterize financial markets and their positive growth effects do not seem to be
as large as those associated with equity flows. Consequently, debt finance must
be used cautiously and should be hedged against exchange rate risks.48
Summary
The different forms of capital flows are best seen as complements, not substitutes.
The capital flows with the greatest potential contribution to poverty alleviation
are both FDI and equity investment. Equity-related finance brings with it the
natural benefits of risk-sharing, and is far less subject to the sudden stops and
reversals of debt flows. In the case of FDI, this is because investors have a ten-
dency to reinvest a portion of retained earnings. Also, FDI capital stock depreci-
ates, and new inflows are needed to sustain the existing capital stock. Finally, the
benefits of FDI go beyond those relating to narrow financial issues: new ideas,
technologies, and improvements in skills and training are all potential and
important spillovers.49
Long-Term Trend of Financial Development
The long-term trend of financial development is probably toward a mix of
all four capital flows described in this chapter. The positions of developing
countries with regard to capital flows can be generalized as in figure 4.8. Here,
Finance 107
FIGURE 4.8 Composition of Financial Development
Commercial bank
lending
1
2
3
Foreign direct Equity portfolio
investment 4 investment
Bond finance
Source: Authors.
for simplicity, our four types of capital flows are represented as the four cor-
ners of a diamond, with the relative strength of any particular flow indicated
by proximity to a corner of the diamond. In the short term, most developing
countries have no choice about their position in the diamond because they
are constrained by the availability and cost of different capital flows. In the
medium term, however, their actions can yield some influence over the avail-
ability and cost of capital flows: their choices can expand.
For example, there is a group of low-income countries who find them-
selves at approximately point "1" in the diagram, relying primarily on the
commercial bank lending form of capital flows.50 Another set of low-income
countries find themselves at approximately point "2," with a mix of com-
mercial bank lending and FDI, the latter probably concentrated in petroleum
or minerals. Many middle-income countries find themselves at approxi-
mately point "3," with the addition of some bond finance and equity port-
folio investment. As financial development proceeds, there will be a move to
somewhere in the vicinity of point "4" in which there is a broad mix of all
four capital flows. Maintaining this position in a stable way would require
108 Globalization for Development
that the financial development of the country be designed to mitigate the
imperfections discussed in this chapter. Capital inflows have a vital role to
play. As noted by Fernandez-Arias and Montiel (1996), "the possibility that
capital inflows may be welfare reducing does not mean that they are invari-
ably harmful" (p. 57, emphasis added).
Absorptive Capacity Requirements
If there is any convergence in the emerging literature on capital flows in
the developing world, it concerns absorptive capacity, which acts as a set of
necessary conditions for potential poverty-alleviating effects. That is, for cap-
ital flows to positively help poor people, a number of things must be true:
First, human capital must be developed. Without it, the hoped-for
positive spillovers from FDI will not emerge.
Second, the domestic financial markets must be "deep" enough to sup-
port liquidity. Without liquidity, volatility will be a problem.
Third, systems of oversight and regulation of domestic financial mar-
kets must be developed enough to prevent excessive volatility and
crises.
Fourth, levels of corruption should be low and strenuously combatted.51
Each of these conditions takes some time to fulfill. Until they are achieved,
caution is warranted. Thus, we sound a note of warning in providing an
overall assessment of global capital flows and their relationship to poverty.
As Hanson, Honohan, and Majnoni (2003) concluded, "the globalization of
finance is not an unmixed blessing, but it appears to be inexorable" (p. 25).
Capital flows are an "inexorable" aspect of financial globalization, which
have potential benefits and costs that are significant. Because poor people are
particularly vulnerable to the potential costs, any errors in managing capital
flows should be on the side of caution.
Impact of Fiscal Imbalance in the United States on Poverty Alleviation
Finally, as discussed in the beginning of this chapter, in significant measure
because of unaddressed fiscal imbalances in the United States, aggregate cap-
ital flows are currently from developing to developed regions of the world.
The United States continues to claim the bulk of world savings, the opposite
of what is optimal from a poverty-alleviation perspective. Given the global-
ization of finance--particularly in the market for government bonds--
addressing fiscal imbalances in the United States is of key importance to
freeing up capital flows that alleviate poverty.
Finance 109
Notes
1. Dobson and Hufbauer (2001) estimate that developing country GDPs are, on average, approxi-
mately 5 percent higher due to both trade and capital flows. They themselves call this a "cautious
assertion" to be taken as a first approximation. Prasad and others (2003) are even more cautious,
noting that "if financial integration has a positive effect on growth, there is as yet no clear and
robust empirical proof that the effect is quantitatively significant" (p. 5). For a general review, see
chapter 4 of Hossain and Chowdhury (1998).
2. The latter point regarding cost and poor people is emphasized by Stiglitz and Bhattacharya (2000).
3. In the case of firms, it is not only financial portfolios that are involved, but also productive port-
folios such as plant and equipment in the form of foreign direct investment.
4. The precise definition in the World Bank's World Development Indicators, for example, is "lasting
interest in or effective managerial control over an enterprise in another country" (World Bank,
various years).
5. Szirmai (2005), for example, notes the "overwhelming impact of Western culture, which is fre-
quently transferred only in the rudimentary form of consumption-oriented behavior and tech-
nology" (p. 509).
6. We discuss noncommercial lending, such as that of the World Bank, in chapter 5 on foreign aid.
7. Chuhan, Claessens, and Mamingi (1998) examine some factors behind bond and equity flows to
Latin America and Asia during the late 1980s and early 1990s. They suggest that equity flows tend
to respond to price-earnings ratios and relative rates of return, while bond flows tend to respond
to credit ratings and debt prices in secondary markets.
8. One potential point of confusion can arise in interpreting figures 4.1 and 4.2. As we will see in the
next section on financial development, beginning in 2000, the developing world became an
exporter of capital to the developed world rather than an importer. How then can the positive
inflows of capital into the low- and middle-income countries take place? The answer is that the
private capital inflows of figures 4.1 and 4.2 are offset by official capital outflows that take place
through the actions of central banks, especially in the case of the middle-income countries.
9. de la Torre and Schmukler (2004) note that privatization proceeds in developing countries increased
from US$ 2.6 billion in 1988 to US$ 25.4 billion in 1996.
10. On this last point, see also Osei, Morrissey, and Lensink (2002).
11. See, for example, Taylor and Williamson (1994).
12. See, for example, Lucas (1990).
13. This insight is reviewed at some length in chapters 1 and 2 of Caves (1996).
14. See World Bank (2004b, 2005a). The World Bank (2005a) notes that "The buildup of foreign
exchange reserves in the hands of developing countries' central banks and monetary authorities--
and its use in financing global payment imbalances--marks a new phase in the postwar system
for financing international payments" (p. 59).
15. This possibility is discussed in Pagano (1993). Evidence is provided by King and Levine (1993).
16. On productivity effects, see Beck, Levine, and Loayza (2000). This research supports what is
known as the "Schumpetarian view" of the role of finance in development (after Schumpeter,
1934) in which the primary effects of financial development are on the productivity of firms. On
external finance effects, see Rajan and Zingales (1998).
17. See Levine and Zervos (1998).
18. See Reisen and Soto (2001). The overall growth effects of FDI had been called into question by
Caves (1996), who wrote: "Some researchers have tried to identify the overall effects of MNEs'
presence in developing countries on . . . subsequent rates of economic growth. The possible causal
connections are numerous but speculative and ill-defined in terms of economic models. Empir-
ical investigations, whether by those disposed to think good or ill of the MNEs, have employed
inadequate research procedures and have yielded no trustworthy conclusions" (p. 242). This
ambiguity is reiterated in the case of Africa by Bhinda and others (1999).
19. For example, the World Bank (2001) notes that "Globalization . . . challenges the whole design of
the financial sector, potentially replacing domestic with international providers of some of these
110 Globalization for Development
services, and limiting the role that government can play--while making their remaining tasks that
much more difficult" (p. 1). See also Calvo, Leiderman, and Reinhart (1996).
20. These estimates are from Collier, Hoeffler, and Pattillo (2001).
21. Reviews of the economic literature on crises can be found in more- and less-technical terms, respec-
tively, in Appendix B of Eichengreen (1999) and chapter 17 of Reinert (2005). For a specific focus
on the role of exchange rate regimes in crises, see Cordon (2002).
22. See, for example, Stiglitz and Weiss (1981) and Williamson (1987). For the role of asymmetric
information in influencing institutional investors, see Frenkel and Menkhoff (2004).
23. International Monetary Fund statistics record 64 banking crises between 1970 and 1999 (Crook
2003). Crook writes that "breakdowns in banking lie at the center of most financial crises. And
banks are unusually effective at spreading financial distress, once it starts, from one place to
another" (p. 11). The World Bank (2001) notes that "If finance is fragile, banking is the most frag-
ile part" (p. 11).
24. For a critique of premature capital account liberalization, see Stiglitz (2000). As the World
Bank (2001) notes, "Poor sequencing of financial liberalization in a poor country environ-
ment has undoubtedly contributed to bank insolvency" (p. 89). Hanson, Honohan, and
Majnoni (2003) also note that "the riskiness of capital account liberalization without fiscal
adjustment . . . , and without reasonably strong financial regulation and supervision and a
sound domestic financial system, is well recognized" (p. 10). See also Bhattacharya and Miller
(1999).
25. See Wolfensohn (1998).
26. See Fiszbein, Giovagnoli, and Thurston (2003).
27. Even short of actual crises, there is some reason for concern about the potentially negative impact
of capital flows on poor people. For people at or near poverty lines, any volatility in consumption
can be quite detrimental or even disastrous. From a theoretical point of view, capital flows can
reduce the volatility of consumption by de-linking it from national output volatility. Unfortu-
nately, there is empirical evidence that increased financial integration through expanding capital
flows can increase rather than decrease consumption volatility in developing countries. See Prasad
and others (2003) and Kose, Prasad, and Terrones (2003).
28. These risks are all the more significant when countries are characterized by "currency mis-
matches" in which assets are denominated in the local currency and liabilities in foreign curren-
cies. Consequently, net worth is directly tied to the value of the local currency. On this issue, see
Jeanne (2000), Eichengreen, Hausmann, and Panizza (2003), and Goldstein and Turner (2004).
As noted by Eichengreen (2004), "Currency mismatches are widely implicated in financial crises
in developing countries" (p. 27).
29. Stiglitz and Bhattacharya (2000) discuss the role of food subsidies, education subsidies, rural infra-
structure, and microfinance in this regard.
30. There is a long-standing inquiry into this issue, the results of which are summarized by Caves (1996):
"Survey evidence indicates that MNEs do some adapting (of technologies to labor-abundant con-
ditions), but not a great deal, and it appears that the costs of adaptation commonly are high relative
to the benefits expected by individual companies" (p. 241).
31. "With the exception of some European-based companies, the proportion of R&D activity by MNEs
undertaken outside their home countries is generally quite small and, in the case of Japanese firms,
negligible" (Dunning, 1993, p. 301).
32. See also Moran (1998).
33. For an introduction to the role of clusters in technological upgrading, see chapter 11 of Reinert
(2005) and the references therein. For the role of clusters in natural resource�based development,
see Ramos (1998).
34. Evidence presented by Hejazi and Safarian (1999) indicate that spillovers for research and devel-
opment are more important for FDI than they are for international trade.
35. See te Velde (2001) and references therein.
36. See Tan and Batra (1995), for example.
Finance 111
37. For readers familiar with "growth and poverty" research, we note that Borensztein, De Gregorio,
and Lee (1998) find that it is the combination of FDI and education that has a statistically signifi-
cant impact on growth.
38. For a review of both benefits and costs of hosting FDI, see chapter 21 of Reinert (2005).
39. See Plender (2004).
40. Unilateral policy options exist, but "because there is competition for MNE activity between home
and host countries, and between different host countries, the opportunities for MNEs to play one
nation against another are enhanced without the establishment of supra-national institutions and
harmonized inter-governmental action towards (transfer pricing)" (Dunning, 1993, p. 523).
41. This evidence is reviewed in chapter 1 of Dobson and Hufbauer (2001).
42. For the case of Korea, see Choe, Kho, and Stulz (1999) and Kim and Wei (2002).
43. See also Hanson, Honohan, and Majnoni (2003).
44. As of January 2005, the Argentine government had made a "final offer" to its bondholders. By the
end of February 2005, the country had negotiated a debt swap, which replaced a portion of this
debt with lower-value bonds. The Argentine government hopes that this restructuring will begin
to bring home the approximately US$150 billion its citizens hold abroad in the form of flight cap-
ital. See The Economist (2005a, b).
45. Mistakes made in these areas have proved to be too costly to poor people for countries to relax their
vigilance. Prasad and others (2003) conclude that "The relative importance of different sources of
financing for domestic investment, as proxied by the following three variables, has been shown to
be positively associated with the incidence and the severity of currency and financial crises: the ratio
of bank borrowing or other debt relative to foreign direct investment; the shortness of the term struc-
ture of external debt; and the share of external debt denominated in foreign currencies" (p. 49).
46. Eichengreen (1999) notes that "the sad truth in all too many countries is that banks have a lim-
ited capacity to manage risk and that regulators have limited capacity to supervise their actions"
(pp. 11�12).
47. This overborrowing is described by McKinnon and Pill (1997).
48. We take up the accumulated debt burdens of developing countries, as well as the issue of debt
relief, in chapter 5.
49. China, for example, has focused on equity rather than debt, and inroads into poverty reduction
have been significant.
50. This group of countries, as well as those at point "2," would no doubt also be relying on foreign
aid, but we leave this discussion to chapter 5.
51. According to the results of Wei (2000), corruption has a tendency to bias capital flows away from
FDI and toward commercial bank lending.
5
Aid
T his chapter examines foreign aid flows, historically the most recent of the
global flows we consider in this book.1 Although ideas, goods, invest-
ments, and people have crossed great distances for millennia in response to a
host of economic opportunities, it is only relatively recently that governments
began to provide financial and technical assistance to foreign countries. The
purpose of this assistance has varied and has included geopolitical purposes as
well as stimulating economic development, ameliorating poverty and suffering,
promoting political outcomes, and ensuring civil stability and equitable gover-
nance. Although foreign aid is often visualized by citizens in rich countries in
terms of financial "handouts" by rich countries to the world's poorest inhabi-
tants, the truth is much more complex. Indeed, contrary to popular perception,
low-income countries generally receive less than half of total aid. Much of the
remainder is made up by flows to middle-income countries such as Colombia
and the Arab Republic of Egypt, and some countries of particular interest--
Israel, and most recently, Afghanistan--have received significant amounts of
assistance.2 The good news is that recent years have seen sharp improvements
in both the quality and quantity of aid.
Aid, or official development assistance (ODA) as it is technically known, cov-
ers a wide range of both financial and nonfinancial components.3 Cash transfers
to developing countries can be vital, but currently they account for less than half
of the aid that goes to those countries. Nonfinancial forms of assistance include
grants of machinery or equipment as well as less tangible contributions such as
providing technical analysis, advice, and capacity-building. Many donors also
count their own administrative costs in their aid budgets as well as contributions
to debt reduction and other financial allocations that never reach developing
countries.4 Just as there is considerable heterogeneity in the types of aid dis-
bursed, there is also a surprising amount of diversity in the countries that receive
ODA. For some countries--such as those in early post-conflict situations or
113
114 Globalization for Development
where institutions are particularly weak and corruption is prevalent--technical
assistance may have a more positive impact than cash transfers, but in the major-
ity of countries, cash transfers in support of government programs are most
effective in contributing to growth and reducing poverty.
An analysis of aid flows cannot be separated from an analysis of the devel-
opment of the international development finance system and the role of insti-
tutions such as the World Bank as conduits for financial and other flows. This
chapter therefore focuses on both bilateral and multilateral flows as well as on
related issues such as the role of official debt and its cancellation.
A Brief History of Aid Flows
In many ways, the histories of modern aid and colonialism are intertwined. In
so far as colonialism was an exercise driven by a desire to stimulate and then
exploit economic activity abroad, providing investment capital, technology,
and technical assistance to colonies was integral to the process. This included
constructing a railroad network in the Congo by Belgium to facilitate the
extraction of ore deposits, establishing foreign legions of civil service employ-
ees, and constructing the Suez and Panama Canals.
Colonial Nature of Early Foreign Aid
It was not until the early 20th century, however, that colonial powers consid-
ered providing assistance to support general aspects of economic development
that were not exclusively tied to extraction and exploitation. Even here, as noted
by Little and Clifford (1965), in the case of the United Kingdom's 1929 Colo-
nial Development Act, infrastructure rather than, say, education, played a cen-
tral role. As stressed by Kanbur (forthcoming), it was not until the 1940 and
1945 Colonial Development and Welfare Acts that the United Kingdom began
to support education in its nascent foreign aid efforts, although its 1948 Over-
seas Development Act established the Colonial Development Corporation.
Even after countries gained independence, the colonial nature of foreign
aid persisted. Szirmai (2005, chapter 14) stresses the role of aid in decoloni-
zation processes, as well as in post-independence assimilation policies, par-
ticularly in the cases of the United Kingdom and France. The Netherlands was
not exempt in this process either. As Szirmai states, in an example not atypi-
cal of the early years of other aid programs,
In the case of the Netherlands, there was a sudden rift with Indonesia in
1949 after the so-called police actions of 1947�49. The Netherlands
attempted to restore its damaged international prestige by participating
Aid 115
KEY TERMS AND CONCEPTS
adjustment programs capacity building
aid flows Green Revolution
Cold War technical assistance
debt overhang tied assistance
debt-service-to-export ratios Washington Consensus
official development assistance (ODA)
on a large scale in multilateral technical assistance which was beginning
at that time. The Netherlands had a reservoir of experience in the form
of colonial training programmes, unemployed colonial civil servants and
technical experts. It was quite successful in finding employment for its
experts in multilateral aid programmes. (p. 586)
Tied Nature of Early Foreign Aid
A key feature of these early forms of development assistance was its "tied"
nature, in which aid was restricted to importing from the donor country.5 This
was true of the Colonial Development Act in the United Kingdom and the
"Good Neighbor Policy" of the United States toward Latin America. The prac-
tice of tied assistance dominated bilateral aid flows during much of the Cold
War and, although there has been considerable progress in untying aid, it
remains a feature of a number of aid programs today. To the extent that aid
is tied, receiving countries have struggled to extract the full potential benefit,
as the assistance provided does not necessarily fit with local choices and pri-
orities. At times, ostensibly magnanimous donations of assistance have in fact
had a discernibly detrimental impact on local producers, to the advantage of
exporters in the donating country. Concerns are often raised about the efficacy
of foreign food aid, for instance, which may ultimately serve to undermine the
markets of domestic growers while at the same time providing a captive source
of demand for producers in the donor country.6
Modern Foreign Aid in the Wake of World War II
The advent of modern foreign aid may be traced back to the Marshall Plan for
bilateral assistance between the United States and Europe in the wake of World
War II, as well as to the Bretton Woods Conference and the creation of durable
multilateral institutions to facilitate increased international assistance and
cooperation, such as the United Nations, the World Bank, and the Internatio-
116 Globalization for Development
nal Monetary Fund (see box 1.2 in chapter 1).7 These efforts were informed by
the adverse experiences of past conflicts, whereby the vanquished often had
been compelled to pay reparations to the victors. As had been the case with
Germany after World War I, such reparations often exacerbated and pro-
longed the impact of the conflict, leading to financial crises and a lasting sense
of resentment. The succession of European wars and failed armistices that
resulted had, by 1945, provided a compelling lesson in the need to invest in
peace and economic integration. Thus, it was in the shadow of World War II
that the international aid architecture was first articulated. Together with
much smaller but increasingly significant assistance from private foundations,
the combination of bilateral assistance and multilateral institutions has
remained the dominant paradigm of international aid flows to the present day.
The amount of aid provided and the evolution of aid programs are traced in
table 5.1 and figure 5.1.8
Figure 5.1 and table 5.2 highlight the changing nature of the aid agencies
over time, from agencies that focused almost exclusively on promoting
exports to a broader multilateral agenda and then, more recently, to under-
pinning private sector investment. The European Bank for Reconstruction
and Development (EBRD), established in 1991 after the collapse of the Berlin
Wall to support the transition to a market economy in Eastern Europe, is the
most modern of the multilateral development banks, and combines lending
to both public and private sectors with and without government guarantees.
From 1944, upon their incorporation in Bretton Woods, New Hampshire,
the initial focus of the World Bank and the International Monetary Fund (IMF)
was on helping to rebuild and reinvigorate war-torn Europe and on ensuring
the stability of the world financial system.9 Of the World Bank's first six loans,
five went to countries in Western Europe; the first four were explicitly for post-
war reconstruction. The poor countries of the world were not the first priority,
and the focus was on raising production and income rather than on broader
notions of development. However, with rapid reconstruction progress and the
TABLE 5.1 Average Annual Aid Flows per Person in Real 2000 US Dollars, 1960�2003
Categories of recipients 1960�9 1970�9 1980�9 1990�9 2000�3
Low-income countries $14.72 $16.85 $16.23 $13.82 $11.41
Middle-income countries $6.86 $9.43 $8.52 $10.78 $8.34
High-income countries $3.38 $4.16 $3.94 $2.94 $1.50
Source: Authors' calculations based on World Bank 2005b.
Aid 117
FIGURE 5.1 Magnitude and Vintage of Major Aid Organizations
OPIC IFU EBRD
Finance to
private sector IFC FMO Proparco
USAID OECF AusAID MCC
Bilateral
IMF CAF
EIB MIGA
Multilateral
IBRD IsDB and GFAT
EHK IDB IDA ADB
France Germany others
Export
credit
USExim Canada Japan
1910 1930 1950 1970 1990 2010
Source: World Bank 2004a.
Note: Agencies are shown in year of creation, with the area of the circles proportional to their most recent annual aid
commitments in US dollars. ADB is Asian Development Bank; AusAID, Austrailian Agency for International Development;
CAF, Corporaci�n Andina de Fomento; EHK, Euler Hermes Kreditversicherungs; EIB, European Investment Bank; FMO,
Netherlands Development Finance Company; GFAT, Global Fund to Fight Aids, Tuberculosis, and Malaria; IBRD, International
Bank for Reconstruction and Development; IDA, International Development Association; IDB, Inter-American Development
Bank; IFC, International Finance Corporation; IFU, Industrialisation Fund for Developing Countries; IMF, International
Monetary Fund; MCC, Millenium Challenge Corporation; MIGA, Multilateral Investment Guarantee Agency; OECF, Overseas
Economic Corporation Fund; OPIC, Overseas Private Investment Corporation; and USEx/Im, Export-Import Bank of the United
States. "IsDB and others" includes the Islamic Development Bank, the OPEC Fund, and the Arab Monetary Fund. Some
organizations with annual commitments of less than US$1.75 million are not labeled.
increasing demands of the Cold War, this slowly began to change, and many
low- and middle-income countries received increasing flows of international
assistance. In 1949, U.S. President Harry Truman set in motion the "Point
Four" program for technical assistance in developing countries.10 In 1961, the
United States established the Agency for International Development (USAID),
and this was followed by similar actions by Sweden in 1962 and Britain in 1964.11
These agencies, along with the African, Asian, and Latin American regional
development banks that were established around the same time, comple-
mented the work of the World Bank and provided channels for increased aid
flows to the world's poorest countries. The resulting flows of aid are plotted in
figure 5.2. They are given in per capita terms in table 5.1.
For many European countries, the national aid agencies at first mainly con-
centrated on supporting their former colonies, leaving the broader global chal-
lenges of reconstruction and development to global and regional institutions
such as the World Bank and the African Development Bank. Increasingly over
time, however, there has been a convergence of objectives and strategy, and a
global professional cadre of development specialists has been built up. With
rapid progress in post-war reconstruction, development assistance began to
118 Globalization for Development
TABLE 5.2 Developments in the History of Foreign Aid
Dominant or
Decade rising institutions Donor ideology Donor focus Types of aid
1940s Marshall Plan, Planning Reconstruction Program assistance
Bretton Woods,
and UN system
1950s United States, Anti- or pro- Community Food aid and
with USSR Communist, build- development project-based
ing regime capacity financing
1960s Bilateral programs Anti- or pro- Productive sectors Technical assis-
Communist, build- (e.g., Green Revolu- tance, budgetary
ing regime capacity tion), infrastructure support
1970s Expansion of mul- Building state Poverty and basic Import support
tilaterals (World capacity, fulfilling needs
Bank and IMF) basic needs
1980s Nongovernmental Structural Macroeconomic Program-based,
organizations adjustment reform debt relief
1990s Eastern Europe Structural adjust- Macroeconomic Human develop-
and Ex-USSR as ment, then state reform and ment and sector-
recipients capacity institutions focused assistance
2000s Security and G-8 Aid effectiveness, Results measure- Budget support,
agenda partnership, ment, governance, global programs
MDGs coherence post conflict (e.g., HIV/AIDS)
Source: Adapted from Hjertholm and White 2000.
Note: MDGs are Millennium Development Goals.
focus on raising incomes in what came to be called the developing world. At
first, the goal was largely confined to raising aggregate national incomes. Then,
with the growing recognition that population growth rates vary sharply (so
aggregate income did not necessarily give a clear picture of changes in living
standards), attention turned to per capita incomes. Soon, with increased under-
standing of the importance of income distribution, simply raising average per
capita incomes also was recognized to be too limited a goal.
By the 1970s, the attention of international aid agencies focused on the twin
problems of growth and income distribution and also, increasingly, on the basic
Aid 119
FIGURE 5.2 Inflows of Official Development Assistance by Region, 1960�2004
0.4
South and East Asia
Middle East & North Africa
Aid as a percentage of high-income country GDP
0.35 Europe & Central Asia
Latin America & Caribbean
0.3 Sub-Saharan Africa
0.25
0.2
0.15
0.1
0.05
0
1965 1969 1973 1977 1981 1985 1989 1993 1997 2001
Source: World Bank 2006a.
needs of poor people.12 Reducing income poverty became a greater priority for
the international financial institutions as well as for governments. Some of the
major deployments of aid relative to the size of the recipients' economies are
summarized in table 5.3. The table illustrates that, for very small economies, aid
can even exceed the size of the national domestic economy. On average, for
developing countries, aid contributes around 3 percent of national income, and
in Africa the average contribution is around 5 percent. However, as the table
shows, some countries--such as Mozambique and Zambia in recent years--
have seen aid levels well in excess of half of their domestic economy. Very small
economies, with total national incomes of less than US$250 million and pop-
ulations of fewer than 1 million people, and those emerging from conflict are
most prone to very high levels of aid dependence, as table 5.3 illustrates.
Foreign Aid and the Cold War
Although the motivation for providing aid in the immediate post-World War II
period was driven at the Bretton Woods Conference by reconstruction and
broader considerations, this soon was coupled by a growing preoccupation with
the politics of the Cold War. From the mid 1950s to the fall of the Berlin Wall
in 1990, aid was increasingly used as a means to support friendly states. Also,
originating in the foreign policy of the United States during the early years of
120 Globalization for Development
TABLE 5.3 Major Deployments of Foreign Assistance
Country Year ODA/GDP Country Year ODA/GDP
(percent) (percent)
Palau 1994 242 Micronesia 2001 60
S�o Tom� & Principe 1995 185 Zambia 1995 58
Liberia 1996 108 Albania 1992 57
Rwanda 1994 95 Nicaragua 1991 56
Mozambique 1992 79 The Gambia 1986 55
Kiribati 1992 79 Tonga 1979 53
Marshall Islands 2001 75 Cambodia 1974 52
Guinea-Bissau 1994 74 Cape Verde 1986 51
Timor-Leste 2000 73 Samoa 1991 51
Somalia 1980 72 Equatorial Guinea 1989 51
Source: Authors' calculations based on World Bank 2004c.
the Cold War, economic and military aid were closely interconnected, and aid's
strategic purpose was seen to be at least as much geopolitical as it was human-
itarian. It was in this context that Hawkins (1970) in The Principles of Develop-
ment Aid, suggested that foreign aid belonged to the field of political economy
rather than economic analysis. Hayter's (1971) title, Aid as Imperialism, was
even more direct. And Milton Friedman (1958, cited in Kanbur [2003]) from
the other end of the ideological spectrum similarly observed, "Foreign eco-
nomic aid is widely recognized as a weapon in the ideological war in which the
United States is now engaged. Its assigned role is to help win over to our side
those uncommitted nations that are also underdeveloped and poor" (p. 63).
Foreign Aid after the Cold War: Poverty Reduction Efforts
When aid is disbursed for political or military reasons, with an eye to support-
ing donor-country exports, or for transition or disaster relief in post-conflict
stabilization, any positive effects for poor people generally occur with a long lag
time. The end of the Cold War and progress in transition countries have made
possible a more direct targeting of aid to poverty reduction efforts. As stated by
Goldin, Rogers, and Stern (2002),
Donor financial assistance is targeted far more effectively at poverty
reduction than it was a decade ago. At that time, Cold War geopolitics
Aid 121
was still exercising a heavy influence on aid allocation, and too many
recipient economies were poorly run, often suffering from excessive state
intervention in economic activity and poor governance. . . . As a result,
the poverty-reduction effectiveness per dollar of overall ODA has grown
rapidly. (pp. 42�43)
Unfortunately, the increase in the effectiveness of aid until 2001 was not accom-
panied by an increase in its availability. After rising rapidly from 1945 to the
early 1960s, flows of aid declined in subsequent decades. Expressed as a per-
centage of high-income country income (figure 5.2), aid has trended down
from slightly over 0.35 percent to approximately 0.2 percent of the GDP of
high-income countries in 2001. The good news, however, is that this decline
finally appears to have been reversed and the last couple of years have seen a
renewed commitment to increasing aid flows. Table 5.4 presents the latest data
as well as estimated ODA for 2006.
On the recipient side, when expressed as a percentage of the recipient coun-
try's GDP, (or GNI) aid has been relatively constant over the entire period
since 1967 (figure 5.3). The average amount of aid received by low-income
and middle-income countries over this period was 3.1 and 0.5 percent of
GDP, respectively. That said, however, there have been significant declines
since the early 1990s, especially for low-income countries. Thus, from the
point of view of helping poor people, foreign aid as an aspect of economic
globalization can be characterized as a significant, missed opportunity.
These numbers reflect the upper limit of what countries actually receive,
because we know that most bilateral aid does not in fact end up as a cash
transfer in the hands of the recipient country. Figure 5.4 illustrates that a great
deal of aid is not provided in the form of transfers of financial resources, but
rather as food aid, emergency relief, technical cooperation, and debt relief.
Although these nondiscretionary forms of aid may make an important con-
tribution, they too often are driven by the priorities of the donors rather than
the recipients. They are no substitute for predictable, multiyear flows of aid that
are mobilized behind government budgets in national programs that are agreed
to across the donor community. Improvements in the quality of aid are neces-
sary as are increases in the volume of aid. For many countries, only a small
part--on average around 20 percent--of the aid is provided in the form of
direct support to budgeted government programs. This is one of the reasons
that the transaction costs of aid are very high and in many cases divert scarce
personnel from their ordinary activities of managing public resources.
Harmonization and coordination is vital to reduce the transaction costs
of aid and to ensure that the national priorities of recipient countries are sup-
122 Globalization for Development
TABLE 5.4 ODA as a Share of GNI, 2005 and Estimated for 2006
Net ODA 2005 ODA as % of GNI ODA as % of GNI
(USD millions) 2005 estimated 2006
Austria 1,539 0.52 0.33
Belgium 1,924 0.53 0.50
Denmark 2,076 0.81 0.77
Finland 883 0.46 0.41
France 9,893 0.47 0.47
Germany 10,013 0.36 0.33
Greece 372 0.17 0.30
Ireland 703 0.42 0.50
Italy 4,958 0.29 0.33
Luxembourg 248 0.84 0.90
Netherlands 5,036 0.82 0.82
Portugal 371 0.21 0.33
Spain 2,911 0.27 0.33
Sweden 3,377 0.94 1.00
United Kingdom 10,640 0.47 0.42
EU members, total 54,943 0.44 0.43
Australia 1,557 0.25 0.28
Canada 3,410 0.34 0.28
Japan 13,534 0.28 0.20
New Zealand 251 0.27 0.27
Norway 2,494 0.94 1.00
Switzerland 1,757 0.44 0.41
United States 26,888 0.22 0.19
DAC Members, Total 104,835 0.33 0.30
Source: www.oecd.org/statistics OECD-DAC Secretariat 2006.
ported, particularly if these are not the same as the pet projects and programs
of individual donors and recipient ministries. The transaction costs of aid
transfers are also important in determining what portion of total aid flows is
spent productively. When ministers have to spend their time hosting visiting
dignitaries, and their officials are engaged in satisfying a wide range of donor
reporting requirements, the administrative and other burdens imposed by the
donors may not only undermine the benefits of the project but also distract
officials and scarce skilled staff from more vital priorities. It is for this reason
that the recent evolution of donor consultative forums, mobilized behind
national strategies and reinforcing existing budget mechanisms and harmo-
Aid 123
FIGURE 5.3 Foreign Aid Receipts as a Percentage of Low- and Middle-Income Country
GDP, 1960�2004
6.00
Low income
Middle income
5.00
ODA as a percentage of GDP
4.00
3.00
2.00
1.00
0.00
1965 1969 1973 1977 1981 1985 1989 1993 1997 2001
Source: World Bank 2006a.
FIGURE 5.4 Breakdown of Aid Flows to Sub-Saharan Africa (excluding Nigeria)
25
Technical cooperation
Debt forgiveness grant
20 Emergency
Development food aid
Government assistance
15
US$ billions
10
5
0
1999 2000 2001 2002 2003
Source: OECD Development Assistance Committee and World Bank and authors' calculations.
124 Globalization for Development
nized reporting standards, are so essential. Considerable progress has been
made in recent years in harmonizing approaches. A growing number of
national and multilateral agencies are reflected in the 2005 Paris Declaration
on Aid Effectiveness, which emphasizes "ownership, harmonization, align-
ment, results and mutual accountability."13
One shortcoming of such donor consultative systems, however, is that,
because they weaken the direct link between an individual donor and an indi-
vidual project, they render attributions of individual ODA efforts with coun-
try or project outcomes more complex. While harmonization and common
platforms almost invariably enhance the effectiveness of ODA, it may be more
difficult to demonstrate to skeptical voters in rich countries where their tax
payments have gone. For this reason, care may need to be taken in the design
of such systems to ensure that donors can still point to concrete examples of
where their funding has made a difference.
Modern Goals of Development Assistance
In recent years, the goals of development have come to embrace the elimina-
tion of poverty in all its dimensions--income poverty, illiteracy, poor health,
insecurity of income, and powerlessness. A consensus is emerging around the
view that development means increasing the control that poor people have
over their lives--through education, health, and greater participation, as well
as through income gains. This view comes not only from the testimony of
poor people themselves, but also from advances in conceptual thinking about
development.14 It is clear that the various dimensions of poverty are related,
and that income growth generally leads to strong progress in the non-income
dimensions of poverty as well. It is also clear, however, that direct action taken
to reduce poverty in these other dimensions can accelerate the reduction of
both income and non-income poverty. Aid policy is beginning to reflect these
new understandings.
Levels of development assistance are small compared with both other finan-
cial flows and the scale of the challenge at hand. Development aid totaled about
US$54 billion in 2000, for example. This was only one-third as much as foreign
direct investment (FDI) in developing countries (US$167 billion), which itself
was only a small fraction of total investment (nearly US$1.5 trillion). Similarly,
although the World Bank is the world's largest external provider of assistance
in the education sector, it typically provides less than US$2 billion in direct
assistance for education each year.15 By comparison, annual public spending on
education in the developing world totals more than US$250 billion. Given this
discrepancy in scale, even if the World Bank were to greatly increase its lending
in the sector from around 1 percent to 2 percent, its effectiveness would have to
Aid 125
come primarily through catalyzing institutional development and policy change
in education rather than through resource transfer alone.
Since, in comparison with domestic investment and government expendi-
tures, aid flows are typically small and should not be viewed as a permanent
source of finance, the key challenge is to ensure that they support systemic
change, introducing ideas and improving practices that increase the overall size
of the resources available for growth and poverty reduction. These indirect
effects of aid are difficult to measure, however, and seeking attribution may
undermine government leadership and harmonization with other donors.
Measuring aid effectiveness is thus necessarily focused on its direct effects.
However, because aid flows are relatively small, their direct effects in terms of
income increases or reductions in mortality will often be swamped by other
factors. For this and the reasons outlined in the next section, evaluating the
impact of aid is extremely complex, although vital in order to enhance its effec-
tiveness and create a virtuous cycle of greater willingness to provide aid.
The Multifaceted Impact of Aid
The complexity of social and economic change means that the impact of for-
eign aid cannot be easily separated from other factors. Countries themselves
bear most of the burdens of development, and they rightly claim credit when
development succeeds. Assistance works best and can be sustained only when
the recipients are strongly committed to development and in charge of the
process. In addition, successful projects that draw on foreign assistance in
their early stages may later become self-sustaining and serve as sources for
lessons that can be applied elsewhere without any foreign involvement at all.
For these and other reasons, the positive impact of ODA can be very large.
Nevertheless, identifying cause and effect and attributing outcomes to par-
ticular actions is often difficult.16 Furthermore, any excessive attempt to claim
credit for the successes of foreign aid can devalue the idea and practice of part-
nership and local leadership. Successful development strategies and actions
generally depend on strong country ownership as well as good partnership
among donors. This makes it difficult, even counterproductive, for any exter-
nal actor to claim full credit for a reform or project.
When all aid is lumped together, some analyses have found no clear rela-
tionship between aid and growth or poverty reduction.17 But not all aid is
aimed directly at poverty reduction, nor has aid always been provided in ways
that will maximize growth. Moreover, because aid is often provided to help
countries cope with external shocks, even if aid is reasonably well designed
and allocated--and thus effective in helping the poor--the positive impact of
such aid may be obscured by the magnitude of the shocks.
126 Globalization for Development
Kinds of Aid: Disaster Relief and Transition
Disaster relief, for example, is not aimed directly at long-term poverty reduc-
tion and, thus, it is no surprise that such aid is not correlated with that result.18
However, it does achieve its goal of helping to avert famine or assisting coun-
tries to recover from natural disasters. Similarly, large amounts of aid were
directed at supporting the transition in Eastern Europe and Central Asia for
both political and economic reasons. There, the mandate in the early 1990s was
explicitly to help transform these countries into market economies, rather than
to focus directly on reducing poverty.
In addition to these concerns with transition, donors initially placed too
much emphasis on the role of what were often isolated projects, neglecting
the quality of the overall country environment for growth--a mistake that
adjustment (or policy-based) aid was intended to overcome. Finally, as men-
tioned above, aid was sometimes allocated for pure strategic reasons, with
growth and poverty reduction in these cases being distinct secondary con-
cerns, if indeed they were concerns at all. Given this diversity of motives, it is
not surprising that aid did not always have the direct effects of spurring
growth and reducing poverty.19
Kinds of Aid: Adjustment Programs
The adjustment programs that came into their own in part in response to the
severe macroeconomic imbalances of the 1970s, including those that were the
result of oil shocks, had their own problems. Donors incorrectly believed that
conditionality on loans and grants could substitute for country ownership of
reforms. Too often, governments receiving aid were not truly committed to
reforms. Moreover, neither donors nor governments focused sufficiently on
alleviating poverty in designing adjustment programs.20 In the late 1970s and
early 1980s, the pendulum in leading donor countries swung to the new poli-
cies of Ronald Reagan in the United States, Margaret Thatcher in the United
Kingdom, and Helmut Kohl in the Federal Republic of Germany. This was
reflected in the World Bank by a new emphasis on "getting the prices right" and
the articulation of the Washington Consensus, and the aid community focused
on macroeconomic reform in developing countries.21 While it was necessary to
achieve macroeconomic stability as a prerequisite for sustainable growth and
poverty reduction, both donor and recipient countries underestimated the
importance of governance, of institutional reforms, and of social investments
as a complement to macroeconomic and trade reforms. Prescriptions for reform
were too often formulaic, ignoring the central need for country specificity in the
design, sequencing, and implementation of reforms.22
Aid 127
As a result, weak governance and institutions reduced the amount of pro-
ductivity growth and poverty reduction that could result from the macro-
economic reforms. Many of these factors came together in Africa, contributing
to the lack of progress in the region. There are many causes to slow develop-
ment in Africa, including poor domestic policies and institutions and weak
commitment to reform, but too often aid did little to improve the situation and
in some cases even worsened it. The notable case of Zaire is discussed in box 5.1.
Rethinking Development Models and the Role of Aid
During the 1990s, a rethinking of development models and the role of aid
began. This was facilitated by a combination of four developments.
First, the end of the Cold War reduced the geopolitical pressures on aid
agencies.
Second, there was an increasing recognition of the successes of India,
China, and other developing countries that had achieved macro balance
BOX 5.1 Aid in Zaire
I
f there is a worst case of geopolitical aims undermining the effectiveness of foreign aid, it may be
Zaire (now the Democratic Republic of Congo) under President Mobutu Sese Seko, who ruled from
1965 to 1997. Mobutu was primarily motivated by amassing his own personal fortune, which
peaked in the mid-1980s at US$4 billion, even as GNP per capita fell from US$460 in 1975 to US$100
in 1996. Domestic policies were either nonexistent or bad, and private sources of credit consequently
disappeared by the mid-1980s. However, with its huge size and strategic location, Zaire was seen as a
buffer against the spread of communism in southern and central Africa. Consequently, both bilateral
and multilateral aid began to fill the gap as private credit dried up. Between 1960 and 2000, donors
disbursed more than US$10 billion in aid to Zaire, with the bulk of this beginning in the 1980s.
Failure to pay adequate attention to corruption and wasteful use of funds severely under-
mined the effectiveness of this foreign aid. Indeed, total capital flight from the country has been
estimated by Ndikumana and Boyce (1998) to be US$12 billion in real 1990 dollars, and Trans-
parency International estimates that US$5 billion was stolen by Mobutu himself. It would be hard
to argue much was achieved in Zaire, either in economic or social terms, as a result of the aid.
The result has been increasing skepticism in the donor countries that aid is effective. Well over
half of respondents in successive polls believe that aid is wasted, as indeed it often was when it was
not aimed at poverty reduction. For aid to lead to poverty reduction, three things are necessary:
It must aim for poverty reduction rather than geopolitical or other objectives.
It must go to countries where poor people live.
It must go to countries whose governments are committed to the eradication of poverty.
Sources: Burns, Holman, and Huband 1997; Ndikumana and Boyce 1998; Financial Times, October 13, 2004; and Goldin,
Rogers, and Stern 2002; Transparency International 2004.
128 Globalization for Development
and sustained growth while adopting their own particular development
models.23
Third, mounting evidence suggested an apparent failure of orthodox
adjustment models adopted, albeit reluctantly, by African and other
highly indebted countries, as seen by the lack of positive growth and
poverty outcomes.
Finally, as discussed in chapter 7, a growing body of analytic literature
highlighted the importance of the need for a more comprehensive
approach to development and wider understanding of poverty, focusing
on human capital (education, health) and physical capital (infrastruc-
ture) as well as institutions, governance, and participation.24
As discussed in chapters 1 and 2, the understanding that poverty is about more
than income leads to the recognition that growth is not the only determinant of
poverty reduction. Social indicators--health and education--improved far
faster in all developing countries during the 20th century than would have been
expected, given the rate of income growth these countries experienced. Most
countries have made major progress in increasing educational attainment and
health outcomes by targeting these goals directly and by applying new knowl-
edge and technologies to them specifically, rather than just waiting for the
effects of income growth to improve these indicators. At every level of income,
infant mortality fell sharply during the 20th century. For example, a typical
country with per capita income of $8,000 in 1950 (measured in 1995 US dol-
lars) would have had, on average, an infant mortality rate of 45 per 1,000 live
births. By 1970, a country at the same real income level would typically have had
an infant mortality rate of only 30 per 1,000, and by 1995, only 15 per 1,000.
Similar reductions occurred all along the income spectrum, including in the
poorest countries.
The improvements in social indicators have been remarkable by historical
standards. Life expectancy in developing countries increased by 20 years over
a period of only 40 years, as it increased from the mid-40s to the mid-60s. By
comparison, it probably took millennia to improve life expectancy from the
mid-20s to the mid-40s. Literacy improvements have also been remarkable:
whereas in 1970 nearly two out of every four adults were illiterate, now it is
only one out of every four.
These advances in education and health have greatly improved the welfare
of individuals and families. Not only are education and health valuable in them-
selves, but they also increase income-earning capacity. Where macroeconomic
analyses of the growth effects of education have been somewhat ambiguous, the
microeconomic evidence of the returns to education is overwhelming and
Aid 129
robust.25 Research suggests that each additional year of education increases the
average individual worker's wages by at least 5 to 10 percent.26 Educating girls
and women is a particularly effective way to raise the human development lev-
els of children. Mothers who are more educated have healthier children, even
at a given level of income. They are also more productive in the labor force,
which raises household incomes and thereby increases child survival rates--in
part because, compared with men, women tend to spend additional income in
ways that benefit children more.27
The Importance of Public Policy
These trends make it clear that public policy matters. As we discuss in chapter
7, government has a role not only in ensuring delivery of good basic services
in health and education, but also in ensuring that technology and knowledge
is spread widely through the economy. The dramatic improvement in life
expectancy at a given income level is attributable to environmental changes and
is the result of public health actions. The control of diarrhea-related diseases,
including the development of oral rehydration therapy to reduce child mortal-
ity, is one example; the education of women was an important component of
these efforts. Smallpox eradication, made possible through a combination of
advances in public health research and effective program management, is
another example of a successful 20th century public health effort.28
The statistical evidence shows that large-scale financial aid can generally be
used effectively to reduce poverty when reasonably good policies are in place.29
In recent years, donors have increasingly acted on these findings by tailoring
support to local needs and circumstances. Thus, the balance of support has
moved toward providing large-scale aid to those who can use it well and focus-
ing on knowledge and capacity-building support in other countries. This has
been reflected in greater selectivity and coordination in lending on the part of
aid agencies, shifting resources toward governance and institutions, empha-
sizing ownership, and making room for diverse responses to local needs. These
new approaches and procedures have begun to pay off. However, it is clear that
there is still much to learn: for example, more work is needed on the question
of how best to catalyze and support reforms and institution-building in coun-
tries with very weak policies, institutions, and governance.
Collier, Deverajan, and Dollar (2001) and Collier and Dollar (2001) sought
to quantify the extent to which policies matter for aid effectiveness. Their analy-
sis claims that in 1990, countries with worse policies and institutions received
US$44 per capita in ODA from all sources (multilateral and bilateral), while
those with better policies received less: only US$39 per capita. By the late 1990s,
the situation was reversed: better-policy countries received US$28 per capita,
130 Globalization for Development
or almost twice as much as the worse-policy countries (US$16 per capita). As
a result, the poverty-reduction effectiveness per dollar of overall ODA has
grown rapidly. In 1990, a one-time aid increase of US$1 billion allocated across
countries in proportion to existing ODA would have permanently lifted an
estimated 105,000 people out of poverty; but by 1997�8, that number had
improved to 284,000 people lifted out of poverty.30 In other words, the esti-
mated poverty-reduction productivity of ODA nearly tripled during the 1990s.
Similar lines of inquiry (for example, Collier and Dollar 2002) suggest that
reallocating existing levels of aid more effectively could double the numbers of
people lifted out of poverty by these flows.
Why would the overall environment matter so much in determining the
effectiveness of ODA? The first reason is very straightforward: policies and
institutions affect project quality. For example, a major reason for the dramatic
decline in measured World Bank project outcomes in the 1970s and 1980s was
the deterioration in policy quality and governance in many borrowing coun-
tries. No matter how well designed, a project can easily be undermined by high
levels of macroeconomic volatility or of government corruption.
The second reason is more subtle. Even if a project does seem to succeed--
based on narrow measures of economic returns and successfully attaining
project objectives--the actual marginal contribution of aid funneled through
that project may be small or even negative. This is because government re-
sources are often largely fungible: money can be moved relatively easily from
one intended use to another. Thus if donors choose to finance a primary edu-
cation project, displacing local money that would have been used for educa-
tion, that local money could then be shifted to less productive purposes, such
as military spending. In a country with poor public expenditure management,
the displaced money could even be diverted to the personal uses of corrupt
officials. In this case, the indirect but very real effect of aid could be to pro-
mote corruption.31
Should we then use only policy and institutional quality as measures in deter-
mining aid flows? Should countries with poor policy and poor institutional
quality receive no aid at all? This would probably be too rash a conclusion.
Recent research by Clemens, Radelet, and Bhavnani (2004) takes an entirely dif-
ferent approach. Instead of focusing on the different policy and institutional
characteristics of recipient countries, they focus on the characteristics of differ-
ent types of aid flows. Importantly, they consider only what they term "short-
impact" aid, which includes budget and balance of payments support,
infrastructure investments, and aid for productive sectors such as agriculture
and industry. In contrast to previous studies, they find a strong impact of aid
on growth (and thus on poverty reduction, at least to some extent) regardless
Aid 131
of institutions and policies.32 In light of such evidence, it is necessary to be
cautious and avoid a new fadism or herd behavior in the reallocation of aid
flows to a small group of countries that meet the criteria. Timely interventions
to support reform efforts and to avert famines and other crises remain a vital
function of aid.
The above considerations suggest that aid can indeed be very productive.
Evidence also suggests that developing countries have never as a group been
better able to absorb distributed aid. Additionally, aid agencies have never been
better able to disburse aid more effectively. Remarkably, however, as discussed
above, although there is virtual unanimity that aid effectiveness has improved,
the amount of aid given by rich countries as a share of their income has
declined. Since 2001, this trend has reversed, but even optimistic predictions
indicate that aid will only account for 0.30 percent of OECD donors' income
in 2006, down from 0.33 percent in 1992 but up from the trough of 0.22 percent.
Improving the Effectiveness of Aid
As we have seen, the development community's understanding of both devel-
opment and poverty has evolved in some significant ways. Most importantly,
it is now widely accepted that poverty reduction efforts should address poverty
in all its dimensions--not only lack of income, but also the lack of health and
education, vulnerability to shocks, and poor peoples' lack of control over their
lives.33 This conception of poverty can call for different approaches than those
used in the past. Examples of these different approaches include an increased
focus on public service delivery to vulnerable groups and greater attention to
early disclosure of information that poor people can use.
As we discuss in chapter 7, experience has shown that neither the central
planning approach followed by many countries in the 1950s and 1960s nor
the minimal-government, free-market approach advocated by many aid
agencies in the late 1970s and the 1980s will achieve these development and
poverty alleviation goals. Most effective approaches to development will be
led by the private sector, but they need to have effective government to pro-
vide the governance framework, to assist with or provide physical infrastruc-
ture, to invest in education and health, and to ensure the social cohesion
necessary for growth and poverty reduction.34 Institutional development has
too often been neglected in past policy discussions, but it is now recognized
to be essential to sustained poverty reduction. Although a number of key
principles for effective development are clear, there is no single road to fol-
low. Countries must devise their own strategies and approaches, appropriate
for their own country circumstances and goals.
132 Globalization for Development
The most successful development assistance will have effects that rever-
berate far beyond the confines of the project itself, either because the ideas in
the project are replicated elsewhere or because the intervention has helped
institutionalize new approaches. As noted above, levels of aid are small rela-
tive to the private capital and public resources that it can leverage. Therefore,
aid's largest impact will come through the effects of such demonstration and
institution-building. These wider or deeper effects of aid are far harder to
measure than its direct effects.
China, India, Mozambique, Poland, Uganda, and Vietnam are all exam-
ples of countries where, within the past two decades, policy and institutional
reforms have sparked an acceleration of development. In each of these cases,
the country and its government have been the prime movers for reform, and
each country mapped out its own development strategy and approach. Their
experiences do have some common features--most notably an increase in
market orientation and macroeconomic stability--and all have seen their
growth powered by private sectors (both farms and firms) that have begun to
thrive. Although these countries did act along those broad guidelines on devel-
opment, none of them closely followed any external blueprint for development
offered by international institutions and foreign donors.
Yet in all of these cases, development assistance from many sources has sup-
ported the transformation. In some cases, advice was more important than
lending. In China, for example, aid flows have been dwarfed by inflows of pri-
vate capital. But development assistance helped pave the way for private sector
growth and international integration. For example, external analysis and
advice was provided to help China open its economy to investment, unify its
exchange rate, and improve its ports early in its transition period.
The converse is also clearly true. There are many examples of countries that
have received very large volumes of aid over time, with little result in terms of
poverty reduction. A case in point, discussed in box 5.1, is the Democratic
Republic of Congo (formerly Zaire). Also, donor-supported progress on
human development indicators in a number of countries has been reversed by
the AIDS epidemic or by conflict. In Botswana, which otherwise has a highly
successful economy, AIDS reduced life expectancy from 57 years to 39 years in
the 1990s. In Sierra Leone, conflict and its aftermath have kept life expectancy
at around 35 years. We take up the issues of both HIV/AIDS and conflict in
chapter 8 when we present our policy agenda.
Commitment of the leadership is one of the most critical conditions for
ensuring the success of reforms, whether they are in the area of the macro-
economy or in combating epidemics such as HIV/AIDS. Evidence has shown
that policy change is driven by the country's own initiative, capacity, and polit-
Aid 133
ical readiness rather than by foreign assistance and associated loan condition-
ality.35 Relying heavily on conditionality is ineffective for several reasons:
It can be difficult to monitor whether a government has in fact fulfilled
the conditions, particularly when external shocks muddy the picture.
Governments may revert to old practices as soon as the money has
been disbursed.
When assessments are subjective, donors may have an incentive to
emphasize progress to keep programs moving.
Without country ownership, adjustment lending has not only failed to sup-
port reforms, but may have contributed to their delay. For example, case stud-
ies of C�te d'Ivoire, the Democratic Republic of Congo, Kenya, Nigeria, and
Tanzania all concluded that the availability of aid money in the 1980s post-
poned much-needed reforms.36
In practice, country commitment has often proved difficult to assess. For
example, a government may be seriously committed to a reform program but
subsequently find it impossible to implement key measures, sometimes for
reasons not fully under the government's control. In other cases, the govern-
ment may be interested primarily in the funds, not in the reforms on which the
funding is conditional. For this reason, the government's track record, as mea-
sured by the quality of the policies and institutions it has already put in place,
is often a good indicator of its commitment to reform. That said, as discussed
in the previous section, some types of aid might be effective even with a lim-
ited degree of reform. For example, the delivery of aid to eliminate school fees
or through providing an incentive to attend school has the potential, already
in progress, to educate millions more African children than are educated
today.37
Assisting Weak States
If the conclusion of the past 50 years of aid is that aid (and debt relief) should
be allocated to countries with a policy and institutional environment that is
conducive to effective use, what should be done in countries where this does
not exist? Or to put it another way, how can the international community assist
countries where states can be characterized as "weak" or "failed?" Approaches
that work in the typical low-income country may not be appropriate in post-
conflict and weak states, as such states usually lack the governance, institutions,
and necessary leadership for reform. In these circumstances, traditional lend-
ing conditionality has not worked well to induce and support reform.
134 Globalization for Development
Countries with weak or failed states vary widely in their problems and
opportunities. As for the better-performing countries, no single strategy will be
appropriate for all of them. Each has its specific challenges and must look for
unique solutions. Nevertheless, it is useful to distinguish approaches in post-
conflict and weak states from those that will work in countries with better poli-
cies, institutions, and governance.
Approaches for Post-Conflict and Weak States
Large-scale financial transfers are unlikely to work well in post-conflict and
weak states because the absorptive capacity in these environments is quite
limited. Instead, donors should focus on knowledge transfer and capacity-
building to facilitate change. Because of constraints on government capac-
ity, such efforts should concentrate on a limited reform agenda that is both
sensible in economic terms (that is, mindful of sequencing issues--what is
possible to achieve and what should be prioritized) and feasible from a socio-
political standpoint. Only when they develop greater capacity will these coun-
tries generally be able to make good use of large-scale aid. There will often be
a case for using aid to improve basic health and education services. To be
effective, however, funding should probably be directed through channels
other than the central government. This suggests wholesale-retail structures
in which a donor-monitored wholesaling organization contracts with mul-
tiple channels of retail provision, such as the private sector, NGOs, and local
governments. The role of the United Nations and its agencies in emergency
relief and coordination with donors on refugees for funding and provision
of basic services is important and not always sufficiently recognized. The very
least that poor people in dire emergencies should be able to expect is that the
international community demonstrates that it is able to coordinate and act
effectively.
Experience of Sub-Saharan Africa
Improvements in policies and institutions in many Sub-Saharan African coun-
tries, combined with examples of successful poverty reduction in a few coun-
tries, now provide grounds for hope.38 As policies in many Sub-Saharan
African countries improved, so did economic performance: GDP growth rates
rose to an average of 4.3 percent in 1994�8, or nearly 2 percentage points
higher than it was in the 1980s. A few countries, such as Mozambique and
Uganda, have seen especially strong returns to reform. These developments
have important implications for aid allocation: although not every country in
Africa could absorb an increase in large-scale aid (for reasons described in the
previous section), as the effectiveness of aid rises, so too should the amount of
Aid 135
aid allocated to the region. Instead, African countries with good policy saw a
substantial decline in aid flows in the 1990s, with aid per capita falling by
roughly a third, even as prices for export commodities also fell sharply. Annual
per capita aid in Africa is currently well below the levels of 20 years ago, while
policies are greatly improved, both in the recipient and in the donor countries.
For these reasons, much more aid than is currently given to well-performing
countries can be effectively utilized.
Aid for Post-Conflict Countries in Need of Reform
Although aid effectiveness requires that large-scale financial assistance be allo-
cated to poor countries that have demonstrated the capacity to use aid well,
the international community cannot simply abandon people who live in coun-
tries that lack the policies, institutions, and governance necessary for sus-
tained growth and for effective use of aid. Poor people in these countries are
among the poorest in the world and face the greatest hurdles in improving
their lives. Experience suggests that current technical assistance for capacity-
building efforts, as well as the promise of greater financial assistance if poli-
cies, institutions, and governance improve, is often insufficient to enable these
countries to initiate and sustain reform.
Of the two or three dozen countries with the poorest institutions and poli-
cies, only a few have made major improvements in their environments for
growth and poverty reduction over the past decade, in contrast to the broad
improvements in policies in other developing countries. Ethiopia, Mozambique,
and Uganda are unusual among former post-conflict countries in having
achieved significant progress. Other post-conflict countries have seen little
development progress, and the performance of the development agencies
lending portfolio in this group has been relatively poor. Projects have failed
there at double the rate for other countries.
Innovative Aid Programs
Despite huge advances in science and in the understanding of the aid and
development processes, there is much that we still do not know. Perhaps
most important, we do not understand fully how to help improve institu-
tions and governance, especially in the poorest countries where the needs are
greatest.39 And we are still learning how best to deal with pressing cross-border
issues--such as disease, environmental problems, and political instability--
that threaten development.
Global development challenges such as conflict, loss of biodiversity, defor-
estation, climate change, and the spread of infectious diseases cannot be han-
136 Globalization for Development
dled solely by individual countries acting at the national level. They require
sustained, multilateral action. As the number and scope of global challenges
have grown, so too have the number of actors involved, creating a need for new
partnerships and networks among stakeholders. Private charities have become
a force in the areas of environment and health. Pharmaceutical companies
have become donors to global health initiatives. As discussed in chapter 4, pri-
vate capital flows to developing countries (especially in the form of FDI) now
dwarf official development assistance. The search for international com-
mon ground, together with a variety of formal and informal international
agreements, have led to new alliances and revised roles for a range of institu-
tions that include the Global Environment Facility, the World Trade Organi-
zation, and the various UN bodies. No single actor can speak to all of these
challenges, but efforts to address them have been growing rapidly.
According to the UN Secretary General's office, hundreds of new pro-
grams to address issues of global scope are being created each year. Although
multinational initiatives are required, they often must be linked to country
actions. Many global initiatives address problems that have both important
domestic effects and major cross-border spillovers, such as financial conta-
gion, the spread of AIDS, ozone depletion, and toxic pollution. Other global
problems call for increasing the efficiency of resources spent at the country
level through the use of science and technology available only in the richer
countries or globally supported research centers. In most cases, comple-
mentary national efforts in developing countries are central to either achiev-
ing objectives of the global programs (such as biodiversity conservation,
which often builds on local programs) or ensuring developing countries'
access to their benefits (such as agricultural productivity, where new crop
varieties must be matched to locally adapted cultivation practices). Here, we
take up just three examples of effective global programs, which highlight the
benefits of global action on aid.
Onchocerciasis Control Program (OCP)
The first program addresses riverblindness or onchocerciasis, a disease wide-
spread in Africa. It causes blindness, disfigurement, and unbearable itching in
its victims, and has rendered large tracts of farmland in Africa uninhabitable.
The Onchocerciasis Control Programme (OCP) was created in 1974 with two
primary objectives. The first was to eliminate onchocerciasis as a public health
problem and as an obstacle to socioeconomic development throughout an
11-country area of West Africa (Benin, Burkina Faso, C�te d'Ivoire, Ghana,
Guinea, Guinea-Bissau, Mali, Niger, Senegal, Sierra Leone, and Togo). The
second objective was to leave participating countries with the capacity to main-
Aid 137
tain this achievement. OCP was sponsored by four agencies: the United Nations
Development Programme (UNDP), the Food and Agriculture Organization
(FAO), the World Bank, and the World Health Organization (WHO).
OCP has now halted transmission and virtually eliminated prevalence of
onchocerciasis throughout the 11-country subregion containing 35 million
people. About 600,000 cases of blindness have been prevented, 5 million years
of productive labor added to the economies of 11 countries, and 16 million
children born within the OCP area have been spared any risk of contracting
onchocerciasis. In addition, control operations have freed up an estimated
25 million hectares of arable land that is now experiencing spontaneous set-
tlement. OCP has been hailed as one of the most successful partnerships in
the history of development assistance.40 As summarized by Benton and oth-
ers (2002), "Through a combination of persistence, dedication, and happen-
stance, the Onchocerciasis Control Programme evolved from an ambitious
plan to a sterling example of disease control" (pp. 8�9).
Given this success, the program has extended operations to what is now
called the African Program for Onchocerciasis Control. This program, begun
in 1995, extends the OCP to the remaining 19 infested African countries. This
effort involves establishing networks of community-directed drug distributors
(CDD) that can potentially be used to combat other health problems in the
region. Again, as summarized by Benton and others (2002), "What began as a
top-down, vertical, disease-control programme has evolved into a bottom-up,
integrated approach that couples strong regional co-ordination with the
empowerment of local communities to address not only onchocerciasis but,
potentially, many other health problems" (p. 12). The potential of the CDD to
help combat HIV/AIDS is particularly of interest here.
The Green Revolution
Sometimes building on success involves helping to diffuse ideas across coun-
tries and regions through partnership with other development actors.41 The
Green Revolution, which began in South Asia in the 1970s and spread to Africa
and Latin America, has led to impressive gains in production of basic food
crops across the developing world, as shown in table 5.5. Between 1970 and
1997, yields of cereals in developing countries rose more than 75 percent,
coarse grains 73 percent, root crops 24 percent, and pulses nearly 11 percent.
International aid agencies supported this sweeping change through its lending
for irrigation, rural infrastructure, and agriculture, and by mobilizing support
with other donors through the Consultative Group for International Agricul-
tural Research, better known by its acronym, the CGIAR. This is a second
example of an effective aid program.
138 Globalization for Development
TABLE 5.5 Yields of Major Food Crops [kg/ha] in Developing Nations, 1970�2004
Period Cerealsa Coarse grainb Root cropsc Pulsesd
1970�4 1,522.1 1,112.8 9,393.7 586.7
1975�9 1,745.4 1,308.6 10,009.1 611.8
1980�4 2,055.5 1,500.1 10,539.7 620.6
1985�9 2,257.1 1,561.4 10,945.0 633.2
1990�4 2,488.7 1,756.8 11,228.4 638.6
1995�9 2,711.0 1,955.9 11,811.6 656.9
2000�4 2,798.6 2,040.7 12,135.9 684.8
Changee +83.86% +83.38% +29.19% +16.72%
a. Wheat, rice, other.
b. Corn, barley, rye, oats, millet, sorghum, other.
c. Potatoes, sweet potatoes, cassava, taro, yams.
d. Dry beans, broadbeans, dry peas, chickpeas, cowpeas, pigeon peas, lentils, other.
e. Percentage change from 1970-4 to 2000-4.
Source: FAO Statistics (http://www.fao.org).
The CGIAR, created in 1971, now includes 16 international agricultural
research centers. The 8,500 CGIAR scientific staff members work to develop
and produce in the following areas:
higher-yield food crops
more productive livestock, fish, and trees
improved farming systems
better policies
enhanced scientific capacity in developing countries.42
The knowledge generated by CGIAR--and the public- and private-sector orga-
nizations that work with it as partners, researchers, and advisors--has paid poor
consumers handsome dividends in terms of increased output and lower food
prices. More than 300 varieties of wheat and rice and more than 200 varieties of
maize developed through CGIAR-supported research are being grown by farm-
ers in developing countries. Food production has doubled, improving health
and nutrition for millions. New, more environment-friendly technologies
developed by CGIAR have released between 230 and 340 million hectares of
land for cultivation worldwide, helping to conserve land and water resources
and biodiversity. CGIAR's efforts have helped to reduce pesticide use in devel-
oping countries. For example, control of cassava pests alone has increased the
value of annual production in Sub-Saharan Africa by US$400 million.
Aid 139
Yet the CGIAR must now meet new challenges. Agriculture research tech-
nology has changed, giving prominence to molecular biology and genetic
approaches. More robust intellectual property rights have produced an explo-
sion in private investment for agricultural research. These changes pose new
challenges to the CGIAR size, organization, and approach as does the urgent
need to lift agricultural productivity in Africa. The Commission for Africa
(2005) notes that US$340 million a year is required by the CGIAR to help off-
set Africa's agricultural productivity deficit.
African Economic Research Consortium (AERC)
A third example of a successful global program is the African Economic Re-
search Consortium (AERC), which is less well known than the first two. Like
the river blindness control program, the AERC is a regional program focused
on addressing one of Africa's greatest needs: strong domestic capacity for pol-
icy analysis and formulation. Recent development experience shows clearly
that development strategies must be "owned" by the countries that imple-
ment them, not dictated by outside donors. But the ability to participate in
design and decision making that is necessary for ownership depends on local
capacity for policy analysis. For this reason, capacity building is an essential
element of development assistance.
The international nature of the AERC has made it stronger by supporting
a critical mass of researchers and academic institutions, and by encouraging
the sharing of experiences across countries. Its mission statement has as its
principle objective "to strengthen local capacity for conducting independent,
rigorous inquiry into problems pertinent to the management of economies
in Sub-Saharan Africa." Established in 1988, this initiative now covers 22
countries.
Established by six international and bilateral agencies and private founda-
tions, AERC is now funded by 15 donors, including foundations, governments,
and multilateral organizations. It has a budget of approximately US$7 million
a year. The AERC conducts research in-house and administers a small grants
program for researchers in academia and policy-making institutions.43 In addi-
tion to its research program, the AERC began in 1992 to administer a two-year
collaborative Masters of Arts (MA) program in economics with students and
faculty from 20 universities in 15 Sub-Saharan African countries. The program
has produced about 800 MA graduates in economics to date, and 200 more stu-
dents now participate in this program. Many graduates of the AERC have gone
on to research and teaching posts throughout the region, and others to high-
level positions in African central banks and finance ministries.
140 Globalization for Development
Easing the Burden of Debt
As we related in chapter 4, debt financing has been an important part of financ-
ing in developing countries for centuries and no reading of economic history
is complete without reference to the debt crises of previous eras. The first recent
major debt crisis to take place, and in which aid policies included significant
debt components, occurred when an oil-price shock and global recession hit
in the late 1970s and early 1980s. Commodity prices turned sharply against the
non-oil commodity exporters, making it difficult for them to pay for both
imports and debt service. While interest rates were rising, official lending
increased to help cushion the effects of the shock, and to substitute for finance
from commercial sources, which for most borrowing countries evaporated.
Components of Foreign Debt
For all countries, including developing countries, any deficit on the current
account (such as through trade deficits) that is not made up for by net factor
receipts, transfers such as foreign aid, FDI, or a reduction in foreign reserves
necessarily translates into foreign debt as the country sells financial assets of
various kinds to generate an offsetting surplus on the capital account.44 It
sometimes makes sense for developing countries to engage in short-term bor-
rowing of this kind to cover short-term current account deficits.
Build Up of Unsustainable Debt in Highly Indebted Countries
Increasingly from the 1950s, developing countries had access to more long-
term borrowing, which in most instances is better suited to their needs. How-
ever, where such borrowing is not used to make productive investments that
increase output of the tradable sectors of the economy (which increase ex-
ports relative to imports), current accounts will persist indefinitely, and debt
will build up to unsustainable levels.
In many of the highly-indebted countries, the expected improvements in pol-
icy performance did not materialize, whether because of insufficient commit-
ment by borrowers or because the design of the adjustment had not paid enough
attention to the political economy of reform, governance, and corruption or to
social concerns. In other cases, reforms were implemented but did not lead to the
expected supply and growth response. As a result, the GDP average growth rate
between 1980 and 1987 of the 33 countries that were characterized in the mid-
1990s as the most severely indebted low-income countries was just 1.9 percent--
which translated into an income decline in per capita terms. The cumulative
effect of the shock and economic decline was that a debt burden that had
been reasonable became unsustainable. Between 1982 and 1992, the debt-
to-export ratio of the 33 most highly indebted countries rose from 266 to
620 percent.45
Aid 141
FIGURE 5.5 External Debt of Developing Countries
600 3000
External debt per capita
External debt (current US$)
500 2500
Current US Dollars per Capita
400 2000
US Dollars billions
300 1500
200 1000
100 500
0 0
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
Source: World Bank, World Development Indicators 2006.
The Debt Crisis
The recent history of external debt is traced in figure 5.5, both in total terms
(solid line and right-hand axis) and in per capita terms (vertical bars, left-hand
axis). Significant increases in both measures began in the mid-1970s. As reported
in Reinert (2005), "Beginning in 1976, the IMF began to sound warnings about
the sustainability of developing-country borrowing from the commercial bank-
ing system. The banking system reacted with hostility to these warnings, arguing
that the Fund had no place interfering with private transactions" (p. 259).
The IMF's warnings became clear when the "debt crisis" began in 1982. The
initiating event was Mexico's announcement that it would stop servicing its for-
eign currency debt. Within months, the debt crisis had spread to Brazil and
Argentina. In 1982, the total external debt of developing countries was approx-
imately US$750 billion and per capita external debt was approximately US$200.
As can be seen in figure 5.5, both total and per capita external debt continued
to increase significantly through 1999 to approximately US$2,400 billion and
US$514 per capita. Indeed, between 1990 and 2002, the total external debt for
developing countries increased by approximately US$1 trillion, the bulk of
which was for middle-income countries. These continued debt burdens in the
developing world negatively affect both growth prospects and the financing of
basic public services. Both of these, in turn, negatively affect poverty in all its
dimensions.
142 Globalization for Development
International Debt Relief Efforts: HIPC Initiative
Since the late 1980s, the international development community has attempted
to address the problem through a variety of debt-reduction mechanisms. In
1996 it went a step further, creating the Heavily Indebted Poor Countries
(HIPC) debt relief initiative to deepen debt relief for poor countries suffering
from unsustainable debt burdens. The initiative aims to increase the effective-
ness of aid by helping poor countries achieve sustainable levels of debt while
strengthening the link between debt relief and strong policy performance.
Forty-two countries, primarily from the Sub-Saharan Africa region, are iden-
tified as potentially eligible to receive debt relief under this initiative. As of
October 2004, 27 countries had met the required governance and other stan-
dards and are receiving debt relief that will amount to about US$54 billion
over time.46 Debt-service-to-export ratios have been reduced for this set of
countries to an average of 10 percent.47
Not only does HIPC reduce debt overhang, it also supports positive
change toward better poverty reduction. Debt relief under the HIPC ini-
tiative is intended for countries that are pursuing effective poverty reduc-
tion strategies as ascertained by the World Bank and the IMF; both better
public expenditure management and increased social expenditures are crit-
ical elements of this affirmation of effectiveness (www.worldbank.org/debt).
For the countries that have received HIPC relief, the ratio of social expendi-
tures to GDP is projected to increase significantly. The challenges are to
ensure that these expenditures translate into better outcomes in the social sec-
tor; that vital infrastructure improvements also increase; and, more impor-
tant, that the broader policy environment continues to improve and support
growth and poverty reduction.
The HIPC experience has demonstrated that debt relief can work. It is clear,
however, that the amounts allocated within HIPC--the debts that are written
off--are insufficient to put all low-income countries on a sustainable debt repay-
ment path and to ease the pressure on their debt servicing sufficiently to allow
an accelerated reallocation of funds toward required investments in infrastruc-
ture, education, health, and other poverty reduction expenditures. A new frame-
work for debt sustainability was therefore needed to match the need for funds
in low-income countries with their ability to service debt. This requires sub-
stantial increases in the funds available. The July 2005 commitment at the Gle-
neagles, Scotland, summit of the Group of Eight leaders to allocate US$40 billion
for additional debt relief is a significant step forward. The Group of Eight con-
firmed that these funds will be "additional" to previous commitments to
increase aid (including to the International Development Association) and that
Aid 143
finance that would go to the better performers who had paid their debts would
not be cannibalized to write off the debts of the eligible HIPC countries.
While the accelerated cancellation of debt has been widely welcomed, there
are concerns regarding the moral hazard and incentive effect of debt write-offs.
For those countries that have diligently repaid their debts or carefully con-
strained their debt burden, the prospect of additional aid flows being given to
reduce the obligations of those who have been less prudent may seem unfair.
To add to this complexity is the question of the intertemporal nature of debt--
the debts being repaid today typically were incurred by previous generations of
leaders. Many individuals and some current governments in countries where
dictators incurred debts argue that these debts are illegitimate. There are moves
that do not necessarily have government support in a wide range of countries,
including Indonesia, Nigeria, and South Africa to write off what may be termed
illegitimate or "odious" debts, and this precedent has been established for Iraq.48
Without debating the virtues of this position, the key issue is the source of
these additional funds. Global flows, like national flows, need to be sourced and
paid for with additional commitments. In honoring their commitments to
increasing aid, the rich countries need to ensure that funding to meet debt for-
giveness is additional and does not represent a claim on existing or future com-
mitments to other forms of aid. They also need to ensure that all countries that
are able to use aid effectively benefit from additional flows, so that easing the
burden of debt does not come at the expense of poor people in other countries.
The Millennium Development Goals and Donor Coordination
A key driver of the effectiveness of aid flows is that they become more pre-
dictable and that there is harmonization behind country-owned programs. Too
many ministers and civil servants in poor countries spend their time servicing
the needs of donors--from taking visiting dignitaries to visit their pet projects
to meeting the unique audit and reporting needs of the different aid and donor
agencies. In Tanzania, for example, it was estimated that well over a thousand
quarterly reports need to be completed for donors. Aid agencies have a respon-
sibility to ensure that their requirements are harmonized in a set of common
standards and that their demands on countries are focused on ensuring that
the money goes to projects and programs prioritized in national budgets,
rather than to individual projects in localities favored by foreign or domestic
politicians. In addition, donors have a responsibility to ensure that their flows
are predictable, that they agree to multiyear commitments, and that they are
not restricted to contracts or goods and services procured from the donor
country. A visit to virtually any low-income country reveals the carcasses of
144 Globalization for Development
projects and programs initiated through donor pressure and promises and that
have failed through lack of follow-through in funding and maintenance.
The commitment in 2002 by heads of state of both rich and poor countries to
achieving the Millennium Development Goals (MDGs) requires the following,
as set out in more detail in box 5.2:
halving poverty and hunger by 2015
achieving universal primary education
eliminating gender disparity in education
reducing by three-quarters maternal mortality
combating HIV/AIDS and other diseases
halving the proportion of people without access to potable water
a global partnership for development.
This agreement reflected a unique coming together in terms of defining the
problem and the role of different actors. It has given clear common goals to
the international community, and not least to donor agencies and the multi-
lateral institutions, as well as a set of agreed measurable targets and results.
Unfortunately, it is now becoming clear that many or most of these goals will
be missed. Indeed, there is a consensus developing that perhaps only one goal,
that of halving income poverty, will be met at the aggregate global level. To help
meet this and other goals, a set of high-income countries have committed them-
selves to increasing their aid donations to 0.7 percent of GDP. Nearly every rich
country, however, has failed so far to meet this target,49 although Sweden, Den-
mark, Luxembourg, Norway, and the Netherlands by 2004 had allocated over
0.7 percent of their income to aid. It is worth noting that the funds represented
by this 0.7 percent of GDP target are approximately half of what the rich world
spends on agricultural subsidies, so it is not a question of feasibility. It is, rather,
a question of will.50
A New Way Forward
What does this analysis imply about aid flows and poverty? One lesson is that
external resources alone will not be sufficient to ensure that poverty goals are
met. The recipient country's level of commitment and the quality of its poli-
cies and institutions are the primary determinants of progress. Experience and
analysis have taught us that outside aid cannot substitute effectively for these
factors. It can, however, be an effective complement, supporting national
efforts to reduce poverty. A second lesson is that, when a country is committed
to reform and poverty reduction, external support has substantial payoffs.
External support can take several forms including, but not limited to, aid.
Aid 145
BOX 5.2 Millennium Development Goals
T
he Millennium Development Goals are an ambitious agenda for reducing poverty and
improving lives that world leaders agreed on at the Millennium Summit in September 2000.
For each goal one or more targets have been set, most for 2015, using 1990 as a benchmark:
1. Eradicate extreme poverty and hunger
Target for 2015: Halve the proportion of people living on less than a dollar a day and those
who suffer from hunger.
2. Achieve universal primary education
Target for 2015: Ensure that all boys and girls complete primary school.
3. Promote gender equality and empower women
Targets for 2005 and 2015: Eliminate gender disparities in primary and secondary educa-
tion preferably by 2005, and at all levels by 2015.
4. Reduce child mortality
Target for 2015: Reduce by two-thirds the mortality rate among children under five.
5. Improve maternal health
Target for 2015: Reduce by three-quarters the ratio of women dying in childbirth.
6. Combat HIV/AIDS, malaria, and other diseases
Target for 2015: Halt and begin to reverse the spread of HIV/AIDS and the incidence of
malaria and other major diseases.
7. Ensure environmental sustainability
Targets:
Integrate the principles of sustainable development into country policies and programs
and reverse the loss of environmental resources
By 2015, reduce by half the proportion of people without access to safe drinking water
By 2020 achieve significant improvement in the lives of at least 100 million slum dwellers.
8. Develop a global partnership for development
Targets:
Develop further an open trading and financial system that includes a commitment to good
governance, development, and poverty reduction--nationally and internationally
Address the least developed countries' special needs, and the special needs of landlocked
and small island developing states
Deal comprehensively with developing countries' debt problems
Develop decent and productive work for youth
In cooperation with pharmaceutical companies, provide access to affordable essential
drugs in developing countries
In cooperation with the private sector, make available the benefits of new
technologies--especially information and communications technologies.
Source: United Nations Development Programme.
146 Globalization for Development
FIGURE 5.6 Aid and Support for Agriculture as a Share of GDP, 2002
1.6
Agricultural subsidies
1.4
Aid
1.2
Percent of GDP, 2002
1.0
0.8
0.6
0.4
0.2
0
Japan European Union United States All OECD-DAC
countries
Source: OECD-DAC 2004 and OECD 2003, cited in World Bank 2005c.
As we show elsewhere in this volume, an important area in which rich coun-
tries can provide support is through reforms of their own trade policies. The
external environment has a strong influence on the returns to reform in devel-
oping countries. Robust global growth is important, but so is reform of the pro-
tectionist policies of rich countries, which target such areas as agriculture and
textiles and are thus particularly damaging to poor countries. As we reported
in chapter 3, estimates suggest that open market access for poor countries,
combined with other trade reforms, would pull a minimum of 100 million
people out of poverty, as measured by the US$2 per day standard.
Coherence between aid policies and other policies is vital to enhance aid
effectiveness. For example, giving support to small farmers or entrepreneurs
is undermined by shutting them out of the donors' markets or by applying
tariffs that discriminate against processed goods. Similarly, aid donors' sup-
port for health and educational systems is undermined by the recruitment of
teachers, doctors, and nurses to work in the rich countries. Donors' support
for governance reforms and combating corruption is not always matched by
donors' pursuit of their citizens or firms who are complicit in corruption or
siphoning aid funds into donor country bank accounts. Ensuring greater
coherence between aid and other potentially complementary government
policies and actions is important to increase the quality of aid.
Aid 147
Many global development challenges--such as stopping the spread of in-
fectious diseases; building an international trade and financial architecture
that is fair to all countries; and halting deforestation, climate change, and loss
of biodiversity--cannot be handled solely by individual countries. These chal-
lenges require multilateral action: unilateral aid flows and arrangements
cannot deal with some of the most pressing global issues. Aid for multilateral
institutions and objectives, be it aid targeted toward the environment, dis-
eases, agricultural development or trade reform, is an essential complement
to national bilateral aid efforts.
The decline in aid flows over the past decade has come precisely at a time
when the returns on aid have increased sharply. We have summarized the evi-
dence on returns--if countries are willing to take the steps necessary to reform,
then assistance in the form of capacity building, financial assistance, and ana-
lytical support typically has large returns. With continued reform momentum
and steady external support, past experience suggests strongly that developing
countries can extend and deepen the progress of the last half century.
Despite the progress made in the past 50 years, an immense poverty chal-
lenge remains. Some 1.1 billion people still live on less than US$1 per day, and
the challenge will grow as the population of the developing world increases by
another 2 billion in the next 30 years. To address a challenge of these dimensions,
aid will need to have effects far beyond the value of the money alone. This means
that aid must support the frameworks for private economic activity and social
improvements, ensuring that its effects go far beyond any individual project,
and it must contribute to greater capacity and greater knowledge. Continued
learning on the part of both developed countries and other parties in the devel-
opment community is essential to these aims. Aid is a complement to the other
flows we have identified--trade, capital, ideas, and migration--not a substitute.
Aid has never been more effective in supporting growth and poverty reduc-
tion. Much more aid and higher quality aid is needed. At a minimum, doubling
the actual amount of aid--along with untying it to ensure it reflects real needs
rather than disguised efforts to support domestic enterprises in rich countries--
and coordinating its flows to ensure that predictable flows of highly concessional
finance and other resources are mobilized in support of the many governments
that can use it effectively are priorities for a more inclusive globalization.
Notes
1. This chapter draws on joint work with Halsey Rogers and Nicholas Stern. See Goldin, Rogers, and
Stern (2002).
2. For example, in 2002, the leading recipients of ODA among high-income countries were Israel
($754 million), French Polynesia ($418 million), New Caledonia ($324 million), and Slovenia
($171 million). See World Bank (2004d).
148 Globalization for Development
3. For an accessible review, see chapter 14 of Szirmai (2005).
4. Recall that we discussed trade-related capacity building in chapter 3, for example.
5. The restriction of this early form of assistance was emphasized by Kanbur (forthcoming).
6. See, for example, Curtis (2001).
7. A comprehensive review of this era and subsequent decades is provided in Hjertholm and White
(2000).
8. With regard to the ideology column of table 5.2, see also Lindaur and Pritchet (2002).
9. In the case of the IMF, it is worth noting that its resources were not sufficient to significantly
support post-war reconstruction in Europe. Its Articles of Agreement set total drawing rights at
$8.8 billion. By the time the IMF opened for business in 1947, post-war Europe's combined trade
deficit was $7.5 billion. Given the size of this deficit in relationship to the IMF's resources, the
United States had to step in to fill the gap. Through 1951, it provided $13 billion in Marshall Plan
aid to Europe, thus significantly supplementing IMF resources. See Eichengreen (1996).
10. "Point Four" refers to the fourth point in Truman's inaugural address.
11. The Commonwealth members the United Kingdom, Australia, Canada, and New Zealand had
signed the Colombo Plan for aid giving in 1950.
12. See Streeten (1979), for example.
13. OECD (2005), Paris Declaration on Aid Effectiveness, Paris, 2 March 2005.
14. See Sen (1999), for example.
15. The resources that organizations such as the World Bank can possibly provide in support of edu-
cation are dwarfed by the needs of developing countries.
16. See Hansen and Tarp (2000).
17. See, for example, Boone (1996). Note, however, that Hansen and Tarp (2000 and 2001) find the
contrary. For a recent review of the effectiveness of aid, see Clemens, Radelet, and Bhavnani (2004).
18. See Owens and Hoddinott (1998). As Clemens, Radelet, and Bhavnani (2004) note, "This kind of
[disaster] assistance should have a negative simple correlation with growth, as the disaster simulta-
neously causes both low growth and large aid flows. While it is possible that aid might mitigate that
fall in growth, any additional pathway of causation from humanitarian aid to growth is extremely
difficult to detect" (p. 2).
19. Alesina and Dollar (2000) analyzed the pattern of aid flows from the 1970s through the early 1990s.
They concluded that "Factors such as colonial past and voting patterns in the United Nations explain
more of the distribution of aid than the political institutions or economic policy of recipients" (p. 55).
20. Stewart (1995) provides a useful overview of links between structural adjustment and poverty.
For an introduction to structural adjustment itself, see chapter 23 of Reinert (2005).
21. Williamson (2000) provides a very useful overview and assessment of the Washington Consen-
sus. For additional information, see also the discussion of ideas in chapter 7 of this book.
22. Taylor (1993) offered one forceful critique along these lines.
23. Some of these successes have been reviewed in the chapters contained in Rodrik (2003).
24. In the realm of foreign aid, some (but not all) of this new thinking was reflected in World Bank
(1998).
25. See, for example, Psacharopoulos (1985, 1994) and Psacharopoulos and Patrinos (2004).
26. Krueger and Lindahl (1999) summarize the evidence.
27. See Schultz (2002) who notes, "The conclusion of many empirical studies of child development is
that increased schooling of the mother is associated with larger improvements in child quality out-
comes than is the increased schooling of the father. This has been studied with birth outcomes (e.g.,
birth weight), child survival, good nutrition, earlier entry into school, increases in school enroll-
ment adjusted for age, and more years of schooling completed on reaching adulthood" (p. 212).
28. These significant health achievements do hide regional and country divergences. Like income
growth, improvements in health status and life expectancy have not been equally distributed.
The health status and life expectancy of the poorest nations lag behind the rest of the world, and
within countries, the health of the poor is worse than that of the rest of the population. Poverty
is the most important underlying cause of preventable death, disease, and disability; and there
Aid 149
is growing recognition that poor health, malnutrition, and large family size are key determinants
of poverty.
29. See Burnside and Dollar (2000), as well as Collier and Dollar (2002). The Burnside and Dollar
(2000) results have been recently questioned by Easterly, Levine, and Roodman (2004).
30. Poverty is defined here as living on less than US$1 per person per day, adjusted for cross-country
differences in living costs. It must be emphasized that moving people above the poverty line rep-
resents just one effect of the aid, which also helped increase income and other dimensions of
development throughout the economy.
31. The issue of fungibility is taken up in chapter 3 of World Bank (1998).
32. Clemens, Radelet, and Bhavnani note that "The result is robust over a wide variety of specifica-
tions. . . . It holds over various time periods, stands up whether we include or exclude influential
observations, and remains robust when controlling for possible endogeneity of several indepen-
dent variables" (p. 40).
33. This multidimensionality of poverty is embodied in the Millennium Development Goals (MDGs)
adopted by heads of state at a United Nations summit in 2000.
34. Social cohesion or "social capital," as pointed out by Woolcock and Narayan (2000) and Fukuyama
(2002), is an underappreciated element of development. It brings together the realms of culture,
governance, and institutions.
35. See World Bank (1998) and International Monetary Fund (1998).
36. See Devarajan, Dollar, and Holmgren (2001).
37. See Dugger (2004) and chapter 1 of Oxfam (2005). Ethiopia, Kenya, Lesotho, Malawi, Tanzania,
Uganda, and Zambia have all recorded large increases in enrollments with the reduction or abo-
lition of school fees. In many cases, aid has supported these achievements.
38. Additionally, arguments that foreign aid given to weak African states tends to exacerbate problems
appear to be untrue. For example, Goldsmith (2001), based on a statistical analysis, concluded,
"Foreign aid provides the wherewithal for African states to pay for and carry out many basic pub-
lic functions. Yet being reliant on aid does not necessarily mean that these states would have evolved
in a dramatically more favorable direction had they received less aid. Something closer to the oppo-
site seems more likely" (p. 144). See also Schwalbenberg (1998).
39. For a recent assessment, see Fukuyama (2004).
40. The OCP involved the pharmaceutical company Merck's drug ivermectin or Mectizan�. The part-
nership thus extended across public-private boundaries.
41. We take up the role of ideas in earnest in chapter 7.
42. One review was given by Greenland (1997).
43. A number of publications that are a result of this research are available at www.aercafrica.org.
44. See chapter 12 of Reinert (2005).
45. See World Bank (1994).
46. Cohen (2001) notes that, measured at market rather than at face value, the committed debt relief
would be substantially smaller than this announced value. The IMF estimated the net present
value of the debt relief involved to be US$37 billion.
47. As of April 2004, these countries were Benin, Bolivia, Burkina Faso, Cameroon, Chad, Democratic
Republic of Congo, Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras,
Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, S�o Tom� and
Principe, Senegal, Sierra Leone, Tanzania, Uganda, and Zambia.
48. Interestingly, the government of South Africa does not support the writing off of apartheid-era
debts. See www.worldbank.org/hipc.
49. See data from Oxfam (2005) based on information provided by the Development Assistance
Committee.
50. Taking the combined GDP of the entire set of high-income countries, the 0.7 percent target trans-
lates into approximately US$180 billion in 2002, for example. This is about half the amount these
high-income countries spend on agricultural protection in the same year. These aid volumes were
around US$69 billion, less than one-quarter of that spent on agricultural protection.
6
Migration
with Andrew L. Beath
H istory shows that international migration flows can offer an effective
way for poor people to escape poverty while promoting economic
growth and enhancing technological progress.1 The initial emigration of hunter-
gatherers from Africa and later emigration of farming communities from the
Fertile Crescent were among the most important events in the economic pro-
gress of humankind.2 Throughout the 18th, 19th, and early 20th centuries,
mass migrations from Europe to the Americas and Australasia enabled tens of
millions of people to escape poverty and persecution and created what today
rank as the world's most prosperous societies. In recent decades, migrant dias-
poras, such as India's "techies," have made manifest contributions to the state
of technology while also promoting global integration, economic growth, and
poverty alleviation in their home countries. Today more people wish to
migrate than ever before. If the tremendous potential of migration as a force
for reducing poverty is to be realized, however, greater attention must be paid
to the impact of migration on sending communities and on the migrants
themselves.
Although mere hours of flight today separate lands marred by extreme pov-
erty from the promise of rich world metropolises, few legitimate avenues exist
by which the world's poorest can migrate to high-income countries. The rel-
atively meager supply of such opportunities relative to the desire of many cit-
izens of less-developed countries to move to richer lands have given rise to a
thriving black market in illegal migration. The costs, both human and
financial, imposed by this black market are large. Many thousands of illegal
migrants have perished while attempting to evade border patrols and make
it across the unforgiving deserts and treacherous stretches of water that form
the natural borders of the United States and the European Union. Others
have been left defrauded and stranded in impoverished third countries after
entrusting their life savings to smugglers of people. In response to this illegal
151
152 Globalization for Development
flow, high-income countries have allocated billions of dollars for border
protection, yet in many cases this has forced illegal migrants to attempt even
more remote--and risky--routes of entry.3 While the taxpayers of high-
income countries and aspiring migrants from low- and middle-income coun-
tries pay the cost, criminal syndicates that run people-smuggling operations
benefit.
In the coming decades, the number of potential migrants is likely to swell,
driven by a rising number of young adults living in low- and middle-income
countries and increases in income that will allow more people than ever to
afford the costs of migration.4 If policies in recipient countries remain un-
changed, rising migration pressures will place great strains on traditional
methods of border protection. The result will be magnified demands on the
taxpayers of destination countries, increased mortality among illegal migrants
in transit, and the proliferation of human-smuggling syndicates. Yet in the
great challenges posed by migration also lie opportunities that can poten-
tially benefit both poor and rich countries. Researchers estimate that even a
modest increase in migrant flows could boost global output by US$150 bil-
lion a year--around one-and-a-half times the predicted gains from the full
liberalization of trade in goods and services.5 The challenge is to use that
potential to develop a global migration system that is able to improve the
economic prospects of the greatest number of poor people worldwide, while
also serving the interests of sources and destination countries and protecting
the migrants themselves.
A Brief History of World Migration Flows
Migration has always been a central characteristic of the world's most dyna-
mic and productive economies. Throughout medieval Europe, states at the
forefront of economic progress hosted entrepreneurs and laborers from
across the continent. When the Netherlands led the world economy during
the 1600s, 10 percent of its population was of foreign birth. In Amsterdam,
migrants totaled as much as a quarter of the population.6 With the dawn of
European colonialism, migration took on a transcontinental dimension, with
labor chasing wealth across the globe. Initially, high costs and harsh condi-
tions limited labor flows to intrepid aristocrats and those they exploited,
either by contract or coercion.7 Yet by the middle of the 19th century, the shift
from sail to steam had dramatically lowered the cost of ocean-going transport
and opened up the lucrative labor markets of the New World to a much wider
segment of the European population. Thus began the age of mass migration.
Migration 153
KEY TERMS AND CONCEPTS
1951 Geneva Convention on Refugees illegal migration
asylum seekers international migration
brain drain migration hump
guest workers refugees
H-1B visa (United States)
By the 1840s, trans-Atlantic flows of free European migrants were running at
300,000 every year.
Sources of Migrants in the Age of Mass Migration
Initially, Britain was the main source of migrants--a consequence of its colo-
nial reach, its economic preeminence, and its surging demographic profile.
Yet, as industrial revolutions spread across Europe, uprooting rural popula-
tions and fueling demographic booms, the continent's emigration flows diver-
sified and grew significantly (table 6.1).8 By the dawn of the 20th century, close
to 1.4 million migrants were crossing the Atlantic annually, the majority from
the poorer regions of Southern and Eastern Europe. In total, between 1850 and
1914 some 55 million Europeans migrated, mostly to the United States. The
majority of migrants were unskilled young men lured abroad by the promise
of higher wages.9 Many others, though, left out of necessity. Ireland recorded
massive levels of emigration in the wake of the disastrous famine that struck in
the late 1840s, for instance, and eventually lost nearly half its labor force to
emigration.
Asian Migration in the Colonial Era
With the demand for primary products booming throughout the 19th cen-
tury, European colonies specializing in plantation agriculture and mining
sought to import as much cheap labor as needed to keep production costs at
minimal levels. With slavery rightfully precluded, colonial authorities increas-
ingly turned to migrants from China, India, and Japan. In the hundred years
after 1820, 3 million migrants from these countries fanned out across the
globe, creating sizeable immigrant communities in East and South Africa and
the Pacific Basin.10 In California, the magnitude of inflows from Asia migrants
incited a political backlash that eventually contributed to long-standing bar-
riers to Asian immigration to the United States.11 In most other cases, how-
ever, technological changes in agriculture and the slowdown in the growth in
154 Globalization for Development
TABLE 6.1 Historical Rates of Migration (per thousand persons)
Country 1850s 1860s 1870s 1880s 1890s 1900s
Source Countries
Norway 24.2 57.6 47.3 95.2 44.9 83.3
Denmark -- -- 20.6 39.4 22.3 28.2
Sweden 4.6 30.5 23.5 70.1 41.2 42.0
Finland -- -- -- 13.2 23.2 54.5
Ireland -- -- 66.1 141.7 88.5 69.8
British Isles 58.0 51.8 50.4 70.2 43.8 65.3
France 1.1 1.2 1.5 3.1 1.3 1.4
Netherlands 5.0 5.9 4.6 12.3 5.0 5.1
Belgium -- -- -- 8.6 3.5 6.1
Switzerland -- -- 13.0 32.0 14.1 13.9
Germany -- -- 14.7 28.7 10.1 4.5
Austria�Hungary -- -- 2.9 10.6 16.1 47.6
Portugal -- 19.0 28.9 38.0 50.8 56.9
Spain -- -- -- 36.2 43.8 56.6
Italy -- -- 10.5 33.6 50.2 107.7
Recipient Countries
Canada 99.2 83.2 54.8 78.4 48.8 167.6
United States 92.8 64.9 54.6 85.8 53.0 102.0
Brazil -- -- 20.4 41.1 72.3 33.3
Argentina 38.5 99.1 117.0 221.7 163.9 291.8
Source: Hatton and Williamson 1998.
Note: -- represents unavailable data.
demand for primary products gradually eliminated much of the need for fur-
ther importation of low-skilled labor.
The Decline of the Age of Mass Migration
By the early 1900s, the wage gap between the New World and Europe's lead-
ing economies had been dramatically reduced, as migration swelled the New
World labor force by a third and reduced that of the Old World by an eighth.12
Where once demographic transitions had magnified the pool of young adults,
the bulk of the population had now moved beyond those ages from which the
vast majority of migrants are drawn. Yet, as Western Europe was reaching
the end of its migration cycle, other less-developed countries of Eastern Europe
were just getting started, giving rise to new sources of migration. These new
Migration 155
FIGURE 6.1 Inflow of Migrants to the United States and Canada, 1820�2003
2.50
Canada
USA
Total number of immigrants (in millions)
2.00
1.50
1.00
0.50
0.00
1820
1825
1830
1835
1840
1845
1850
1855
1860
1865
1870
1875
1880
1885
1890
1895
1900
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
Source: U.S. Department of Homeland Security 2003a; Citizenship and Immigration Canada 2003a. The chart plots the
inflow of migrants to the United States and the inflow of permanent residents to Canada.
migrants were generally less skilled, spoke new languages, and brought with
them a culture that was unfamiliar to those who had come before. With rising
levels of wage inequality, political focus was brought to bear on the new wave
of immigrants. This resulted in intense political debate and a series of legisla-
tive measures aimed at stifling the inflow of immigrants from nontraditional
sources. In 1917, the United States introduced a literacy test for migrants,
intended to stifle further immigration of low-skilled workers. Later that year,
the United States entered World War I, disrupting trans-Atlantic shipping
routes and effectively bringing an end to the age of mass migration (figure 6.1).
The Fall and Rise of Migration Flows in the 20th Century
Starting in 1917 and continuing throughout the 1920s, waves of jingoism and
economic isolationism swept through political systems across the Old and
New Worlds. The onset of the Great Depression and the outbreak of World
War II reinforced the trend, resulting in policies aimed to limit further migrant
flows.13 Transnational migration steadily slowed to a near halt.
In the aftermath of World War II, millions of refugees crossed the Euro-
pean continent, yet more traditional forms of migration remained hamstrung
by a reluctance to roll back the isolationist policies of the Great Depression.
156 Globalization for Development
Interestingly, it was Western Europe--once a major source of migrants--that
was first to attract immigrants. In France, Germany, the Netherlands, and the
United Kingdom, rapid economic growth in the late 1940s and 1950s had
generated a shortage of low-wage labor. Initially, this demand was met by
migrants from southern European countries, though such sources quickly
proved insufficient. By the 1960s, countries across Western Europe--Germany
in particular--were importing millions of guest workers from Turkey and
North Africa. While the 1973 oil crisis and the ensuing high unemployment
brought an abrupt end to guest-worker programs in Western Europe, the oil-
exporting countries in the Middle East later replicated and expanded upon
the guest-worker model.
Perhaps the most defining change in modern immigration, however, came
in the mid-1960s when Australia, Canada, and the United States overhauled
their immigration policies. These reforms not only allowed for a much greater
volume of flows, but also opened the door to migration from nontraditional
sources in Africa, Asia, and Latin America. Together with the sharp decline in
cost and increased speed of intercontinental transport and communication,
the reform of migration restrictions has ensured a steady growth in both the
volume and diversity of migrant flows over recent decades.
Legal Framework of Modern Migration
Throughout the 19th century, migration occurred mostly in a legal vacuum.
The modern age of migration, on the other hand, has been defined by efforts
to bring international migration under the aegis of a legal framework. The
founding of the United Nations and the 1951 Geneva Convention on Refugees
established a process by which persecuted individuals could seek asylum free
of fears of unjustified repatriation, while the 1948 Universal Declaration of
Human Rights and the 1959 Declaration on the Rights of the Child affirmed
the primacy of kinship in immigration law.14
Beyond such humanitarian principles, however, governments have gener-
ally enacted immigration policy to serve their national economic self-interests.
For the great mass of countries, this has meant near zero immigration. Others,
though, have sought to "cherry-pick" economically attractive immigrants. In
1965, Canada devised its archetypal points system, by which immigrant visas
were awarded to those who possessed a desirable mix of education, experience,
language skills, and investment capital.15 Australia and New Zealand later
copied the Canadian model, and the United States implemented a program to
bring in immigrants specialized in targeted high-skill occupations. Although
countries in Europe and the Middle East have resisted permanent immigra-
tion, many have found it necessary to establish systems of contract or seasonal
migration to meet skill shortages.
Migration 157
TABLE 6.2 Stock of International Migrants, 1990, 2000 and 2005
Percent of
Number of persons population
Geographical areas 1990 2000 2005 2005
World 154,945,333 176,735,772 190,633,564 3
More-developed regions 82,368,170 105,004,320 115,396,521 9.5
Less-developed regions 72,577,163 71,731,452 75,237,044 1.4
Africa 16,351,076 16,496,240 17,068,882 1.9
Asia 49,887,766 50,303,887 53,291,281 1.4
Europe 49,381,119 58,216,735 64,115,850 8.8
Latin America and the Caribbean 6,978,142 6,280,578 6,630,849 1.2
Canada and the United States 27,596,538 40,387,759 44,492,816 13.5
Oceania 4,750,692 5,050,573 5,033,887 15.2
Source: United Nations Population Division: World Migrant Stock: The 2005 Revision Population Database
Source: United Nations Population Division http://esa.un.org/migration/p2k0data.asp
Structure of Migrant Flows
Currently around 191 million people--3 percent of the world's population--
live outside their country of birth.16 By historical standards, that figure is low,
though in recent decades migration flows have grown rapidly. Since the late
1980s, in particular, European flows have surged, fueled by the end of com-
munism in Eastern Europe and the conflict in the Balkans. Although West-
ern Europe is proving to be an increasingly popular destination for migrants
(table 6.2), the United States continues to accept more immigrants than any
other country in the world. The Middle East has also emerged as a major host
of migrants, particularly for low-skilled workers from South and Southeast
Asia. Among countries of emigration, the middle-income countries tend to
have the higher rates of outflow. Mexico and the Philippines, in particular,
are major exporters of labor. The Philippines, for example, has over 7 million
people overseas, equivalent to 10 percent of its population.
Since the age of mass migration, international flows of people have been
thwarted by world war, global economic depressions, and populism, and then
reorganized under a swathe of international treaties and national legislation.
Nevertheless, the structure of immigration flows today broadly reflects those
of the 19th century, which is a testament to the common human desires that
underscore individual decisions to migrate and the common benefits that
recipient societies reap from the contributions of migrants.
158 Globalization for Development
A Typology of Contemporary International Migration Flows
The legislative revolution that characterizes the modern age of migration has
delineated a series of legal channels of migration. Some of these--such as
flows of refugees and asylum seekers--have been defined by covenants of
international law. Others--such as the flows of high-skill and low-skill expa-
triates and, to some extent, permanent settlers--are the result of stand-alone
national policies drafted in observance of evolving norms of immigration law
worldwide. Still others--primarily the flow of visa-free migrants--are the
result of bilateral, sometimes multilateral, agreements among contiguous
countries. Finally, a significant portion of migrant flows takes place outside
the practical realm of international or national law. Table 6.3 identifies the
major channels of modern international migration and provides summary
data concerning the magnitude and composition of these flows. The para-
graphs that follow examine one of these channels in further detail.
Permanent Settlers
Throughout the age of mass migration, flows of transnational migrants were
composed overwhelming of permanent settlers who migrated with the intent
to resettle permanently in another country. In the modern age, however,
nation states have grown more resistant to conferring citizenship upon for-
eigners who lack a connection to the national cultural identity. In fact, from
the 1960s until recently, only four countries have regularly granted perma-
nent residence to nonrefugee foreigners devoid of familial, ethnic, or resi-
dential ties to the country. Perhaps unsurprisingly, these are the traditional
countries of immigration--Australia, Canada, New Zealand, and the United
States--whose cultural identities were forged by inflows of migrants.17
Economic Migrants
In contrast to those times in the 19th century when the people who crossed the
Atlantic in search of a better life were virtually assured of entry, today the immi-
gration regimes of the richer countries aggressively guard the national interest
and seek out economic migrants who possess desirable socioeconomic char-
acteristics. For Australia, Canada, and New Zealand, this is achieved through
the points system, which grants permanent residence to applicants who offer
the right mix of skills, capital, and adaptability.18 The United States, on the
other hand, assigns annual quotas to categories of persons eligible for perma-
nent residence. Categories include "persons of extraordinary ability," religious
workers, outstanding researchers, multinational executives, and investors.19
A significant portion of these economic migrants originate from low- and
TABLE 6.3 Major Channels of Modern International Migration
Migrant Source Recipient Skill Duration Annual flow
category countries (%) countries (%) level of stay (millions)
Permanent Mexico (17) US (36) Medium Permanent 1.5
settlers Turkey (9) Canada (14)
China (7) Germany (12)
Vietnam (6) France (10)
India (5) Australia (5)
High-skill India (26) US (34) High Temporary 0.6
expatriates US (9) UK (14)
China (4) Canada (14)
Philippines (4) Australia (7)
UK (3) Japan (4)
Low-skill Philippines (25) Saudi Arabia (43) Low Temporary 3.5
expatriates India (17) UAE (11)
Poland (9) Kuwait (10)
Indonesia (9) Germany (9)
Bangladesh (9) Malaysia (7)
Asylum seekers Iraq (6) UK (15) Medium Permanent 0.9
Serbia (5) US (14)
China (5) Germany (10)
Congo, D.R. (4) France (9)
Turkey (4) South Africa (6)
Refugees Afghanistan (45) Pakistan (45) Low Temporary 1.4
Liberia (9) Tanzania (7)
Gaza Strip (6) Egypt, Arab Rep. of (5)
Congo, D.R. (4) US (4)
Burundi (4) Sierra Leone (4)
Undocumented Mexico (25) US (30) Medium Semi- 1.2
migrants Morocco (6) Italy (8) permanent
Albania (6) UK (8)
Turkey (4) Germany (8)
Romania (3) France (8)
Visa-free Italy (15) Germany (37) Medium Semi- 0.4
migrants France (11) UK (17) permanent
Germany (10) Spain (9)
UK (10) Belgium (8)
Ireland (9) Netherlands (6)
Students China (8) US (29) High Temporary 1.6
Korea, Rep. of (4) UK (14)
India (4) Germany (12)
Japan (3) France (9)
Greece (3) Australia (7)
Total Philippines (9) US (17) 11.1
India (8) Saudi Arabia (14)
Mexico (5) Germany (8)
China (5) UK (6)
Afghanistan (5) Pakistan (5)
Note: See the annex to this chapter for information on sources and methodology. Percentages represent proportion of the flows
in respective categories accounted for by migrants to and from associated country.
160 Globalization for Development
middle-income countries, with China, India, and the Philippines being major
contributors.
Family Migrants
In addition to the "economic channel" of permanent migration popularized
by the traditional countries of immigration, a "family channel" also exists that
allows resident nationals to sponsor non-national family members for per-
manent residence.20 In some cases, this feature of immigration regimes has
given rise to self-perpetuating chains of migration, by which an immigrant
gains citizenship through economic, asylum, or other channels and then
sponsors their extended family members, who in turn sponsor their extended
family members, and so forth. Migrants from low-income countries, in par-
ticular, have taken advantage of this provision, resulting in immigrant flows
unanticipated by policy makers and the public alike.21
The shift in the composition of immigrants and the seeming incapacity of
governments to fully control inflows has generated predictable controversy. In
response, policy makers have struggled with the challenge of balancing human-
itarian obligations with public demands for limited immigration.22 Constrained
by constitutional obligations to treaties such as the Universal Declaration of
Human Rights, many have erred on the side of humanitarianism. Accord-
ingly, immigration as family reunification continues to represent the most
significant channel of legal migration from low- and middle-income coun-
tries to high-income countries, with as many as a million people a year
exchanging their citizenship.
Highly Skilled Expatriates
High-income countries use skilled migrant programs to fill occupational
shortages that cannot be met by training resident nationals. Historically, such
flows have been concentrated in education and health-related services. Dur-
ing the 1990s, however, booms in telecommunications and in information
and communications technology (ICT) led to a shortage of related skills in
many high-income countries, causing a renewed surge in flows of highly
skilled migrants. As a result, developing countries with respected systems of
higher education have emerged as major sources of particular skills for the
developed world. India, for instance, has dominated the international market
for computer-related skills, accounting for over 60 percent of migrants head-
ing to the United States to work in the field.23 The Philippines, to take another
example, has been relied upon by many developed countries for its medical
professionals.
Migration 161
Competition for Highly Skilled Expatriates
With the increased global demand for skilled labor, high-income countries
have increasingly found themselves in competition with one another to secure
talented expatriates. The result has been that high-income countries have
introduced many new programs for skilled migrants and renovated existing
programs to make these countries more attractive to potential highly skilled
migrants and more responsive to the needs of domestic employers whose
growth is constrained by a shortage of skilled people. Australia, Canada, France,
Germany, Ireland, Japan, the Republic of Korea, and the United Kingdom
have all recently instituted programs to grant temporary visas to workers in
ICT or other industries. The biggest program for high-skill expatriates, how-
ever, remains the United States' H-1B visa, which is designed to meet short-
ages in specialty occupations such as accountancy, computer programming,
education, engineering, and medicine.24
High-Skill Expatriate Visas as a Route to Permanent Residency
Although these programs provide migrants with explicitly temporary visas,
many of them do offer migrants the possibility of eventually gaining the right
of permanent residence. As such, the extended nature of many high-skill migra-
tion programs distinguishes them from low-skill programs, which ordinarily
explicitly aim to prevent any adjustment by migrants to permanent status.
Low-Skilled Expatriates
In the modern age of migration, official programs to attract low-skilled expa-
triates have been implemented after rapid economic growth improved the
wages and work conditions of the local workforce, leaving them less willing
to work in low-wage but essential nontradable sectors such as construction or
homecare. Initially, the main sources of labor for such programs have been
poorer neighboring countries; when these prove insufficient, sources further
abroad are tapped. Generally, these labor sources tend to be middle-income
countries with comparatively good education systems.
Low-Skill Expatriates in Oil-Exporting Countries of the Middle East
In recent times, the largest beneficiaries of low-skilled migrant labor have been
the oil-exporting countries of the Middle East, where the infusion of oil rev-
enues generated low-skilled jobs that local workers were unwilling to occupy
at the prevailing wages. Initially, migrant workers were drawn mainly from
other Arab countries such as the Arab Republic of Egypt and the Republic of
Yemen. When these sources proved inadequate, countries in South and South-
east Asia became increasingly important sources. Today, there are some 10 mil-
162 Globalization for Development
lion expatriates working in the Middle East, 5 million of them in Saudi Arabia
alone. Although most expatriate workers in the Gulf are employed either in the
oil industry or in occupations supported by oil revenues, in recent years the
United Arab Emirates (UAE) has used its large, low-wage migrant population
not just as a response to labor shortages in specific nontradeable sectors, but
also as a source of comparative advantage to be spread across a widening
range of service industries. As a result, the UAE has experienced considerable
success in attracting foreign investment and diversifying its economy.
Low-Skill Expatriates in East Asian Countries
Over recent decades, countries in East Asia have also undergone rapid eco-
nomic growth and many have turned to migrant labor to fill low-skilled posi-
tions. Hong Kong (China), Japan, Malaysia, Singapore, Korea, and Thailand,
for instance, are all major recipients of low-skilled expatriates from less-
developed neighboring countries in Southeast Asia. Sometimes--as in
Hong Kong (China), Malaysia, Singapore, and Thailand--these flows occur
through official government-mandated programs. Other countries, such as
Japan and Korea, have resisted instituting official programs to employ for-
eigners and instead fill low-skill jobs with foreign trainees and students, over-
staying tourist visas. In a similar vein, Australia, Canada, the United Kingdom,
and a number of Western European countries have developed "working-
holiday schemes" for young people from other industrial countries. A num-
ber of high-income countries have also instituted low-skilled migrant
programs to attract agricultural workers, although these programs tend to
operate only on a strictly seasonal basis.25 This use of low-skilled migrant work-
ers not only ensures low prices for domestic consumers and low costs for pro-
ducers, it also segments the labor market in a way that guards against the
potentially damaging wage-price spirals that could result if domestic workers
were employed.
Abuse and Exploitation of Low-Skilled Migrants
Unfortunately, for all the benefits that low-skilled migrant programs offer to
the migrants themselves and their home and recipient countries, the migrants
themselves often suffer greatly (see box 6.1). The market for low-skill expatri-
ate workers suffers from abuse and exploitation. In source countries, recruit-
ment agencies and brokers may demand large sums up front from prospective
migrants. In Bangladesh and India, for instance, the average fee charged to
those wishing to work in a major gulf destination has been estimated at between
US$2,000 and US$2,500, about 80 percent of what low-skilled migrants can
expect to earn in their first year.26 Some migrants evidently consider this to be
Migration 163
BOX 6.1 Migrant Dreams Become Nightmares
I
n 2004, Human Rights Watch completed a thorough investigation into human rights abuses
suffered by low-skilled migrant workers. The ensuing report paints a troubling picture of the
extent to which vulnerable individuals are exploited by unscrupulous individuals in both source
and destination countries and then ignored by the governments involved. Many victims, it seems,
are doomed even before they leave home. Recruitment agencies demand substantial sums from
prospective migrants for the promise of a job abroad. For this, migrants borrow heavily. Their
confidence is ultimately belied, however, upon arrival in the destination country, when the con-
tract they signed is replaced by a document promising far below the agreed wage. Unaware of
their rights or fearful of being sent home without earning a cent, such exploitation is endured.
This climate of fear--and the confined or isolated living quarters migrants often inhabit--also traps
many female migrant workers in situations in which they are abused by employers. Such employ-
ers perhaps know that many migrants are afraid of the justice system, a fear that for some
migrants may be well founded.
Source: Human Rights Watch 2004.
a price worth paying, although few are offered any reciprocal guarantees that
the conditions of employment will be as promised. As noted by Barber (2004),
it is all too common for employers "to force [migrants] to work long hours, to
delay or withhold payment of wages altogether, to confiscate their passports or
other identity documents, to dismiss them or blacklist them for joining workers'
associations, . . . and to subject them to violence or sexual abuse" (p. 14).
Asylum Seekers
In the wake of horrors suffered by Jewish and Roma people during World
War II, there existed great political will within the international community
to create a durable system that protected refugees and bestowed upon them
rights of resettlement. In 1951, the Geneva Convention on Refugees achieved
this, establishing a process by which persons with a "well founded fear of per-
secution [by state agents] for reasons of race, religion, nationality, member-
ship of a particular social group, or political opinion" could apply through
the United Nations (UN) for resettlement in a signatory nation.27 Although
large numbers of refugees are resettled by the UN every year, it has over recent
years been common for individuals seeking asylum to travel on their own
accord to their desired country of resettlement before applying for refuge.28
We distinguish here between these migrants--referred to as asylum seekers in
the popular discourse--and conventional refugees who flee in desperation to
neighboring countries and are often assisted by the UN agencies, but who are
not necessarily entitled to resettlement under the 1951 Convention.
164 Globalization for Development
Changes to the Asylum System at the End of the Cold War
Prior to the late 1980s, annual applications for asylum rarely topped 200,000.
As with many other aspects of political life, the Cold War dominated asylum
outcomes; "defectors" from the Soviet Bloc won automatic asylum in the
West, yet those fleeing allied countries received routine denials. Given the
obstacles associated with leaving communist countries, the system was thereby
inherently self-limiting. This changed irrevocably, however, with the collapse
of the Eastern Bloc and the outbreak of civil war in the former Yugoslavia.
Western European countries, in particular, received huge inflows of asylum
seekers. Flows fell in the mid-1990s with the resolution of the Balkan conflict,
but rose again toward the end of the decade. In 2002, over 900,000 people
from 165 countries applied for asylum across 143 countries, though since
then asylum claims have fallen considerably.29
Controversy of the Asylum System
Of the total number of asylum applicants, the vast majority are eventually
found not to be in need of resettlement. Of the 967,097 asylum cases resolved
in 2002, only 23 percent resulted in a grant of refugee status or other form of
humanitarian status.30 Few of those who fail in their bid to win asylum are
returned home, however.31 As a consequence, many politicians and com-
mentators in major recipient countries have accused asylum seekers of being
illegal immigrants out to "cheat the system"; a number of governments have
enacted strict policies to prevent asylum seekers from making landfall and
have meted out harsh treatment to those who do make it through.32
Remittances of Asylum Seekers
For source communities, however, those who have sought asylum abroad
often serve as an invaluable source of income and support during precarious
times. Because many who obtain asylum in high-income countries are among
the most skilled and wealthiest in any refugee diaspora, they are often able to
earn a significant income abroad, part of which is then remitted to support
family and communities back home.33 Remittances to Somalia were of such
importance that when flows were disrupted in November 2001 by the closure
of the al-Barakat hawilad network due to suspected ties with Al Qaeda, a food
crisis ensued, severely affecting some 300,000 people.34 In El Salvador, remit-
tances sent by refugees living in the United States are estimated to sustain
15 percent of domestic households. To sustain these flows, the Salvadoran
government went so far as to offer legal assistance to Salvadorans in the
United States to pursue asylum claims.35
Migration 165
Refugees
Although asylum seekers typically attract substantial attention from the West-
ern media, they are in fact greatly outnumbered by those refugees who have
not opted to seek--and in most cases are not entitled to--resettlement by the
United Nations under the 1951 convention. These are people who have fled
to neighboring countries because of the onset of adverse civil, political, eco-
nomic, or meteorological conditions, but who do not face any systematic or
permanent form of persecution in their home country. In 1980 there were an
estimated 8.8 million refugees. This figure peaked at 17.2 million in 1990 and
stood at 10.4 million in 2003.36
Distinction between Refugees and Asylum Seekers
Usually refugees cross borders in extremely large groups, distinguishing them
from asylum seekers who often travel more methodically, either as individuals
or in small bands. As a consequence, camps are often established by inter-
national humanitarian agencies along the border of the affected country pend-
ing resolution of the disturbance that caused the outflow. The individual
status of such refugees--and their entitlement to protections under the 1951
convention--are often not determined.37 This is because of the logistical
problems of doing so and also because resettlement is a relatively difficult and
complex solution given the underlying assumption that the disturbance is
temporary.38 One of the most striking examples of how this system operates
came during the Rwanda genocide in 1994. The border town of Goma, Za�re,39
was transformed overnight into a tent city hosting over a million Rwandan
refugees, yet with the rapid victory of rebel forces and the stabilization of the
situation, the population was repatriated relatively quickly.
Demands on the Refugee System
Most disturbances from which persons seek refuge, however, tend to be pro-
tracted and place demands on the refugee system for which it is ill designed
and that it is ill prepared to handle.40 As a consequence, large populations of
refugees can become quasi-permanent, albeit technically illegal, residents in
border towns of neighboring countries, generating resentment and persecu-
tion from local residents and governments who view them as unwelcome
competitors for scarce local resources. Whole generations grow up in camps
with makeshift schools, and entire villages are created to support refugee pop-
ulations, as is the case for the Palestinean population of Gaza. Such was the
case in certain border towns in Pakistan and Iran, for instance, from the early
1990s until recently, with each country hosting over 2 million Afghan refugees
who had fled civil war in their home country.
166 Globalization for Development
Undocumented Migrants
Of all the different forms of migration, few seem to grip the public imagination
and engender as much political consternation as flows of undocumented, or
illegal, migrants. Undocumented migrants include both those who move vol-
untarily and those who are trafficked against their will. Due to its very nature,
there is limited evidence on which to base estimates of how many people are
involved; consequently, the estimates that do exist tend to vary wildly. Few
commentators would disagree, however, that flows have increased markedly
over the past decade, particularly to the European Union.
Voluntary Undocumented Migrants
Most people who cross borders illegally do so voluntarily. The United States
receives large flows of such undocumented migrants from Mexico, with the
common route being across arid, unforgiving deserts that stretch from Califor-
nia to Texas. In 2001, the journey claimed at least 500 lives, with over 1.2 mil-
lion apprehensions made by U.S. authorities.41 Comparable in danger are the
attempts made by undocumented migrants to cross the Mediterranean or
Adriatic Sea to reach the European Union. The journey across the Straits of
Gibraltar, for instance, is composed of 19 kilometers of what at times becomes
some of the most treacherous water to be found anywhere in the world. Many
migrants pay up to US$750 to make this journey on fragile, flat-bottomed
boats built for in-shore fishing but crammed with 20 or 30 migrants.42
Human Trafficking
Tragically, there also exist a significant number of persons whose undocu-
mented migration takes place against their own wishes. According to the U.S.
government, there are between 800,000 and 900,000 such victims of human
trafficking every year.43 Some are simply kidnapped, often with the complic-
ity of relatives who profit from the transaction. More commonly, though, vic-
tims are duped with misleading information, such as an offer of a well-paid
job in the service industry--upon arrival they are forced into jobs in the sex
industry or other unattractive forms of employment.44 In such cases, it is up
to the traffickers' discretion whether they treat the victims as indentured ser-
vants, who must repay the costs of passage, or simply as slaves. In either case,
the victim will be effectively imprisoned and denied access to authorities who
would be able to assist.45
Visa-Free Migration
Prior to the advent of passports and immigration controls in the late 19th cen-
tury, free cross-border movement was available to all with the means and
Migration 167
wherewithal to make the trip. In Europe, such movement was particularly sig-
nificant. As noted earlier, it was quite sizeable in the case of inflows to such
cities as Amsterdam and Antwerp, which attracted artisans and entrepreneurs
from across the continent throughout the 17th century on account of their
burgeoning wealth. Similarly, when famine blighted Ireland in the mid-19th cen-
tury, many destitute persons set sail across the Irish Sea in search of better for-
tunes in the booming factory towns of northern England. The magnitude of this
flow was also sizeable; by 1851, 25 percent of Liverpool's population was Irish.
Although most of these flows were disrupted in the first half of the 20th cen-
tury by the two World Wars and the intervening depression, by the 1950s moves
were afoot to liberalize intra-European migration. In part this was driven by
economic concerns, with many of the booming northern European countries
eager to draw upon the cheap labor offered by their southern counterparts.
Today visa-free migration exists in the European Union, where the partici-
pating countries have formed a single labor market. Single labor markets also
exist between New Zealand and Australia, granting citizens the unrestricted
right to work in the other country for an unlimited term. A number of simi-
lar arrangements also exist between some European countries and their island
colonies in the South Pacific and the Caribbean, as well as between the United
States and territories such as Guam and Puerto Rico.
Students
Although individuals who travel to foreign countries for educational purposes
are not ordinarily categorized as migrants, university study has emerged as a
major avenue by which young people from developing countries can obtain
the right to work and permanently reside in developed countries. This is par-
ticularly so in the United States, where it is common for foreign university
graduates to use the one-year Optional Personal Training visa to build a rap-
port with a company that then, at the conclusion of the year, may sponsor
them for the H-1B visa, which entitles them to work in the United States for
three years and can be renewed for a further three years after that. At any point
during this period, the employer may choose to sponsor the H-1B holder for
permanent residency through the economic channel described previously.
Many foreign students in the United States are eager to take advantage of this
route, and it is estimated that only about half of foreign students return home
at the conclusion of their studies.46
Understanding the Decision to Migrate
Economists explain human decisions, such as migration, using the concept of
utility maximization, which assumes that the ultimate goal of all human beings
168 Globalization for Development
is to maximize their personal utility or sense of happiness.47 In the case of
migration, for instance, potential migrants will consider how migration will
affect their income, their friendships, and their relationships with family mem-
bers, as well as other factors that affect their happiness, before deciding whether
to migrate. Generally, people will opt to migrate only if they are reasonably
confident that the sum total of all these changes will increase their overall level
of satisfaction or personal, family, or community utility, to use the economic
jargon, relative to their utility had they stayed home. Here we profile the con-
ditions that stimulate and inhibit international migration.
What makes the migration decision especially complicated is that migra-
tion affects a very wide range of the many factors that constitute well-being,
often in ways that are difficult to predict. Even in the presence of perfect infor-
mation, migration is an activity fraught with personal risk, making it difficult
for people to know with any degree of certainty whether migration will
improve their overall level of happiness. Aversion to these risks tends to dis-
courage people from leaving their home countries, even when doing so would
increase their income. For instance, Puerto Ricans are free to migrate to the
United States, which has over three times the average income and a quarter
of the unemployment rate of Puerto Rico, yet only one in four people born
on the island elect to migrate.48 International migrants tend to be unusually
willing to tolerate risk and, because of their typically young age, are often less
constrained by domestic obligations to family members.
Costs of Migration
Although we may presume that a significant number of poor people would like
to move to wealthier lands, migration to a high-income country, whether legal
or illegal, may require risking large amounts of cash as well as life and limb.
Given that the average per capita income in low-income countries stands at
below US$500 a year, the cost of such journeys often exceeds the annual income
of the vast majority of the world's poor.49 In addition, because of historically low
levels of migration, people from impoverished communities are much less
likely to have family members who can sponsor their applications for migration
through legal channels. They are also less likely to have access to social networks
of migrants that can provide information prior to migration and provide assis-
tance and aid acclimatization at the end of the journey. For all these reasons,
long-distance migration is an especially risky endeavor for very poor people.
Consequently, migrants from low-income countries generally come from the
middle and upper reaches of the income distribution or otherwise journey only
as far as neighboring low- and middle-income countries.
Migration 169
The Migration Hump
Impediments to migration are much less burdensome for persons migrating
between high-income countries than for persons migrating from low- or
middle-income countries to high-income countries. Nevertheless, even though
large differences in income exist among high-income countries, only a small
fraction of migrants to high-income countries come from other high-income
countries. For example, citizens of member states of the European Union are
free to live and work in the territory of other member states, yet non-EU
migrants to EU countries outnumber EU migrants by a factor of four to one
despite sizeable differences in per capita income within the European Union.50
The difficulties facing people from low-income countries to migrate and the
unwillingness of people from high-income countries to migrate gives rise to
the migration hump.51 Those with the highest inclination to migrate come
from middle-income countries, where wages are high enough to provide the
base level of wealth necessary to finance migration, but also low enough to
generate significant financial incentives. Thus, as incomes in middle-income
countries increase, migration rates tend to decline.52 The migration hump for
the United States is shown in figure 6.2. Here we see that emigration rises dra-
matically after per capita income reaches US$3,000 and falls sharply after per
capita income exceeds US$10,000.
FIGURE 6.2 Rates of Emigration to the United States by Income, 1989�2000
25
Rate of emigration to US (per thousand)
20
15
10
5
$100 $1,000 $10,000 $100,000
Real cost-of-living-adjusted income per capita (log scale)
Sources: Authors' calculations based on U.S. Department of Homeland Security 2003a and World Bank 2004d.
Note: "Real cost-of-living-adjusted income per capita" represents PPP-adjusted GDP per capita (in constant 1995 dollars).
Each dot represents a country-year combination showing one country per year. The migration patterns observed between
source countries and the United States may not necessarily represent those observed between source countries and other
destination countries. PPP = purchasing power parity.
170 Globalization for Development
The Role of Information in Migration Decisions
The willingness of people to migrate will increase with the quantity and qual-
ity of information that is available. A common and relatively trusted source
of information on the benefits and costs of migration are migrants who have
returned to their home community or the friends and family of those who
have migrated. Additional information may also be provided by recruiters or
other agencies seeking to encourage persons to migrate abroad. Potential
migrants are unlikely to have complete confidence in everything they are told,
however, and may discount the purported benefits of migration based on
their level of trust in the source of the information. If a large number of peo-
ple from their community have migrated, potential migrants generally will
have easy access to information and relatively high confidence in what they
are told. Correspondingly, if potential migrants know of few who have gone
before, they will view migration with much more trepidation.
Chain Migration
Immigrant enclaves--where members share a common source country or
community of origin--can ease both the financial costs and the psychologi-
cal adjustment associated with migrating to a new country. Immigrant com-
munities also provide tangible services essential to new arrivals, such as
accommodation, employment, and other forms of assistance, thereby lower-
ing both the cost and risk of resettlement. Because of this, one person's deci-
sion to migrate will be affected by the migration decisions made by other
members of that community in the phenomenon known as chain migration.53
For much the same reason that migrants are attracted to countries where
other migrants from their home communities have settled, migrants also tend
to cluster in particular industries and occupations. In some instances, indus-
tries become dependent on migrant labor to survive. Agriculture in developed
countries has proved particularly susceptible. In the early 1990s, the U.S.
Department of Labor found that around 85 percent of the 670,000 farm work-
ers in the United States were immigrants, many of whom were undocu-
mented.54 European farmers have recruited Eastern Europeans who enter on
tourist visas, but work as agricultural laborers.55 Many developed countries
have also come to depend on migrant labor to help meet shortfalls in various
sectors, including medicine, a topic we discuss further below.
In some cases, particularly among lesser skilled expatriates, the decision to
migrate may not belong to the individual, but rather to the family or com-
munity. Although migration may be risky for the individual, for a family with
uncertain local income, sending offspring abroad may be a prudent way to
diversify risks. Where there is collective decision making, the family or com-
Migration 171
munity may pool resources to pay the migrant's travel and adjustment costs,
with the migrant then expected to remit a portion of his or her earnings once
employed. In that way, if the local source of income should fail for some rea-
son (such as through crop failure), the family or community will have an
additional source of income to draw upon. It is thought that this phenome-
non provides the explanation for increasing numbers of young Asian female
expatriates, because daughters are usually regarded as a more reliable source of
remittances than their male counterparts.56
Impact of Source Country Pressures on Emigration
Much of the discussion above has focused on "pull" factors of migration, yet
it is also important to recognize that disturbances in the source country can be
important in causing surges in migration flows. Civil strife and other forms of
political turmoil can generate large outflows of refugees.57 Less well recognized,
though, are the longer-term flows that can arise from less dramatic changes in
social or economic policy in source countries. For instance, with the cuts in
once-generous farm subsidies by the Mexican government in the 1980s and
the introduction of NAFTA in 1994, Mexican farmers have been forced to
adapt to a more competitive trading environment. Some have succeeded, but
those with the least fertile land struggled to make ends meet. The consequence
of this has been an increase in the flow of undocumented Mexican migrants
to the United States. It is estimated, for instance, that by 1996, around 750,000
subsistence farmers had migrated.58 Financial crises, such as those discussed
in chapter 4, can have similar effects.
Benefits and Costs for Source Countries
Because of the inherent risks of journeying abroad and the skill requirements
imposed by the migration regimes of destination countries, emigrants are usu-
ally higher skilled, wealthier, and more economically productive than other
members of their communities of origin. Therefore, the world's poorest resi-
dents are not--and are not ever likely to be--part of the international migra-
tion system. This is not to say, however, that migration does not affect them.
Quite the contrary: emigration can impose sometimes unpredictable conse-
quences on those left behind. Whole communities can be lifted out of poverty
by a steady flow of remittances from a migrant diaspora. If migrants are suc-
cessful in building business, trade, and investment networks and in facilitating
the transfer of technology between destination and source countries, the eco-
nomic payoffs to source countries can be even more profound.
Migration can also have harmful effects on those left behind. Some migrants
may take with them skills in critical demand, such as medical knowledge. The
172 Globalization for Development
loss of household heads, innovators, and leaders may also impose a broad
range of social and political costs on families, communities, and even coun-
tries, undermining the social cohesion, dynamism, and growth potential of the
economy. A recent study by the Organisation for Economic Co-operation
and Development suggests that "emigration of highly skilled workers may
adversely affect small countries by preventing them reaching a critical mass of
human resources, which would be necessary to foster long-term economic
development."59 Emigration also deprives governments of tax revenues,
depleting the quality of public services and preventing society from earning a
return on money invested in the education of migrants. Whether migration
positively or adversely affects those who do not migrate will depend upon
which of the above factors are dominant.
The mass emigrations from Europe in the late 1800s and early 1900s are
generally considered, in economic terms, to have had very beneficial effects on
the source communities. Those leaving were generally not more skilled than
those they left behind, and their departure had the effect of reducing the sup-
ply of labor in the source community, which led to a commensurate increase
in the wage rate.60 In this way, the dynamics of migration were inherently self-
limiting, providing benefits to source communities. Today, though, the forces
that govern the impact of emigration are more complicated and tend to yield
results that are often difficult to predict and sometimes on aggregate not nec-
essarily beneficial for the source community. One underlying difference is that
today's skilled migrants are not typical of the communities they leave behind,
as they often have been trained at substantial cost to the taxpayers of source
countries with the expectation that they would serve their communities.
Brain Drain
Brain drain--the phenomenon of highly skilled workers leaving their home
country and not returning, at least during their most productive years--has
historically been viewed as one the most significant costs to source coun-
tries of international migration.61 Since the 1960s, academics and policy
practitioners have drawn attention to the potential damage to source countries
caused by brain drain, yet it was not until recently that researchers attempted
to empirically gauge its extent. Analysis of census and immigration data from
destination countries indicates that, with a few exceptions, migration rates tend
to be higher for highly educated individuals. Three-quarters of migrants enter-
ing the United States from Africa and India are highly educated, for example.62
Given that highly educated migrants are more likely to have the resources to
finance migration, and that migration policies in destination countries com-
monly favor those with verifiable skills and qualifications, this is perhaps not
Migration 173
surprising.63 What is more startling is just how many highly skilled workers low-
and middle-income countries have lost. Meyer and Brown (1999) report that
400,000 scientists and engineers from developing countries are employed in
research and development in high-income countries, compared with around
1.5 million who are working in their home countries.
Impact of Brain Drain on Capacity
Small countries with close transport and historical ties to developed regions and
countries suffering from high levels of crime or civil unrest are those hardest hit
by brain drain.64 For example, Guyana has lost 70 percent of its university grad-
uates to the United States, while the large diaspora of Jamaican migrants in the
United Kingdom and the United States comprise over three-quarters of
Jamaicans with tertiary education and a third of Jamaicans with secondary edu-
cation.65 Some African countries have suffered equally acutely, with 65 percent
of Gambians, 51 percent of Somalis, 45 percent of Sierra Leoneans, and 44 per-
cent of Ghanaians with university degrees estimated to be living abroad.66 In
total, about 70,000 professionals and university graduates are thought to leave
Africa each year to take up work in Europe or North America.67
Impact of Brain Drain on Heavily Populated Countries
Heavily populated countries, even those with high emigration rates, generally
suffer less from the brain drain simply because they have a larger base of highly
skilled people. For instance, despite India being a major source of highly skilled
migrants for developed countries, only 4 percent of Indians with university
degrees have emigrated.68 The Philippines has lost around 15 percent of its uni-
versity graduates, as has Mexico.69 For China, the figure is around 4 percent.
The fact that it is the most talented among the highly skilled who elect to leave
can make the loss of even a relatively small brain drain costly, however. For
instance, a group of researchers estimated that the income earned by the rela-
tively small number of Indians in the United States is equivalent to 10 percent
of India's national income.70
Wealth Transfer from Brain Drain
There are around 3 million immigrants with university degrees residing in
developed countries. With many of these degrees having been financed by
source country governments, the total wealth transfer from poor to rich coun-
tries represented by the brain drain stands somewhere between US$45 and
US$60 billion.71 The fiscal losses of the brain drain do not stop there, how-
ever. Highly skilled workers in many countries generate the largest share of
tax receipts. For instance, although India loses less than a third of its univer-
174 Globalization for Development
sity graduates to emigration, researchers have estimated that it forgoes up to
a third of individual income tax receipts through migration to the United
States alone.72 Many low- and middle-income governments would no doubt
find such tax revenues to be of great benefit in the fight against poverty. On a
number of occasions, source country governments have attempted to recoup
some of their investment in emigrant's education through imposing taxes on
remittances, but these have generally met with little success.73 Numerous pro-
posals have been advanced to share tax revenues of migrants between source
and destination countries, but these have been met with predictable reticence
by the destination countries, which benefit from immigrant flows. The effec-
tive transfer of billions of dollars from less developed to developed countries
thus continues unabated.
Impact of Brain Drain on Training
A compensating benefit of the brain drain is that it does tend to increase the
demand for training in the source country by raising the rate of return to edu-
cation, thereby potentially increasing the domestic supply of skills. After the
financial collapse in Russia in 1998, for instance, there was an increase in
enrollments in science and technology. Interviews showed that, because well-
paid domestic job opportunities were more limited, many students saw a sci-
ence and technology education as the best road out of Russia. A survey in
Bangladesh found that 72 percent of information technology specialists and
85 percent of information technology students planned to emigrate to take
advantage of better opportunities abroad.74 Even taking emigration into
account, the increase in demand for education generated by the brain drain
may actually increase the number of skilled workers in the population.
The impact of brain drain on a source country will obviously depend heav-
ily on the specific skills of emigrants and the demand for those skills in the
domestic economy. If emigrants are trained in skills that are wholly unemployed
by domestic industry, then the remittances sent home by such emigrants may
well be of more overall value to the source country than having the migrants at
home, although the underlying rationale of the education system must be ques-
tioned--especially if public funds are devoted to educating people to leave.
Unfortunately, though, a significant share of the skills sent from less developed
to more developed countries are very much in demand in the countries that
migrants leave behind. The case of medical services is considered in box 6.2.
Brain Drain and Foreign Direct Investment
When low-income communities permanently lose professionals such as teach-
ers, engineers, accountants, and doctors, the effect can be severe. Yet the emi-
Migration 175
BOX 6.2 Musical Doctors
H
ealth services are a common and growing source of demand for skilled migrants. Over a
quarter of work permits issued by Britain go to people working in medicine. In Australia
and the United States, a quarter of all physicians are foreign born. Competition for med-
ical professionals is so fierce that many of these immigrant doctors are drawn from other high-
income countries. To fill shortages that result, these countries recruit physicians from middle- and
low-income countries. The resulting system of migration tends to resemble the game of "musical
chairs," with countries competing to secure a limited and insufficient number of medical profes-
sionals. In this game, however, the losers lose their doctors--as many as 60 to 80 percent of them
in the case of Ghana and Jamaica, for example.
In the Philippines, the education system has adjusted to meet the international demand for
nurses and accordingly trains many more than are needed domestically. South Africa has partially
covered its shortfalls by "borrowing" 450 doctors from Cuba. For other countries, however, the
outflow of medical professionals has imperiled the public health system. Malawi, for instance, lost
more than half its nursing staff to emigration over the past four years, leaving just 336 qualified
nurses to serve a population of 12 million. Meanwhile, vacancy rates stand at 85 percent for sur-
geons and 92 percent for pediatricians. In the face of the HIV/AIDS pandemic, health services
have been hard to come by in Malawi. Rates of prenatal mortality doubled from 1992 to 2000, a
rise that is attributed to falling standards of medical care.
It is ironic that even as high-income countries invest millions of dollars to build up health sys-
tems in Africa, the same countries eviscerate those very systems by recruiting their personnel.
Some destination country governments are beginning to appreciate this. In 2001, the British gov-
ernment stopped public sector recruitment of medical professionals from some developing coun-
tries. However, the lack of restrictions on private recruitment, along with the unwillingness of other
countries to adopt similar self-restraint, has limited the measure's impact. The outflow of doctors
and nurses from low- and middle-income countries is currently as large as it has ever been.
Sources: Anderson 1998; Clarke and Salt 2003; and Dugger 2004.
gration of skilled workers is not always so problematic. In particular, when a
country's skill base is numerically large and relatively underutilized, as in some
middle-income countries, emigration can play an instrumental role in alert-
ing outside investors to the economic opportunities represented by the skill
base in the source country. For instance, when the Indian diaspora established
a record of success in the U.S. technology market, investors were prompted
to inquire about whether there were others in India with similar skills, and if
so, whether it would make economic sense to establish production facilities
in India. The result was a large flow of foreign investment into India. This
case demonstrates that when the conditions are right, skilled migrants are
able to generate symbiotic networks of investment, trade, technology trans-
fer, and skill acquisition that increase the productivity and demand for skills
176 Globalization for Development
in the home country while extending the global technology frontier and low-
ering the cost of products used by billions of people worldwide. This is one
key area where many of the dimensions of globalization considered in this
book positively interact.
Remittances
The most common benefit of emigration to source countries is the flow of
remittances sent by migrant workers to friends and family back home. In
2004, the value of these remittances to developing countries was estimated at
US$160 billion, over five times the level in 1990.75 A breakdown of remit-
tances to major recipient nations is presented in table 6.4. As seen in this table,
in some cases, remittances can be larger than both foreign direct investment
(FDI) and official development assistance (ODA).
Figure 6.3 depicts the time trend of official remittance flows from 1975 to
2006 for the six regions of the developing world. Recorded remittance flows--
particularly to countries in Latin America, South Asia, and East Asia and the
Pacific--have risen dramatically in recent years. The extent to which in recent
years this increase in recorded remittance flows is representative of an increase
in actual remittances (that is, funds remitted through formal and informal
channels) is unclear, however. Since the events of September 11, 2001, there
has been an increased emphasis placed on monitoring and controlling inter-
national fund transfers, with many informal channels being closed com-
pletely. Accordingly, some of the increase in official remittance flows observed
over the last two years of the sample may simply be a consequence of remit-
ters switching from informal to formal channels. Nevertheless, the broader
time series makes it clear that, over the past decade, flows of recorded remit-
tances have risen significantly.
Remittances have been found to powerfully affect levels of poverty and con-
sumption among recipients. They also tend to be stable or countercyclical to
other capital flows, so they can help to stabilize local economies during times
of recession or other crises. Because of this, there is little controversy among
developing country governments about the aggregate benefits that remit-
tances offer to their economies. The recent rise in recorded remittance flows,
at a time when capital flows were undergoing great volatility, means that remit-
tances sent through official channels are now second only to FDI as a source
of hard currency for low- and middle-income countries.
Impact of Remittances on Small Countries
For small countries with large migrant populations, remittances are of par-
ticular significance to the health of the overall economy. For example, in
Migration 177
TABLE 6.4 Economic Importance of Remittances, 2003
Total value Per Percent Percent Percent
Geographic area (US$ million) capita of GDP of FDI of ODA
Latin America and the Caribbean 24,153 $63.84 1.97 93 634
Mexico 14,595 $143 2 135 14,148
Jamaica 1,259 $477 16 175 36,599
Haiti 811 $96 30 10,397 406
South Asia 15,959 $18.77 3.54 518 433
India 17,406 $16 3 408 1,847
Bangladesh 3,191 $23 6 3,114 229
Sri Lanka 1,309 $68 7 572 195
East Asia and Pacific 19,532 $10.53 0.95 33 285
Philippines 7,880 $97 10 2,470 1,069
Tonga 66 $647 40 2,454 240
Vanuatu 53 $252 19 279 163
Middle East and North Africa 14,400 $51.66 2.14 338 219
Morocco 3,628 $120 8 159 694
Lebanon 2,700 $600 14 754 1,182
Jordan 2,201 $415 22 585 178
Sub-Saharan Africa 4,901 $8.49 1.43 59 27
Nigeria 1,676 $12 3 140 528
Lesotho 184 $103 16 439 232
Cape Verde 92 $196 11 622 64
Europe and Central Asia 12,818 $27.12 0.92 36 135
Poland 2,314 $61 1 56 194
Bosnia and Herzegovina 1,178 $285 17 309 219
Moldova 465 $110 24 796 399
Source: World Bank 2005b.
El Salvador, Eritrea, Jamaica, Jordan, Nicaragua, and the Republic of Yemen,
remittances make up more than 10 percent of national income.76 In Egypt,
remittances have on some occasions provided as much foreign exchange as
oil exports, tourism, and income from the Suez Canal combined; 15 percent
of households in the Philippines receive income from abroad.77 Such remit-
tance flows can often make significant difference for families living in poverty.
For example, families in Mali have been found to depend heavily on remit-
178 Globalization for Development
FIGURE 6.3 Flows of Official Remittances to Regions of the Developing World,
1975�2006
60.0
Workers' remittances (billions of current US dollars)
50.0
40.0
30.0
20.0
10.0
0.0
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
es 4
ate
06 200
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
tim
20
East Asia and Pacific Europe and Central Asia Latin America and Caribbean
Middle-East and North Africa South Asia Sub-Saharan Africa
Source: World Bank 2006a and World Bank Staff estimates.
tances from relatives in France to meet food consumption needs.78 Similar
research in the Dominican Republic found that 34 percent of residents
received remittances, which made up 60 percent of family income on aver-
age.79 The importance of remittances in alleviating poverty carries across much
of the developing world. Research from the World Bank shows that among 74
low- and middle-income countries, poverty rates were significantly reduced
by high emigration rates and large flows of remittances.80
Improving the Development Impact of Remittances
Historically, only a small portion of remittances have found their way to com-
munity development projects or local enterprises. However, with such invest-
ments, the impact of remittances might potentially be augmented. Recognizing
this, a number of countries have implemented programs to attempt to extend
the economic reach of remittances. Prompted by a government initiative, Mex-
ican migrants working in the United States have helped to establish around
1,500 Home-Town Associations that support activities to enhance infrastruc-
Migration 179
ture and enterprise in the source communities.81 States such as Jalisco have also
established Economic Development Funds into which the associations can
invest, with contributions matched by the Mexican government.82 In the state
of Guanajuato, American-based migrants have invested some US$10 million in
factories in their source communities.83 Following the Mexican approach,
Salvadoran migrants have established Comit�s del Pueblo to support activities
back home. More research is needed to evaluate effectiveness of these types of
schemes and the extent to which they assist migrants or their communities.
Improving Efficiency of Remittance Channels
Improving the development impact of remittance flows will also necessarily
involve raising the efficiency of channels to remit money. Currently a few firms
dominate the official global remittance market. Fees to send money interna-
tionally often exceed 10 percent, encouraging many migrants to use informal
channels.84 Estimates indicate that as much as half of total worldwide remit-
tances are sent through these unofficial channels.85 The fees imposed by money
transfer organizations, and thereby the reluctance of migrants to use them,
can be ameliorated by developing local banking sectors and working to link
credit unions across countries.86 For instance, the introduction of a network
that brought together credit unions from the United States and six Central
American and Caribbean countries in 2001 was able to reduce average fees for
remittances down to 2.6 percent. Source country governments and local non-
governmental organizations (NGOs) can also take a lead in this regard, by
helping to inform migrants and remittance recipients on the most economi-
cal way to transfer funds.87
Benefits and Costs for Destination Countries
History shows that the world's most productive economies often require and
benefit from the presence of migrant workers. Today, in spite of restrictions and
controversies, the world's richest countries continue to import labor from
abroad. In Singapore, Southeast Asia's richest state, migrants make up around
one-quarter of the workforce. In Europe, those countries with the highest num-
ber of migrant workers--Switzerland and Luxembourg--are also the wealthi-
est. The Arab Emirate of Dubai, which is probably currently among the world's
fastest expanding areas of economic activity, has nine times as many migrant
workers as it has native workers. By lowering the costs of production and bring-
ing in needed skills and expertise, migrants can indeed offer large positive
benefits to growing economies.88 Critics of immigration, however, are usually
concerned with its impact on such things as social fabric, national culture,
180 Globalization for Development
environment, and social welfare programs, or the wages of low-skilled workers.
Correspondingly, in addition to their traditional focus on much-needed skills,
advocates of increased immigration have turned their attention in recent years
to the potential role further inflows could play in ensuring the sustainability of
pension systems in the face of the aging of the population.
Fiscal Impact of Migration on Destination Countries
A common refrain of advocates of increased immigration restrictions is that
immigrants, particularly those who are low skilled or undocumented, consume
far more in public services than they contribute in tax revenue. For example,
this argument has been made by Borjas (2004), who claimed that "illegal immi-
grants created a net burden for California's taxpayers of around $2 to $3 bil-
lion annually" (p. 26). However, there is a wide body of economic research that
paints a very different picture of the fiscal impact of migration. Many Euro-
pean studies, for instance, conclude that immigrants--even those who are
undocumented--contribute more in taxes and pension contributions than
they consume in benefits or other public services.89 In the United Kingdom,
the contribution of immigration to public finances is so large that, in the words
of the United Nations, "were it not for the immigrant population either pub-
lic services would have to be cut or the government would need to increase the
basic rate of income tax by one penny in the pound."90 Even in the United
States, immigrant families are less likely to claim social welfare benefits than
native families once income levels are controlled for.91
Role of Migration in Sustaining Pension Systems
Contrary to the argument that migration undermines the sustainability of
social welfare systems, it is increasingly recognized that migration may well
have an integral role in helping to sustain these systems. As many residents of
developed countries are now aware, the population of retirees is set to rise
dramatically in coming years. Due to long-running declines in fertility rates
to below replacement levels in high-income countries, the share of popula-
tion that is working and thus paying taxes into those pension systems is also
falling.92 Thus, without large increases in taxes or public debt levels, retirees
may be faced with the prospect of receiving less in pension benefits than they
had been promised. Migration offers a way out of this dilemma. Many less-
developed countries that currently send migrants overseas are at the opposite
point in their demographic transition. By borrowing workers from low- and
middle-income countries and using the tax receipts to support social security
programs, high-income countries can slow the mushrooming liability of
promised benefits to pensioners.
Migration 181
Effect of Immigration on the Labor Market
The contention that migrants take the jobs of native workers is probably the
most ubiquitous and controversial argument advanced against immigration.
For economists, it has proved to be a difficult debate to settle empirically. Basic
theory suggests that increasing the size of the labor force will lower the wage
level, all other things being equal. Yet in the real world all other things are not
equal. When a city or region receives an influx of immigrant labor, native
workers may opt to move to other regions, thereby masking and spreading out
any changes in the aggregate wage. Firms also may decide to move into a
region experiencing such an influx, causing local wages to go up. Migrants
may also differ substantially from native workers in what they offer employ-
ers, and thus they may look for very different jobs.
Migrants who bring with them distinct skills or business contacts may also
generate changes in technology, productivity, and trade patterns that can
affect an economy in ways quite unforeseen before their presence. It does not
thus follow that simply because a particular region experiences an inflow of
migrant labor, the average wage of native workers will decline relative to what
it would have been otherwise.
Impact of Migration on Wages
Much economic research has been devoted to attempting to discern the true
relationship between immigration and wages, though controversies over the
issue still abound. A common approach has been to examine how immigrant
penetration of labor markets correlates with local wage levels. The general
finding is that the average wage of native workers tends to be only slightly
lower in labor markets with a large number of immigrants.93 Although the
sheer volume of evidence contributed by such studies may seem convincing,
it does not necessarily tell us much about the true effect of immigration on
wages. As outlined above, native workers are free to move to other regions
when faced with an inflow of immigrants, and enterprising firms are free to
move in. This will have the effect of equalizing wages across immigrant re-
gions and nonimmigrant regions alike, though at a lower level than would
have prevailed in the absence of immigrants. Thus, even though migrants may
adversely affect the wages of native workers, this result may not be identifi-
able by any of the traditional methods outlined above.94
Skilled Migration and Innovation
Inflows of skilled migrants can stimulate innovation and lower the cost of
producing high-tech goods and services in destination countries. The magni-
tude of these benefits is often sizeable, particularly in countries with long-
182 Globalization for Development
established programs for attracting talent. In the United States, for instance,
it has been estimated that a quarter of Silicon Valley firms are headed by immi-
grants from China and India.95 Furthermore, entrepreneurial immigrants
have frequently played a crucial role in establishing trade and investment links
between destination and source countries. These links often prove equally
crucial in raising the living standards of native citizens.96 Immigrants can also
help economies in much less tangible ways as well, such as by aiding in the
adoption of foreign innovations and ideas.
Employment of Low-Skilled Migrants
There are many reasons why migrants--even low-skilled migrants--help des-
tination economies and native workers. Often low-wage immigrant workers do
not compete with low-wage native workers, but instead they are employed in
sectors that traditionally have been dominated by migrants. Thus, one wave of
migrants would displace another. Such sectors include child care, cooking,
other household services, cleaning services, and menial farm jobs, all of which
native workers have been unwilling to perform. Thus, without the presence of
migrant workers to fill these jobs, society as a whole would be worse off.
Protecting the Vulnerable
In some respects, the current international migration regime is characterized
by significant injustices. It costs thousands of lives each year, redirects hun-
dreds of millions of dollars from poor people to the hands of criminal gangs,
and deprives many needy communities of their most important members.
History teaches us that migration can be a powerful force for world devel-
opment, yet the current system, while making vital contributions, as is evi-
dent in remittance flows and diaspora networks, also contains elements that
may actually exacerbate the world's inequalities. To spread the benefits of
globalization, policy reform in migration should aim to enhance the devel-
opment impact of migration and also protect the most vulnerable people
involved.
Exploitation of Undocumented Migrants
While high-income countries are focusing on protecting their borders against
inflows of undocumented migrants, they have paid relatively little attention to
undocumented migrants who are already in the country. This has allowed the
exploitation of undocumented migrants by unscrupulous employers, who can
threaten to turn workers over to immigration authorities if they do not accept
whatever conditions are presented to them.
Migration 183
Most of the countries that experience large inflows of undocumented work-
ers rely heavily on the low-cost labor they provide. Political considerations,
however, and perhaps past experiences, have prevented governments from
instituting more official low-skilled "guest-worker" programs, except in partic-
ular industries such as agriculture. Unfortunately, the unintended consequence
of such policies include unnecessary suffering among migrants attempting
undocumented entry, and because they are often in a legal limbo, the potential
for exploitation and abuse of undocumented workers who make it into the
country. Implementing low-skilled migration programs, targeted at workers
who would otherwise enter the country through undocumented means, can sig-
nificantly prevent the most common forms of exploitation and abuse.
As noted in box 6.1, there is great variety in the scams and maltreatment
that migrants can be subjected to, with perpetrators often spread between both
source and destination countries. A common thread, though, is a lack of capac-
ity among source and destination countries to deal with claims of migrant
abuse, as well as a lack of knowledge among the migrants themselves of their
rights throughout the migration process. Recently, the Philippines, which
sends more low-skilled migrant workers abroad than any other country, has
undertaken a concerted effort to protect its expatriates abroad. Some exam-
ples of this effort are detailed in box 6.3.
Effects of High-Skilled Migration on Source Countries
While high-skilled migration in sectors such as ICT seems to have played an inte-
gral role in helping spur economic development in a few source countries, high-
skilled migration in other sectors--health and medicine, in particular--have
done considerable damage to source countries. It may therefore be desirable to
consider adopting and expanding measures by destination countries that limit
the recruitment of doctors, nurses, educators, and other key professionals from
countries facing a shortage in these sectors. The United Kingdom has already
made steps in this direction, precluding recruitment by its National Heath Ser-
vice of such personnel and encouraging members of the British Common-
wealth to adopt similar rules. However, to be more effective, such measures must
extend both to private operators and recruiters and to other countries that
recruit health and other professionals. They should also be developed in part-
nership with the source countries that need to address the factors causing peo-
ple to emigrate and improve the incentives for skilled people to remain at home.
Refugees and Asylum Seekers
The 1951 Geneva Convention, which provides the legal mainstay for refugee
protection and resettlement programs, is severely tested by modern refugee
184 Globalization for Development
BOX 6.3 Migrant Labor Institutions of the Philippines
N
o country exports more labor annually than the Philippines. Given this importance of
migration, the government of the Philippines has established a number of agencies to pro-
mote and protect the welfare of migrants. The Philippine Overseas Employment Agency
(POEA) regulates, licenses, and monitors recruitment agencies. The Philippine Overseas Labor
Office (POLO) maintains attach�s in approximately 32 destination countries and provides such
services as counseling, legal assistance, and liaison service to migrant nationals.
To ensure that employers and recruitment agencies do not seek to exploit workers, the gov-
ernment has also developed and disseminated "model employment contracts" with standards
and requirements for a variety of different countries and occupations. The government of the
Philippines requires all migrant workers leaving to register with POEA and undertake a day-long
briefing, informing migrants of their rights and obligations, providing information on how to effi-
ciently remit money to friends and relatives and on how to ensure that their health and occupa-
tional safety are protected. In addition, NGOs give seminars for migrants thought to be
particularly vulnerable, such as female household workers.
The government of the Philippines has also entered into agreements with some 12 destination
countries to protect and enhance migrants' welfare and has been known to place diplomatic pres-
sure on a number of destination countries to sign and ratify the UN Convention on the Protection
of the Rights of All Migrant Workers and Their Families. Although these efforts are not without
shortcomings, they nevertheless represent a step forward in informing migrant nationals about
their rights and how to protect those rights, and also provide something of a model for other
source countries.
Source: Barber 2004.
flows. The traditional system of processing asylum seekers, in particular, is
under great pressure, generating a level of controversy in leading destination
countries that threatens many other forms of migration as well. Meanwhile,
many large-scale regional refugee flows struggle to attract sufficient funding
and attention. Although there are 10 times as many refugees in the world as
asylum seekers, the UN agency charged with assisting those refugees receives
less than one-tenth the resources that are expended on processing claims for
asylum.
It seems appropriate to begin to think about ways in which the current
arrangement could be improved. Means must be developed, for instance, to
dissuade asylum seekers from undertaking dangerous and expensive illicit
journeys to reach their choice country for resettlement. It has been suggested
that a desirable option may be to establish UNHCR-operated "reception cen-
ters" in each region, to which asylum seekers would be forced to apply. Such
proposals may have merit, but it is important that they be more fully studied
Migration 185
to ensure that any alternative system does not dissuade asylum seekers from
fleeing persecution in their home country or subject them to further perse-
cution in neighboring countries as they await decisions on their cases. Once
persons are granted asylum in a foreign country, it is also important that they
are given the opportunity to contribute to their source and host countries.
Summary
Migration is a central and underappreciated feature of economic globalization.
It has the potential to help poor people, but it also can hurt them in a variety
of ways. Migrants send tens of billions of dollars worth of remittances to their
home countries, and the remittances can directly contribute to alleviating
poverty. However, many migrants, including refugees and undocumented
workers, remain vulnerable to discrimination and abuse. Additionally, skill
poaching, especially in the area of medical professionals, can undermine health
systems in source countries, even while these systems are trying to combat
public health crises such as AIDS, tuberculosis, and malaria.
Although migration holds great potential as an aspect of globalization that
could significantly assist poor people, in part, the present system is open to
abuse, is inefficient, and may at times even exacerbate inequalities. History
shows that migration can be a powerful force for world development. To spread
the benefits of globalization, migration reforms, as the Global Commission on
International Migration (2005) identifies, should seek to enhance the benefits
and mitigate the negative dimensions of current flows. Migration in the past has
been a powerful driver of poverty reduction. Migration has enormous poten-
tial to interact positively with networks of trade, investment, and technology
transfer between rich countries and the world's poorest societies to spur growth
and development. In chapter 8, we draw a number of policy implications from
our analysis of migration.
Annex: Sources and Methodology for Table 6.3
This annex documents data sources and procedures used in constructing table
6.3. Countries and flow volumes cited represent values for annual inflows and
outflows, but not necessarily net flows.
Permanent Settlers: Here we are concerned only with those who cross bor-
ders with the right to settle permanently in the destination country. For the
United States at least, most migrants who gain the right of permanent resi-
dence or citizenship do not fall into this category. In 2002, for instance, 9.6 per-
cent of new permanent residents in the United States adjusted from temporary
worker status, 9.5 percent from refugee status, 1.8 percent from student status,
186 Globalization for Development
and 31.3 percent from undocumented, unknown, or unreported status.
Accordingly, large differences may exist between the annual cross-border flow
of permanent migrants and the total number of persons granted permanent
residency.
For the United States, according to U.S. Department of Homeland Security
(2003a), a total of 1,063,732 immigrants were admitted to the United States in
2002, of whom 384,427 were new arrivals and 679,305 were previously present
in the United States and adjusted from temporary visa status. In assessing the
magnitude of inflows of permanent settlers, we are specifically interested in
those who initially enter the United States with the intent of settling perma-
nently. Our assessment of the total inflows of permanent settlers thus included
those who had previously been living abroad, persons adjusted to permanent
resident status from business or pleasure visitor visas, fianc� or "other" status,
plus persons with immigrant visas pending granted temporary admission under
the Legal Immigration Family Equity (LIFE) Act. We concluded that 569,938
such persons immigrated to the United States in 2002.
For Canada, the figures in table 6.3 are "actual landings" in 2002 as listed in
Citizenship and Immigration Canada (2003a). For Germany, they are "natu-
ralizations of foreign nationals" in 2000, as listed in Table IV.11 of OECD
(2004), p. 200. For France, they are inflows of permanent workers, persons
entering under family reunification, and persons entering under additional per-
mits relating to family reunification from non-EU countries in 2001, as listed
in Table A1.1 of OECD (2004), p. 308. For Australia, they are settler arrivals in
financial year 2002�3 as provided by Australian Government (2004a). To deter-
mine the volume of total annual flows and the leading countries of origin, we
consulted the above sources and the tables supplied on the OECD Web site.
High-Skill Expatriates: For the United States, a total of 201,079 petitions for
initial employment under the H-1B visa scheme were approved in 2001, accord-
ing to U.S. Immigration and Naturalization Service (2002), which also provided
data on the countries of origin of beneficiaries. For the United Kingdom, data
on the UK Work Permit scheme and the countries of origin of beneficiaries
were provided by Clarke and Salt (2003). For Canada, data on foreign work-
ers entering Canada were provided by Citizenship and Immigration Canada
(2003b). For Australia, data on skilled temporary residents were provided by
Australian Government, Department of Immigration and Multicultural and
Indigenous Affairs (2004a). For Japan, OECD (2004) provided lists of "resi-
dents with restricted permission to work" by occupation in table IV.16 on
p. 221. Contrary to the OECD, we did not count "entertainers" as high-skilled
migrants. Information on migrant worker flows to other OECD countries is
provided in table 1.1 of OECD (2004), p. 28.
Migration 187
Low-Skill Expatriates: Data on the stock volumes of migrant workers in
Saudi Arabia, Kuwait, the U.A.E., and other Gulf countries were provided by
Human Rights Watch (2003). To assess flow volumes, we obtained estimates
of the volume of Filipino workers in the respective countries from various
sources, including Human Rights Watch (2004) and Philippine government
documents. We then utilized these estimates with data on outflows of Filipino
workers by destination, as provided by the Philippine Overseas Employment
Administration (2004), to calculate a ratio of inflows to stocks for each desti-
nation country. Under the assumption that the ratio of inflows to stocks for
migrant workers from other source countries did not differ substantially from
those of Filipinos, we were able to determine inflow volumes for each desti-
nation country. The equation is as follows:
Filipinos
Outflow Philippines
Inflow Total
Destination = Filipinos
� StockDestination
Total
Stock Destination
Data on inflows of contract and seasonal workers to Germany, with source
country breakdowns, were provided in table IV.11 of OECD (2004), p. 200.
Information on migrant worker inflows to Malaysia was provided by Scal-
abrini Migration Center (2000). Further information on outflows from lead-
ing source countries was provided by the Scalabrini Migration Center (2000)
and the Philippine Overseas Employment Administration (2004).
Asylum Seekers and Refugees: The United Nations High Commissioner for
Refugees (UNHCR) collects and disseminates detailed statistics on annual
stocks and flows of refugees and asylum seekers. The data listed represent
flows of new refugees and asylum seekers in 2002 and are sourced exclusively
from UNHCR (2003). Table 5 lists the number of asylum applications filed
since January 1, 2002, as 926,086 and provides a breakdown by country of asy-
lum. Table 8 provides complementary information on the countries of ori-
gin of asylum seekers. Table 2 lists the number of new refugees in 2002 as
1,411,605 and provides a breakdown by country of asylum. Table 4 provides
complementary information on the countries of origin of refugees. Note that
although there were 632,340 new refugees from Afghanistan in 2002, a total
of 1,997,474 Afghans were repatriated in 2002. Across the world, a total of
2,827,123 refugees were repatriated, so the total number of refugees in the
world actually declined by 1,415,518 in 2002. At year end, there was a total
stock of 10,389,582 refugees outside of their home countries. The total stock
of asylum seekers was about a tenth of this: 1,014,300.
Undocumented Migrants: Data on the volume of inflows of undocumented
migrants to the European Union countries were provided by Jandl (2003). Esti-
188 Globalization for Development
mates of the origin of undocumented immigrants were extrapolated from
nationality of undocumented immigrants regularized under amnesty programs,
as provided in table I.14 of OECD (2004), p. 71. An estimate of undocumented
inflows to the United States is provided by U.S. Department of Homeland Secu-
rity (2003a), p. 213, "Average annual [unauthorized] population growth in the
1990s was estimated to be 350,000." Information on the composition of such
flows is provided by the same source. No data on illegal flows in Asia or Africa
are available; therefore, numbers represent an extreme lower bound.
Visa-Free Migrants: Estimates of intra-EU migrant flows are derived from
tables B.1.1 of OECD (2003b). In the event that flow data between particular
source and destination country pairs were unavailable, they were extrapolated
from data on the stocks of EU foreigners in EU-15 member states, as provided
in table 11 of Recchi and others (2003). When these data were unavailable (as
in the case of non-British migrants residing in Ireland), flow data was extra-
polated from aggregate intra-EU migration rates.
Students: Data represented stock of foreign students enrolled in tertiary
education in 2001 and were sourced from table C3.5 of OECD (2003c).
Notes
1. Here we consider only international migration--that is, flows of persons across national borders.
It should be noted, though, that many developing countries experience sizeable flows of internal
migration (particularly from rural to urban areas), which can have powerful independent effects
on levels of poverty and economic development.
2. See Diamond (1997)
3. See Cornelius (2001).
4. See Hatton and Williamson (2002).
5. See, for example, Walmsley and Winters (2003).
6. See Schrover (2004).
7. Of the 8 million people that crossed the Atlantic by the end of the 18th century, 7 million were
enslaved Africans, and at least half of European migrant flows were composed of indentured ser-
vants (Chiswick and Hatton 2002, p. 2).
8. Massey (2003, p.2) finds a "significant positive association between the onset of industrialization
and the initiation of large-scale international movement."
9. According to Hatton and Williamson (1998, p. 40), "a 10 percent rise in the real wage ratio
[between the sending and receiving countries] reduced the emigration rate by 1.27 per thousand."
10. See Massey (2003).
11. The Chinese Exclusion Act of 1882 barred Chinese laborers from the United States; the 1908 gen-
tlemen's agreement ended Japanese migration to the United States; and in 1917, legislation cre-
ated the "Asiatic Barred Zone," which prohibited migration from Asia (Massey 2003, p. 8).
12. Hatton and Williamson (1998) report that "mass migration accounted for 208 percent of the real
wage convergence observed in the Atlantic economy between 1870 and 1910."
13. The United States imposed literacy tests on immigrants in 1917 and, in the 1920s, country-based
quotas limited inflows from Southern and Eastern Europe. Literacy tests were introduced in South
Africa in 1897, Australia in 1901, New Zealand in 1907, and Canada in 1910. By the early 1930s, all
these countries had adopted stringent migration restrictions (Chiswick and Hatton, 2002, p. 33).
Migration 189
14. In many countries, it took years for the principles of these conventions to be fully adopted. It was
not until 1980 that the United States accepted the UN definition of refugees and began taking in
refugees from non-Communist countries (Chiswick and Hatton 2002, p. 35).
15. See Chiswick and Hatton (2002), p. 36.
16. See United Nations Population Division (2002).
17. In 2000, foreign-born persons comprised 24 percent of the population in Australia, 19 percent in
New Zealand, 16 percent in Canada, and 11 percent in the United States (International Organi-
zation for Migration 2003b, p. 157).
18. Characteristics rewarded by the points-based system include education, job experience, financial
resources, linguistic skills, age, job offers, and relatives residing in the country.
19. The United States also accepts around 50,000 permanent residents through the annual "diversity
lottery" from countries with comparatively low rates of emigration.
20. The existence of a family channel is arguably required by the Universal Declaration of Human
Rights.
21. Vietnam, for instance, ranked third as a source of family migrants to Australia in 2002, through
a chain that was initiated over a generation ago with a relatively small inflow of refugees (authors'
calculations based on Australian Department of Immigration and Multicultural and Indigenous
Affairs 2004b).
22. The United States has adopted the solution of imposing annual quotas on grants of permanent
residence to extended relatives, with "subquotas" then limiting the number of those visas that can
be issued to any one country. For some extended relatives of U.S. citizens living in countries with
a high demand for visas, this has meant as much as a 20-plus year wait for a visa decision (U.S.
Department of State 2004).
23. Authors' calculations based on U.S. Department of Homeland Security (2003b), Table 33.
24. With the economic growth of the 1990s, the annual quota on H-1B issuances was raised from
65,000 in 1998 to 195,000 in 2001; in 2004 the quota was reduced to 65,000 again.
25. Germany has the highest number of such workers, attracting 278,000 migrants in 2001, an over-
whelming number of whom came from Poland. Other European countries, such as Austria,
France, Italy, Switzerland, and the United Kingdom, attract between 10,000 and 50,000 seasonal
agricultural workers annually (OECD 2003a).
26. See Human Rights Watch (2004, pp. 12�13).
27. The Convention does not oblige signatories to protect people who have fled their country due to
war, famine, environmental collapse, or persecution by nonstate agents.
28. Studies of asylum seekers have found that the choice of destination is often influenced by trans-
port costs, location of family and friends, perceptions of justice, or colonial, linguistic, or cultural
affinities (Robinson and Segrott 2002). Asylum seekers at times pay human smuggling networks
thousands of dollars to facilitate such journeys, which are often fraught with personal risk of
death, injury, or exploitation.
29. Sources and destinations of asylum seekers are concentrated. Only 24 countries produced over
10,000 asylum seekers (authors' calculations based on UNHCR 2003, tables 5 and 8).
30. Among the 16 countries that received over 10,000 asylum seekers in 2002, that figure fell to 19 per-
cent (authors' calculations based on UNHCR 2003, table 5.
31. According to the International Organization for Migration, across six countries that received large
inflows of asylum seekers, only one out of every five people with rejected claims was returned
home (IOM 2003b, p. 102).
32. In 1993, the German government adopted legislation that automatically rejected asylum claims
filed by those who entered Germany via third countries considered "safe." In 1994, the United
States shipped refugees fleeing civil disturbances in Haiti to Guantanamo Bay, Cuba. In 2001, the
Australian government sent a boatload of Afghan asylum seekers to the desert island of Nauru,
while accommodating others in an isolated location in the South Australian outback.
33. Research by the British Home Office found that one-third of all those accepted as refugees had
university degrees, or post-graduate or professional qualifications (Stalker 2001).
190 Globalization for Development
34. See Koser and Van Hear (2003), p. 10.
35. See Koser and Van Hear (2003), p. 16.
36. See UNHCR (2003).
37. In the aftermath of the Rwandan genocide in 1994, the absence of any mechanism to determine
the individual status of refugees had the unfortunate consequence of allowing g�nocidaires to orga-
nize and commit further crimes against humanity under the aegis of humanitarian protection
provided by the international community.
38. During the Kosovo crisis in 1999, Western European countries granted blanket protection against
return to all refugees. This precluded access to individual refugee status determination until the
crisis was resolved and the overwhelming majority of people could return in safety.
39. Zaire is now the Democratic Republic of Congo.
40. It is noteworthy that the annual budget of the UNHCR is less than $1 billion, yet developed coun-
tries spend approximately $10 billion each year processing and hosting one-tenth the number of
asylum seekers.
41. Note that the U.S. Department of Homeland Security does not track the number of people appre-
hended, only the number of apprehensions. Because of repeat arrests, it is highly plausible that the
number of apprehensions greatly exceeds the actual number of individual people apprehended.
42. Stalker (2001).
43. See U.S. Department of State (2003).
44. The International Organization for Migration (1999) estimates that 300,000 women and children
are trapped in "slavery-like" conditions in the Mekong Delta.
45. In a significant number of countries, trafficking victims can expect little assistance from legal
authorities even if they do manage to escape from their captors.
46. See Szel�nyi (2003).
47. Note that many people have interdependent personal utility, which means that their happiness
depends on the welfare of their close relatives or friends.
48. See Ramos (1992).
49. Migrants from poor countries often attempt to circumvent this "liquidity constraint" on migra-
tion by entering into contracts of indentured servitude with smuggling groups to finance the cost
of illicit passage.
50. Authors' calculations based on data from Eurostat (2002).
51. For further discussion, see Martin and Taylor (1996).
52. Borjas (1999) reports that a US$5,000 increase in per capita GDP reduces the emigration rate by
one percentage point
53. In economics, this is known as a network externality.
54. See Gabbard, Mines, and Boccalandro (1994).
55. See Stalker (2001).
56. For further discussion, see Stark (1991).
57. We briefly discuss civil conflict in chapter 8, where we propose a multilateral agreement on arms
trade.
58. Migration News (1996) Vol. 3, No. 10, cited in Stalker (2001).
59. Financial Times, March 23, 2005 citing OECD (2005).
60. Hatton and Williamson (1998) report that "A CGE [computable general equilibrium] model esti-
mated that the real wage in Sweden was 9.4 percent higher in 1890 than it would have been in the
absence of twenty years of emigration after 1870" (p. 27) and that "Post-famine Irish emigration
accounted for as much as a half of the growth in real wages at home and for as much as a third of
the growth of income per head" (p. 189).
61. With the globalization of the tertiary education market over recent decades, a new dimension of
brain drain has opened up whereby talented students head abroad to earn qualifications and elect
to stay there. The Economist (2002) reports that half of all foreign students who earn doctorates
in the United States are still there five years later.
62. See Carrington and Detragiache (1999).
Migration 191
63. The Economist (2002) reports that 21 percent of new legal immigrants to the United States had at
least 17 years of education--a level reached by only 8 percent of native-born Americans.
64. See Adams (2003); and �zden and Schiff (2005).
65. See Carrington and Detragiache (1999).
66. See Docquier and Rapoport (2004).
67. See Weiss (2001).
68. See Docquier and Rapoport (2004).
69. See Docquier and Marfouk (2004).
70. See Desai, Kapur, and McHale (2001).
71. Authors' calculations.
72. See Desai, Kapur, and McHale (2001).
73. Mandatory earmarking of remittances failed in Bangladesh, Pakistan, the Philippines, and Thai-
land, but the Republic of Korea did experience some success in the taxation of temporary work-
ers sent to the Middle East (Lowell 2001).
74. United News of Bangladesh (2000), cited in Stalker (2001).
75. World Bank 2005b. World Bank (2005F) provides an analyses of remittance data and its distribu-
tion and impact. It is thought that at least some of the large rise in recorded remittances over recent
years reflects a switch to formal financial channels following the imposition of restrictions and
higher levels of scrutiny on informal transfer agents in the wake of the events of September 11, 2001.
These and other underlying questions on the remittance data mean that considerable caution
should be exercised in interpreting these numbers--part of the rise in remittances may be
accounted for by a switching from informal to formally recorded channels rather than an actual
rise in the total amount of transfers. As is the case with other dimensions of migration, the net
impact on the donor country or community cannot be assessed without reference to the full costs
and benefits, including the potential negative impact of the loss of skills and social fabric, as well as
factoring in the amount that the migrant could have contributed if he or she had stayed at home.
76. See United Nations Population Division (2002).
77. See Stalker (2001).
78. See Hatton and Williamson (2001).
79. See Waller Meyers (1998).
80. For further discussion, see Adams and Page (2003) and Maimbo and Ratha (2005).
81. See Stalker (2001).
82. See Stalker (2001).
83. See Martin and Teitelbaum (2000).
84. See Orozco (2003) and United Kingdom (2005).
85. See Stalker (2001).
86. See Orozco (2003).
87. One example of an attempt to reduce remittance costs through increased transparency is that of
the United Kingdom Department for International Development (2005), which has conducted
research on the alternative methods open to migrants in the United Kingdom. The Web site
www.sendmoneyhome.org aims to provide information on the different options and rates.
88. In the case of the United States, for example, these positive effects have been estimated to be as
large as US$10 billion dollars a year. See U.S. Commission on Immigration Reform (1997).
89. For further discussion, see Simon (1989), Glover and others (2001), and United Nations Popu-
lation Division (2000).
90. United Nations Population Division (2000).
91. See Fix and Passel (1999), cited in Stalker (2001). The fact that migrants come to high-income
countries seeking work not welfare is borne out by a recent study that finds that migrants in fact
avoid destinations with generous social welfare programs and the attendant high tax rates. See
Pederson, Pytlikova, and Smith (2004).
92. Fertility rates must be 2.2 children in order for the population to be stable. The average for high-
income countries is now well below that, at approximately 1.7. Projections are that by 2050, 33 per-
192 Globalization for Development
cent of the population of developed countries will be over 65 as opposed to 19 percent in 2000. See
United Nations Population Division (2000).
93. Pischke and Velling (1994) perform spatial correlations for Germany and find a weak negative
correlation between the native wage and proportion of immigrants in the work force. Hunt (1992)
reports that following the 900,000 persons who migrated to France from Algeria during the year
after that country's 1962 independence, there was little change in the wage levels of affected local-
ities. Glover and others (2001) report that a 1 percent increase in immigrant labor has only a very
small effect on the wages of British-born workers. According to Borjas (1999), "A typical study
finds that if one city has 10 percent more immigrants than another, the native wage in the city
with more immigrants is only about 0.2 percent lower." The OECD (1997) has found no rela-
tionship between immigration and rates of unemployment in destination countries. Finally, Card
(1990), who examined the influx of 125,000 Cuban immigrants to Miami in 1980, found that
wage and employment trends among Miami's workers were barely altered by the inflow.
94. Borjas (2003) argues that ". . . despite all of the confusion in the literature, the available evidence
teaches [that] the study of the geographic dispersion in native employment opportunities is not
an effective way for measuring the economic impact of immigration; the local labor market can
adjust in far too many ways to provide a reasonable analogue to the `closed market' economy that
underlies the textbook supply-and-demand framework" (p. 1339).
95. OECD (2002), p. 4.
96. Florida (2002) explores some of these issues for the case of the United States, drawing attention
to what he calls the "three T's": technology, talent, and tolerance.
7
Ideas
I n previous chapters, we examined trade, capital flows, aid, and migration
and the interaction of these global flows with development. In each case,
these dimensions of economic globalization had the ability to contribute to
development under certain conditions. This chapter focuses on ideas, an
often-neglected dimension of globalization, despite often being the most
important. Ideas involve generating and transmitting distinctive intellectual
constructs in any field that can affect production systems, organizational and
management practices, governance practices, legal norms, and technologi-
cal trends. Our scope here is thus very wide. Nevertheless, as with the other
dimensions of economic globalization, there are distinct if subtle connec-
tions between the realm of global idea generation and dissemination and the
realm of poverty and development. We attempt to convey some of these con-
nections here.1
The Power of Ideas
Ideas are the most powerful influence on history. Globalization is above all
about the flow and intermingling of ideas among the countries of the world.
Ideas inform the evolution of politics and economics. The ways in which ideas
flow and are absorbed shapes globalization and its impact on poor people.
This has been true since the first migrations of "primitive" peoples across
Africa, the Americas, Asia, and Europe. That the global spread of ideas is not
a new phenomenon is evident in the rise of the earliest civilizations and the
development and adoption of language, early implements, and agricultural
technologies.2 The spread of languages and cultures, of religion, and of spe-
cialization and trade reflect the forces of globalization. Although the expan-
sion and then contraction of the influence of the ancient African, Chinese,
Greek, Mayan, and other civilizations may be interpreted as the rise and
193
194 Globalization for Development
decline of their military power, this power reflected an underlying set of ideas
and technologies that shaped and informed the waxing and waning of the
empires.
Development may be characterized as the application of better and smarter
ways of dealing with key challenges. As a leading growth economist Paul
Romer (1993a) has written, "Nations are poor because their citizens do not
have access to the ideas that are used in industrial nations to generate eco-
nomic value" (p. 543). Development marks the evolution of newer and more
effective ideas that replace those that no longer reflect the opportunities and
policy choices available to individuals and societies. The acceleration of
growth and poverty reduction requires a more rapid evolution and dissemi-
nation of ideas. The challenge is the identification and assimilation of what
works (and what does not work) in the fight against poverty, with local ideas
addressing the uniqueness of local problems drawing on the full richness of
global knowledge.3
Bad Ideas
Not all ideas are good. Indeed, some of the most negative effects of globaliza-
tion can be attributed to the adoption of inappropriate ideas. One extreme
case of this--the idea of mercantilism--is considered in box 7.1. However,
creating barriers against the flow of ideas is not an appropriate response to the
risk of adopting bad ideas. Insulating society from these flows, through intel-
lectual autarky (intellectual self-sufficiency), is perhaps best illustrated by the
Democratic People's Republic of Korea, which--after adopting and adapting
the big, far-reaching idea of Marxist-Leninism--has virtually cut itself off
from the world, with disastrous consequences for its population. We might
imagine that if the Democratic People's Republic of Korea were to end its
isolation and benefit from its proximity to its neighbors, the Republic of
Korea and China, the dynamic effects of the new ideas flowing in would dwarf
the development impact of foreign aid and even foreign investment flows.4
Identifying and Adapting Useful Ideas
The challenge for countries and individuals is to create the capacity to iden-
tify, from the myriad idea flows, those that are most interesting and that offer
the most potential--and to then evaluate, reject, and adapt those ideas in a
process that leads to local innovation and progress.
This is no small challenge. The evaluation and adaptation of ideas requires
local capacity in the form of both skills and institutions.5 It also requires a cul-
ture of learning and adaptation, of openness to ideas and to challenging past
practices. In development projects, it requires the explicit recognition of the
Ideas 195
KEY TERMS AND CONCEPTS
civil society organizations (CSOs) mercantilism
global economy nonexcludable nature of public good
Green Revolution nonrival nature of public good
import-substitution model of trade patent ladders
information gaps public goods
intellectual property rights Washington Consensus
knowledge gaps
market system
need for independent assessments based on accurate data, followed by frank
discussions of what works and what does not, what can be improved and how.
Global Economy and the Market System
The fall of the Berlin Wall and the integration of China into the global econ-
omy, together with technological change--not least in telecommunications
and transport--has been associated with an acceleration in the integration of
the global economy and the reach of the particularly ubiquitous idea of the
market system. As defined by Lindblom (2001), the market system "is a sys-
tem of society wide coordination of human activities not by central command
but by mutual interactions in the form of transactions" (p. 4). This system
now informs economic governance virtually everywhere. This is not to
say, however, that the system of market-based coordination is in any way
monolithic, as China's strong central management of the market economy
illustrates. Economic activity exists in many forms, shaped by the interface of
global ideas with local ideas and preferences. The global economy is con-
sequently in constant evolution, as well as in coevolution with systems of
governance.
Flow of Ideas
The post�World War II period has been associated with an unprecedented
increase and reach of the cross-border flow of ideas. It is no accident that this
period also has been associated with unprecedented leaps in life expectancy
and literacy, benefits brought by the spread and adoption of new policies and
technologies. The combination of global knowledge and local innovation
and adaptation and implementation has been particularly powerful. This is
196 Globalization for Development
BOX 7.1 Mercantilism
M
ercantilism was one the most misguided development ideas of all time. In its myriad
forms, mercantilism influenced development patterns from the mid-15th century
through the end of the 19th century. This influence ranged from mild to catastrophic
among the various regions of what we now call the developing world. The basic notion of mer-
cantilism was that wealth was to be found in precious metals, primarily gold. As an admiral of
Christopher Columbus stated, "of gold is treasure made, and with it he who has it does as he wills
in the world and it even sends souls to Paradise." Where gold was not to be acquired directly,
through mining, it was to be acquired indirectly, by generating a trade surplus. As stated by
Thomas Mun in an early mercantilist treatise, "The ordinary means . . . to increase our wealth and
treasure is by Foreign Trade, wherein we must ever observe this rule; to sell more to strangers
than we consume of theirs in value." Gold was seen as important in part for its role in paying
armies. Indeed, trade and war were closely related in much mercantilist thinking and practice,
perhaps most famously in the case of the Dutch East India Company, which at its height main-
tained a force of 30,000 soldiers. As one of its employees wrote, "We can't trade without war, nor
make war without trade."
It was mercantilism that provided the intellectual structure of Spain's brutal colonial conquests
and set the stage for the famous inflows of gold into the capital of its empire, Sevilla. The barren
nature of mercantilist ideas became apparent with Iberian inflation and, ultimately, the collapse of
the empire by the end of the 17th century. Spain itself gained few long-term benefits from its
empire, no less its brutalized colonial subjects. As Adam Smith noted in his anti-mercantilist
Wealth of Nations, "Wealth does not consist in gold and silver; but in what money purchases."
In the late 1700s, Spain locked up the documents of its colonial history in the Old Exchange
Building in Sevilla. In 1862, the young King Leopold of Belgium spent a month in these archives,
carefully studying Spain's application of mercantilist practice to its colonies. These he applied to
his own colony in the Congo after the Berlin Conference of 1885. Again, the effect was brutal,
resulting in the deaths of approximately 10 million Congolese from 1885 through 1920. Thus, the
mercantilist idea extended its devastating reach across more than four centuries, with each impe-
rial power seeking to run a trade surplus by locking its colonies into patterns of trade that pre-
vented the colonies trading with other imperial powers or their colonies, choking what now is
known as South-South trade.
Sources: The Economist 1998, 1999; Galeano 1997; Hochschild 1999; Mun 1924, orig. 1664; Smith 1937, orig. 1776.
evident, for example, in the way that global knowledge about the relations
between germs and diseases has been applied in local campaigns to encour-
age people to wash hands, and in how the biological advances in under-
standing HIV/AIDS have been combined with local knowledge to develop
public health strategies that have saved hundreds of millions of lives. Simi-
larly, the combination of global knowledge and local innovation provided
the engine for the Green Revolution, which benefited hundreds of millions
Ideas 197
of poor people through dramatically raising agricultural productivity, partic-
ularly in Asia.
Implications of Ideologies
Although the rapid spread and adoption of new ideas is behind the greatest
leaps in development, ignorance and the failure to learn rapidly enough is
behind some of the greatest development setbacks. For example, the failure
to act earlier and more decisively against HIV/AIDS in a number of countries,
such as Botswana and South Africa, has already reversed the gains of the life
expectancy of the past 30 years.6 However, the significance of ideas is not
largely confined to health and technology. The implications of ideologies,
including ideas about religion and economics, have an even more powerful
influence.
Ideas of Destiny
Ideas of destiny, right, and might, enacted in the crusades, colonial conquest,
and communism, have massive and continuing implications for develop-
ment. Globalization does not appear to have diluted such ideas. Although in
some senses there has been what Bell (2001, originally 1960) and Fukuyama
(1992) heralded as "the end of ideology" and "the end of history," respec-
tively, the tenacity of ideologies remains evident. Examples range from the
growth of religious fundamentalism in many parts of the world to the dogged
adherence in the richest countries to protectionist policies. As discussed in
chapter 3, protectionism in rich countries has a devastating impact on mil-
lions of poor people whose struggle to escape poverty is frustrated by the bar-
riers that rich countries place on their exports.7 Protectionism in rich country
agriculture is an idea that Sir Nicholas Stern (2004), the former Chief Econ-
omist of the World Bank, has characterized as "politically antiquated, eco-
nomically illiterate, environmentally destructive and ethically indefensible."8
Yet it persists.
Context of Ideas about Human Rights
Ideas on development cannot be divorced from the broader context of ideas
of humanity, freedom, culture, and religious belief. These shape and inform
economic development and globalization and, in turn, they evolve in
response to the changes in their operating environment. The spread of ideas
about human rights, for instance, has driven development progress.9 Impor-
tant phases of this spread have included the movement for the abolition of
slavery, the struggle for suffrage for woman, the anticolonial movements, and
the development of trade unionism. Today, thousands of international con-
198 Globalization for Development
ventions and the development of hundreds of international organizations,
not least the United Nations and Bretton Woods systems to which the great
majority of the world's nations belong, have given institutional form to the
globalization of ideas about rights and the broadening of our understanding
of development
Global Governance System
The rise of this global governance system developed to spread ideas about
human rights, poses numerous challenges, as is evidenced in the rich and
complex debate about the management, reform, and evolution of global insti-
tutions. As the outcome of past compromises, it is not surprising that global
institutions are neither ideally equipped to deal with current and future global
challenges nor easy to reform. Indeed, it is not difficult to identify a raft of
reforms that would better equip the international community to meet the
challenges of the 21st century.10 In practice, however, major structural
reforms require new agreements, which are not easily reached by the relevant
global constituents. More practical, therefore, is the evolutionary reform of
the system and its component parts.11
Civil Society Organizations (CSOs)
In this area, civil society organizations (CSOs) and other global lobbying
groups, often aided by the Internet, have demonstrated the new power of vir-
tual networks in the international communities of ideas. Through pressure
on governments and international organizations, global networks of lobby-
ing groups can exercise a powerful influence on the evolution of policies at
both the national and global level. The international networks have been asso-
ciated with many reforms that have benefited poor people. Global campaigns,
such as the Jubilee Campaign to Drop the Debt or the Live Aid event on
famine in Africa, have proved particularly effective in contributing to increas-
ing awareness about poverty reduction. However, the rising power of distant
lobbyists is not without its dangers, as their interests and objectives and those
of the local communities who are directly affected may not always coincide.
For example, the activities of San Francisco�based activists against the con-
struction of the Bujagali dam in Uganda was apparently largely uninformed
by the preferences of the local communities who stood to benefit from the
dam.12
Contagion and Unpredictability of Ideas
Ideas can be contagious and their flow unpredictable. Recent examples
include the collapse of the seemingly deeply-entrenched communist regimes
Ideas 199
in Eastern Europe, the collapse of the apartheid regime in South Africa, and
the rise of religious fundamentalism. The advent of mass communication
technologies, particularly global television channels and the Internet, has
lifted the globalization of ideas to new heights. In addition to transferring
ideas that weaken government and other national monopolies over informa-
tion, mass communication has profound implications for patterns of pro-
duction and consumption. This is one of the defining features of the latest
wave of globalization. As John Stuart Mill in the mid-19th century observed,
It is hardly possible to overrate the value . . . of placing human beings in
contact with persons dissimilar to themselves, and with modes of thought
and action unlike those with which they are familiar. . . . Such communi-
cation has always been and is peculiarly in the present age, one of the
primary sources of progress. (Mill 1846, volume 2, book 3, chapter 7, sec-
tion 5, cited in Meier 2001, p. 5)
Ideas and Development
As we noted in the introductory chapter, perhaps the most fundamental
change in ideas about development relates to our understanding of develop-
ment itself. For example, our understanding of the goals of development has
changed substantially even in the last 20 years. We now look beyond incomes
to health, education, and human development. We now see the objectives
of development as ensuring that all people have the ability to shape their
own lives ("development as freedom" in the words of Sen 1999). Overcom-
ing poverty means giving poor people opportunity, empowerment, and secu-
rity. We have learned that empowerment is both an end and a means of
development.13
The Power of Ideas
The focus of a growing number of economists on the challenges of develop-
ment has been associated with a widening recognition of the power of ideas.
For example, Meier (2001) has noted that "ideas are fundamental to the
future progress of development" (p. 1). The examination by Paul Romer and
others of the sources of economic growth has also been responsible for a
growing understanding and emphasis on the role of ideas. In Romer's
(1993b) view,
Ideas should be our central concern. . . . Ideas are extremely important
economic goods, far more important than the objects emphasized in most
200 Globalization for Development
economic models. In a world with physical limits, it is discoveries of big ideas,
together with the discovery of millions of little ideas, that make persistent
economic growth possible. Ideas are the instructions that let us combine lim-
ited physical resources in arrangements that are ever more valuable. (p. 64)
Innovations in Growth Theory
Building on Schumpeter (1949), recent innovations in growth theory empha-
size the role of the evolution of ideas at the micro level in processes of firm
innovation. For development to occur, ideas have to produce innovations in
productive methods, including organization, sources of supply, and quality.
The Schumpeterian vision is that of development being accelerated through
an increase in the supply of ideas and their translation into innovations. For
this to happen, the transmission and acceptance of ideas must be in a form
that can be translated into capabilities. Increases in rates of growth and
poverty reduction thus require both an acceleration of idea transmission and
the adoption of ideas through innovations that contribute to technical and
societal change.
Some time ago, Summers (1991) indicated that "To put it bluntly, since
there will not be much development money over the next decade, there had
better be a lot of good ideas" (p. 2). However, as Meier (2001) notes,
"Although the creation of ideas is a necessary condition for development, it is
not a sufficient condition. The absorptive capacity of the developing countries
is crucial. . . . [I]f ideas on policy reforms require political conditions . . . and
these do not exist, or if the absorptive capacity depends on institutional
change that is not forthcoming [the ideas cannot be activated upon] . . . the
preconditions must be in place for the acceptance and implementation of
ideas" (p. 5). In fact, these preconditions often do not exist, especially in low-
income countries.
Capacity to Absorb, Evaluate, and Adapt Ideas
Although it is vital to stress the importance of the capacity to absorb ideas, at
least as important is the capacity to evaluate and either adapt or reject ideas.
For too long, developing countries have suffered the burden of the imposi-
tion of inappropriate ideas. Although this characterized the colonial period,
it is not confined to it. Tied aid and inappropriate conditions associated with
financial flows have for many countries reflected the imbalance in their bar-
gaining strength in the realm of ideas, an imbalance similar to the one they
have in trade and in other dimensions of global interchange. The solution
cannot be isolation, but rather judicious engagement on all key dimensions.
As we discuss elsewhere with respect to trade, capital markets, migration, and
Ideas 201
aid, the question is not whether to engage, but how. In the realm of ideas and
innovation, the key question for governments revolves around how they han-
dle knowledge management.
Managing Knowledge
As suggested above, the deficiency of knowledge can be a more pervasive hand-
icap to development than the scarcity of any other factor. Knowledge, however,
is in many respects a public good. Once something is known, that knowledge
can be used by anyone, and its use by any one person does not preclude its use
by others. This characteristic of knowledge is precisely the hallmark of a public
good, and suggests that knowledge, like other public goods, will be underpro-
vided by market systems. The challenge, then, is the effective development and
management of knowledge, recognizing its public good nature.14
Characteristics of Knowledge
The World Development Report (World Bank 1999) noted that "Knowledge is
like light. Weightless and intangible, it can easily travel the world, enlighten-
ing the lives of billions of people everywhere. Yet billions of people live in the
darkness of poverty--unnecessarily" (p. 1). The World Bank went on further
to distinguished between knowledge gaps in know-how or technical knowl-
edge (such as birth control, software engineering, and accountancy) and
information gaps in areas such as product quality, creditworthiness, and
other types of incomplete information that lead to market failures.
Addressing Knowledge Gaps
For developing countries to address the problem of knowledge gaps, the
authors of the World Development Report recommended three key actions:
Acquiring knowledge by tapping into and adapting knowledge avail-
able elsewhere in the world--for example through trade, foreign
investment, and licensing--as well as by creating knowledge locally
through research and development and building on indigenous
knowledge.
Absorbing knowledge by ensuring universal basic education, creating
opportunities for lifelong learning, and supporting tertiary education.
Communicating knowledge by taking advantage of new information and
communications technology. This requires that poor people have
access and that information flows be promoted, using vibrant media
and modern technologies, among other methods.
202 Globalization for Development
Addressing Information Gaps
To address information gaps, the World Bank report recommended that pri-
ority be given to ensuring transparency and accountability in financial flows,
reducing the risk of capture and corruption, and increasing knowledge of
opportunities. It also highlighted the need to overcome information deficits
that discriminate against poor people and isolate them from markets, as well
as those that lead to failing to account for the environment.
Disseminating Knowledge
A vibrant media can play a vital role in disseminating knowledge. Higher lit-
eracy rates, lower printing costs, and new broadcast technologies (including
the Internet) can promote the potential of the media to inform citizens and
create global constituencies and commerce. At the global level, media can
move currency markets and influence international trade. At the other end of
the spectrum, however, are the local, vernacular media. These can help
develop market opportunities for poor farmers through daily radio broad-
casts of prices, for example. They can also increase awareness of local threats
and opportunities, considerably improving local health and knowledge.
Information and Institutional Reform
As emphasized by the World Bank (2002d), open information flows can pro-
mote institutional reform by affecting peoples' incentives and by promoting
the sharing of ideas and knowledge. New information can change people and
culture and create demand for new institutions as well as facilitate debate and
collective action. The combination of providing information and voice (the
ability to access views and express them effectively) can and does facilitate
social change.
Effect of the Media
The extent to which the media improve governance and support markets
depends to a large extent on their ability to provide relevant information and
reflect diverse ideas and social views. Too often, the capture of the media by
narrow political or financial interests, coupled with weak capacity and heavy
constraints on journalism, lead to the media not rising to their potential.
Diversity of perspective, as well as financial and editorial independence, is
vital for both state and private media. This is a major regulatory challenge,
which, in the age of increasing global concentration, needs ongoing and
increased attention. This challenge is not simply confined to the poorest soci-
eties, where lack of capital and capacity and the constraints placed on mar-
kets by the poverty and illiteracy of readerships and advertisers undermine
Ideas 203
the potential for the use of media in addressing knowledge deficits. In the
most advanced societies, a plethora of choice and availability, as is evidenced
in the more than 600 channels available on satellite TV and the unprece-
dented access offered by broadband Internet, is coupled with a homogeniza-
tion of content. Consumers typically choose among a widening range of
similar products owned and operated by a narrowing set of major multina-
tional corporations.
Although the potential to learn about the world and develop a global citi-
zenry has never been greater than it is now, the irony is that global and
national polls do not appear to reflect a rising knowledge among consumers
who spend hours a day watching television, "surfing" the Internet, or reading
newspapers and journals. Clearly, content is at least as important as capacity.
Effect of Education and Training
Education and training in all its form is about exposure to ideas. The educa-
tion of children and adults is a vital starting point for development. In par-
ticular, literacy, numeracy, and the ability to absorb and evaluate information
are central. In the important phrase of development economics, education
and training are all about "learning to learn." Without this capacity, ideas
have no vitality.15
Intellectual Property
Trade in goods and services and flows of capital are often packaged with ideas
and innovations, and there is an extensive literature on the role of technology
transfer in foreign direct investment.16 Here we go beyond the arguments of
chapter 3 to discuss the particular questions of trade in knowledge products.
Public Good Characteristics of Knowledge
As stated above, knowledge has strong public good characteristics. Because of
this, it tends to be underprovided by a market-based system. For example,
"The innovator's inability to obtain adequate compensation for his effort
would, under a competitive system, cause too few resources to be allocated to
research" (Leach 2004, p. 174). This problem is typically addressed in the
coevolution between markets and governance systems through various types
of intellectual property protection, a key form of knowledge management.17
Intellectual Property Rights Controversy
The area of intellectual property rights is among the most controversial in
economics. One area of intense debate concerns the role of intellectual prop-
204 Globalization for Development
erty rights in growth. The common argument is that the presence of strong
intellectual property rights spurs innovation, which leads to higher rates of
economic growth and increasing benefits for all. The kernel of the argument
is that, if strong property rights provide good incentives for the production
of things, they must also provide appropriate incentives for the production of
ideas. Boldrin and Levine (2002, 2004a, 2004b) question this, arguing that
intellectual property has come to mean not only the right to own and sell
ideas, but also the right to regulate their use, which can create a socially in-
efficient monopoly.18 They agree that for efficiency reasons ideas should be
protected and available for sale, just like any other commodity. They object,
however, to the idea of an intellectual monopoly, arguing that monopoly is
neither needed for, nor a necessary consequence of, innovation and that intel-
lectual property is not necessary for innovation and growth--that in fact it
may hurt more than help. They suggest that, although the producers of a new
product or service should have the right to benefit from its sale, they should
not be able to appropriate the right of others to learn from the ideas embod-
ied in that product, just as the producers of potatoes or French fries cannot
monopolize the ideas embodied in their production.19
The Role of Intellectual Property Rights
Intellectual property rights are designed to increase innovation by offering
incentives to those who develop new techniques. As Wolf (2004) has noted,
"given the role of innovation, intellectual property is not a marginal feature
of the property-rights regime of a modern market economy, but its core. It is
the most important example of property that only a powerful state can pro-
tect. The reason that such action is needed is because ideas are public goods"
(p. 51). The problem for developing countries is that intellectual property rights
are a legally sanctioned restraint of trade. They can lead to the monopolization
of ideas and innovation by first-comers and those with the most well-endowed
research and legal systems. Not surprisingly, their application requires careful
analysis of both benefits and costs on the part of the development community
if they are not to lead to further inequities, and to ensure both growth and more
equitable development, benefiting poor people and poor countries.
How this can best be done is a question to which answers greatly diverge.
As noted by the International Centre for Trade and Sustainable Development
(2003), "since the early 1990s, Intellectual Property (IP) policy has become
one of the most economically and politically contentious issues in the in-
ternational arena, whether in discussions on public health, food security,
education, trade, industrial policy, traditional knowledge, biodiversity, bio-
Ideas 205
technology, the Internet, or the entertainment and media industries" (p. 1).
In each of these areas, consensus of the development community members
on correct policy is often elusive.
Reach of Intellectual Property Protection
As the above list of issue areas suggests, the range over which intellectual
property protection can help or harm poor people is large. A summary of
some of these areas, including potential costs and benefits, is presented in
table 7.1.
TABLE 7.1 Potential Effects of Intellectual Property Protection on Poor People
Area of concern Potential costs Potential benefits
Health Increased prices of essential Greater innovation of drugs of
drugs. importance to developing countries.
Food and agriculture Loss of self reliance for poor Increased use of geographical indi-
farmers. cations to promote commercializa-
Increased privatization of genetic tion of products.
materials and biological
resources.
Traditional knowl- Piracy of traditional knowledge Increased protection of and royalties
edge, folklore, and in the form of medicinal plants, for music industries.
culture agricultural products, and forest Provision of intellectual property
products. registration systems to indigenous
peoples.
Access to knowledge Restrictions of fair use of digital Support of knowledge generation
and innovation information. and diffusion.
Increased licensing costs. Promotion of inflows of private cap-
ital, especially FDI.
Increased protection of textile designs
and emergent software industries.
Education Increased prices of educational Development of new educational
materials. resources of relevance to developing
countries.
Source: International Centre for Trade and Sustainable Development 2003.
206 Globalization for Development
Patents
Patents are a central concern with regard to the impact of intellectual prop-
erty protection on poor people, affecting three areas of table 7.1: health, food
and agriculture, and access to knowledge and innovation. As stated by Leach
(2004), "The essential tradeoff in choosing the patent life is that a longer
patent life raises the rate at which discoveries occur, but reduces the social
benefits of each discovery" (p. 175). The proponents of stronger patent pro-
tection in developing countries argue that this protection will promote
domestic innovation as well as the flow of ideas through increased FDI and
exports. There is not complete agreement on this matter, however. In addi-
tion to the arguments of Boldrin and Levine (2004a, 2004b) cited above, Kash
and Kingston (2001), for example, argue that, in the case of complex tech-
nologies, patent protection can actually inhibit innovation. To some extent,
then, the ability of increased patent protection to deliver access to knowledge
and innovation is uncertain.20
Pharmaceuticals and Patent Rights
One key area regarding patent protection and the poor is in the field of phar-
maceuticals and the extension of patent rights to developing countries as
required by WTO membership. Although some argue that the extension of
intellectual property rights may lead to more research on drugs to address
developing country needs, the evidence on the short experience since this
extension remains hotly contested.21 For many commentators, the relatively
small size of the purchasing power in developing countries and the apparent
lack of commercial interest by the pharmaceutical companies rather than
patent issues explain the tiny portion of research devoted to diseases preva-
lent in tropical and other low-income developing countries. Whereas the
average health care budget per person per year in the United States is approx-
imately US$4,000, in Sub-Saharan Africa it averages less than US$20 per per-
son per year; in the poorest rural areas it is even lower. With the average cost
of bringing a new drug to market currently running at about US$800 million,
and the annual sales from the three leading therapy classes--cholesterol
reducers, anti-ulcerants, and antidepressants--exceeding US$70 billion per
year, the incentives for the major drug companies are overwhelmingly skewed
in favor of the primary problems facing rich countries.22
Boosting Investment in Research
Recent years have seen a number of highly significant efforts to boost invest-
ment in research and its application in developing countries. The Measles
Ideas 207
Initiative, started in 2000 with significant support from the World Health
Organization (WHO), the Red Cross, and media entrepreneur Ted Turner
has contributed to reductions of 60 percent in mortality rates from measles
in children in Sub-Saharan Africa. Vaccination campaigns over the past five
years are estimated to have saved one million lives in this region. Despite these
remarkable gains, the ongoing limited access of many people to the vaccine,
which costs under $1 per dose and has been available since 1963, results in
over 400,000 deaths among children a year, half of them in Africa. The Global
Alliance for Vaccines and Immunizations (GAVI) is an impressive example of
a new type of public-private partnership, bringing together donor and devel-
oping country governments, established and emerging vaccine manufactur-
ers, nongovernmental organizations (NGOs), research institutes, UNICEF,
the World Health Organization, the World Bank, and the Bill & Melinda
Gates Foundation.23 The devastating impact of malaria is receiving increasing
attention from this widening coalition of partners, whose efforts aim to
reverse the more than 3 million deaths per year, including 1 million child
deaths per year in Africa alone, in the Roll Back Malaria Partnership. Malaria
alone is estimated to cost Africa over US$12 billion per year in lost produc-
tivity and is closely correlated with poverty. This is both because it is most
rampant where the associated drugs, bednets, and public health systems are
least affordable, and because malaria itself undermines productivity, clogs
public health systems, and undermines the economic and technical capacity
of countries to cope with it as well as with other diseases such as HIV/AIDS.
Meeting the Challenge of HIV/AIDS
With over 5 million people becoming infected each year, and with 15 million
children orphaned by AIDS, the global community is belatedly organizing
itself to meet the devastating challenge of HIV/AIDS.24 Since 1990, the num-
ber of people living with HIV/AIDS has quadrupled to around 40 million
worldwide, and in 2004, 3.1 million people died from this disease, more than
from any other infectious disease. Sub-Saharan Africa remains the worst
affected region, with two-thirds of all cases. In nine African countries life
expectancy has fallen below 40 years, and already 11 million African children
have been orphaned because of the disease.
The key to combating HIV/AIDS is forthright national leadership, wide-
spread public awareness campaigns, and intensive prevention efforts, includ-
ing the availability of affordable drugs. The debate on intellectual property and
incentives for innovation is being severely tested in this area. Work continues
on vaccine development, and the number of people with access to anti-
208 Globalization for Development
retrovirals has doubled in two years--to 700,000 in 2004. Given the scale of
the problem, this remains grossly inadequate. With increased advocacy and
coordination around UNAIDS, financing commitments for HIV/AIDS pre-
vention and treatment jumped from less than US$400 million in the late 1990s
to around US$6 billion in 2005. Research and its application remains a critical
stumbling block, with questions of affordability and availability of drugs and
the timing of their development, as well as the availability of skilled profes-
sionals and health care systems for their application, posing key constraints.
The recent example of the governments of Brazil, India, and South Africa
challenging U.S. patents on HIV/AIDS drugs, which raised the costs of these
drugs to AIDS patients in these countries, received widespread attention. In
2001, WTO members gathered in Doha Qatar for the fourth Ministerial Con-
ference of the WTO. At this meeting, pressure over the HIV/AIDS issue was
intense. As a result, the members issued a special declaration allowing for
measures "to protect public health." More specifically, the declaration re-
affirmed certain "flexibilities," including the following statement: "Each
member has the right to determine what constitutes a national emergency or
other circumstances of extreme urgency, it being understood that public
health crises, including those related to HIV/AIDS, tuberculosis, malaria and
other epidemics, can represent a national emergency or other circumstances
of extreme urgency." This was a victory for those in developing countries with
a concern for AIDS and other public health issues. However, for countries
with no domestic productive capacity in pharmaceuticals, the right to import
cheaper, nonpatent drugs remains a contested issue.
Intellectual Property Protection for Traditional Knowledge
To enhance development, it is important that intellectual property protection
be extended to what table 7.1 calls "traditional knowledge, folklore, and cul-
ture," or what Finger (2004) calls "poor people's knowledge." It is not only
vital that intellectual property regimes allow developing countries to benefit
from ideas developed in rich countries, but also that their own indigenous
ideas are suitably protected. The key issue here, as expressed by Finger, is that
of "enhancing the commercial value of poor people's knowledge in which
there are no worries about this use being culturally offensive to members of
the community or about this use undermining the traditional culture of the
community" (p. 3). Examples include the protection of the craft designs of the
nearly 10 million artisans in India, Congolese wire toy designs, the recordings
of the Senegal Musicians' Association, Kente designs in Ghana, and many,
many others. By enhancing the returns on these types of knowledge, intellec-
tual property protection could help poor communities.
Ideas 209
Reform of Intellectual Property Arrangement
One suggested reform of current intellectual property arrangements is to
modify rules governing patents under the Agreement on Trade Related
Aspects of Intellectual Property Rights (TRIPS) of the WTO to allow for
patent ladders, in which the minimum extent of patent protection varies
according to level of per capita income. Although designing such a system is
not straightforward, this is a way to avoid what, in the case of environmental
or labor standards, is called a "one-size-fits-all" approach to standardization
of governance systems.
Global Brands
The crowding out of local ideas and culture by global brands--such as
McDonalds, Nike, and Coke--is of particular concern to many who worry that
this undermines local cultures and products. The appeal of many global prod-
ucts transcends national borders and ideologies. To the extent that they crowd
out consumption of traditional or local products or are seen as a symbol of
U.S. or "Western" economic and cultural domination, they have become ral-
lying points for antiglobalization protests.25 This presents some cause for con-
cern. As expressed by Sen (1999), "Equity in cultural as well as economic
opportunities can be profoundly important in a globalizing world" (p. 241).
However, Sen concludes that "The one solution that is not available is that of
stopping globalization" (p. 240, emphasis added). Rather, what is required is
that people, including poor people, be empowered enough to take part in
social decisions about cultural issues. In the case of poor people, deprivations
of access, information, participation, and education make this very difficult.
Sen casts this issue in terms of "human rights in the broadest sense" (p. 242).
Ideas About the Roles of States, Markets, and Institutions
How governments and societies organize themselves and how they absorb
ideas and allow their citizens and firms to operate is a key determinant of
growth and poverty reduction. Much of the intellectual property debate is
about the private appropriation of ideas, and hence is vital in considering the
role of ideas embodied in technologies and processes that are developed and
adopted by private firms and individuals. Until recently, for many countries
and firms, the very idea of a private or market-based economic system was
foreign. Through the absorption and adaptation of ideas, new economic sys-
tems have evolved, which in turn, over time, fundamentally change the way
in which ideas are generated, transmitted, and absorbed.
210 Globalization for Development
Evolution of the Development Community's Ideas on Economic Management
The development community's understanding of the most effective way to
achieve development objectives has evolved over time with the accumulation
of evidence and experience. Approaches that once appeared to be both cor-
rect and obvious have been shown not to work by experience and closer
analysis. In the same way, our current ideas will no doubt give way to others
as experience accumulates and thinking evolves. This surely reminds us to
beware of simplistic solutions or "silver bullets" in development thinking.
Perhaps the most important questions on which our understanding has deep-
ened over the past decades are: What are the respective roles of governments
and markets in spurring development? How do institutions fit into the pic-
ture? At the risk of oversimplification, we can identify at least three major
phases in the evolution of our answers to these questions.
In practice, we recognize that there is a continuum of approaches, both in
developed and in developing countries, and that the phases described here do
not match precisely the evolution of thinking in any particular region.
Instead, the discussion of these phases is intended to capture the broad shifts
in the thinking of the development community and development practition-
ers. It is also the case that successful countries throughout this post-World
War II period have seen both state and market play positive roles. With those
caveats, this broad-brush picture can nevertheless provide a useful context for
a discussion of development assistance by suggesting where that assistance is
most likely to be effective.
Phase One: Confidence in Government
The 1950s and 1960s were a period of great confidence on the part of the
development community. Development practitioners and thinkers trusted
government both for its intentions and for its ability to make economic
progress happen, in both the richer and the poorer countries. Development
thinking focused on market failures, which were especially prevalent in devel-
oping countries and seemed to provide a strong rationale for state interven-
tion. The private sector was thought to be too uncoordinated, too poorly
developed, and too focused on private interests to allow it to serve as the loco-
motive for growth. In Africa, newly independent countries searched for a
postcolonial model of development and a strengthened leadership role for the
national state. In many countries around the world, the confidence in gov-
ernment was reflected in the heavy role of central planning and in the rela-
tively closed (import substitution) trade policy.26
This state-led approach had some initial development successes. Leading
economies of Latin America, where state economic management did not com-
Ideas 211
pletely crowd out the private sector, grew rapidly for decades under the import-
substitution model. And even in some "tiger economies" of East Asia, industry
managed to grow and become more productive behind high trade barriers,
thanks to otherwise good economic management. Nevertheless, the costs of state
economic control became clearer over time. State planners were not omniscient:
they could not possibly acquire all the information needed to make decisions
that reflected both efficiency considerations and people's differing preferences.
Worse, governments revealed themselves to be collections of interests rather
than disinterested and benevolent "social planners." Even had they been effec-
tive in their role as social planners, government officials would not have been
able to create the entrepreneurial dynamism essential for sustained develop-
ment and change. Behind protective barriers, firms in many countries (India
and Mexico, to name just two) became less efficient as they focused on obtain-
ing government favors rather than improving productivity. Finally, fiscal and
macro instability rose with the oil price shocks of the 1970s and early 1980s,
contributing to the debt crisis and revealing the weaknesses in the statist model.
Phase Two: Primacy of Markets
As a result of the disappointing results of the state-led approach, the 1980s
and early 1990s saw a strong reaction that stressed the primacy of markets in
development.27 This reaction was a necessary corrective in many ways: it refo-
cused attention on production efficiency and market signals, and it inspired
the move to lower trade barriers as a way to spur productivity. Macro stabil-
ity and balanced fiscal accounts were seen as fundamental building blocks for
development and became early priorities for reform. This period saw sub-
stantial improvements in both macroeconomic stability and openness to
trade and financial and other flows through much of the developing world.
This important change in development thinking was summarized by Lin-
dauer and Pritchett (2002) along the dimensions of table 7.2. These include
the role of government, encouragement of savings, trade and integration, for-
eign capital, and development assistance. Development policy changed in
each of these dimensions to reflect new thinking.
Phase Three: Importance of Institutions
By the mid 1990s, it became increasingly widely recognized that this purely
"pro-market" school of development thinking failed to address some key
points. Once countries began to achieve macro stability and greater openness
to trade, it became clear that these elements were necessary but not sufficient for
growth and poverty reduction. In particular, the free-market view tended to
neglect the institutional foundations of effective private markets. The impor-
212 Globalization for Development
TABLE 7.2 Idea Changes in Development Thinking
Dimension State-led approach Pro-market approach
Government Plays a central role; acts as the driv- Plays a central role, but acts as the
ing force behind development. main obstacle to development.
Accumulation Is central to development process; Is central to development process;
coordination and scale problems private sector investment is the
require government involvement. key.
Trade and integration Has no particular advantage Exports bring dynamic advantages;
beyond the import of capital goods import competition is necessary for
and the purchase of necessary disciplining domestic producers.
inputs.
Foreign capital FDI is to be avoided, but govern- Government borrowing is to be
ment borrowing is acceptable, avoided, but FDI is encouraged.
preferably from foreign sources.
Development Provide project-based lending of Quick disbursing; policy-based
assistance foreign exchange and resources to lending to establish conditions for
governments. FDI and domestic investment.
Source: Lindauer and Pritchett 2002.
tance of institutions was underscored by major shifts: the economic decline in
the countries of the former Soviet Union; the continued growth in China, a
country that moved forward with market-oriented reforms without excessive
disruption of institutional foundations; and, later in the 1990s, the financial
crisis in East Asia, to which institutional weaknesses contributed heavily. Fur-
thermore, even as it performed a useful service by spotlighting government
failure, the free-market reaction had minimized very real problems of market
failure that are prevalent in the developing world. As a result, growth per-
formance fell short of expectations in many parts of the developing world.
Current Thinking: Complementarities Between Markets and Governments
Recent years have seen a greater recognition in the policy debate of the com-
plementarities between markets and governments. Clearly, experience shows
that the private market economy must be the engine of growth; but it shows
also that a vibrant private sector depends on properly functioning state institu-
tions to build a good investment climate and deliver basic services competently.
Ideas 213
This view of complementarities pursued in the remainder of this chapter
draws heavily on what we have learned in the past two to three decades in the
more successful cases of income growth, such as East Asia and Chile. It also
draws on learning from the transition process in the former Soviet Union,
where a lack of institutional development combined with excessively opti-
mistic expectations led to disappointing development outcomes and demon-
strated clearly the importance of a sound state in providing the environment
for growth. The role of institutions has come through more strongly than it
did in earlier views of development, and particularly than it did in the policy
debate in the 1980s and early 1990s. Countries that have combined institu-
tional improvements with market-oriented policy reforms and greater
engagement with the world economy saw their per capita incomes grow in the
1990s at the historically very rapid pace of 5 percent per year.28
No Single Model for Development
We have also learned more about the diversity of approaches among coun-
tries that have been effective in accelerating growth and reducing poverty.
Evidence from past successes and failures suggests strongly that
neither the more statist approach of the 1950s and 1960s nor the
more minimal-government, free-market approach that dominated
policy debate in the 1980s and early 1990s will achieve these goals.
Effective approaches will be led by the private sector, but with effective
government to provide the governance framework as well as the physi-
cal infrastructure and human capital investments necessary for growth
and poverty reduction. In fact, to set state and market against each
other is to miss the central question: how can they best complement
each other to promote growth and reduce poverty?
A public-private development partnership is essential, especially in the
area of health and education. Institutional development has too often
been neglected in the development policy debate, but strong institu-
tions are now recognized to be essential to sustained poverty reduction.
We now apply this broad perspective of complementarities to the impor-
tant subjects of economic growth and development learning.
Ideas about Economic Growth
Ideas about development are constantly in flux, evolving over time and flow-
ing from one country to another. It is therefore misleading to talk about a uni-
versal model of development. Development is about change. It is about the
contesting and evolution of ideas. It involves learning about what works and
214 Globalization for Development
what does not in particular circumstances. It is informed by historical cir-
cumstances and is intensely local. It cannot be replicated. There is little to be
gained from seeking to define a universal economic model, which would sug-
gest that we can collapse all our learning into a summary formula.29 The chal-
lenge for policy makers is to draw on a wide range of experience and to be
informed by both the past and others' experiences to identify those common
factors that are associated with progress in development. In part, these factors
associated with progress confirm the widely appreciated key dimensions of
macroeconomic stability; trade reform; and an emphasis on health, educa-
tion, and infrastructure. However, it is also a confirmation of the inherently
idiosyncratic nature of development processes.
Economic Growth as Force for Reducing Poverty
A distillation of the lessons of experience suggests that the most powerful force
for reducing income poverty is economic growth. Countries that have reduced
income poverty most effectively are those that have grown the fastest over a
sustained period, and poverty has expanded most in countries that have stag-
nated or fallen back economically. As stated by the United Nations Develop-
ment Programme (1991), "Although growth is not the end of development,
the absence of growth often is" (p. 13). There has been no example of devel-
opment without sustained and prolonged periods of high per capita growth of
output that, in turn, depends upon a stable macroeconomic and institutional
environment. Unstable macroeconomic conditions--often resulting from
unsustainable fiscal positions--undermine the confidence of individuals and
firms in making decisions to invest in their own or their firm's future.
Market Model as Organizing Principle
In the realm of economics, with the end of the Cold War and the decline of
communism, there has arisen a growing acceptance of the market model as a
fundamental organizing principle for economic activity. The model is far
from homogeneous, however, and no two countries interpret the framework
in the same way. Even within countries, and especially in large federal coun-
tries such as India, variation abounds. China is evolving on a path that in crit-
ical respects cannot be characterized as "market based." Although far from
universal, greater acceptance of the market model has opened space to explore
economic options and new possibilities. This is particularly true in the for-
merly communist countries, but is also the case in the market economies
whose policies to differing extents were shaped in opposition to communism.
The past decade has consequently been characterized by perhaps unprece-
dented experimentation and learning based on the absorption and adaptation
Ideas 215
of ideas from elsewhere. To the extent that leaders have been freed from ide-
ological straightjackets and have been able to draw on, without simply repli-
cating or copying, ideas tried by others, and to seize opportunities to find new
and better ways of organizing, they have been rewarded.30 A strong contest-
ing of the balance between market and state has become part of the norm in
Europe and in a wide range of democratic developing countries, including
Brazil, India, and South Africa. So, too, has been the search for new ways of
doing things and the rejection by sizeable minorities of what is seen as the
dominant "idea of capitalism." This idea has not yet become common currency
in many countries or is reflected in the strength of recent anti-globalization
protests in Latin America and parts of Western Europe. For Friedman (2000),
as for Max Weber and the economic historian Richard Tawney, this clash
between the modern and traditional has a considerable distance to travel. It
helps to explain the constant struggling for new ways to self-identify and new
ways to confront the fears embodied in the association of globalization with
integration and being molded by foreign ideas and products.
Interplay of States and Markets
The most rapidly growing economies, and those where poverty is being reduced
most rapidly, have benefited from an increasingly nuanced understanding of
the relationship between states and markets. In no two countries has this inter-
play taken the same form. The adjustment costs of going from communism to
capitalism, as well as of other major transitions, have been high. Consequently,
for politicians, the challenge is to ensure that the benefits of these policy tran-
sitions are felt in the short term. The political economy of policy reform is a cen-
tral challenge in the implementation of ideas. This, together with the associated
institutional dimensions, remains one of the least researched and least under-
stood dimensions of the social sciences. Clearly, however, the form of transi-
tion and the particular adjustment paths followed have a powerful impact on
the outcomes and the sustainability of reform. A comparison of the Russian
Federation and many other parts of the former Soviet Union, where poverty has
increased over the past decade, with China, where opening the economy has
been associated with unprecedented increases in income, highlights the crucial
role of leadership and choices about transition paths.
Development as Learning
If there is a new consensus, it is around the need for a more nuanced and
broader approach to development.31 The intermingling of ideas evidenced over
the past decade has meant that even the more orthodox economic leaders are
216 Globalization for Development
seeking to go beyond the standard ideas, such as what came to be known as the
Washington Consensus.32 In certain dimensions, such as capital account liber-
alization and privatization, there is a widening appreciation of the need for a
differentiated approach--one that takes account of vulnerabilities, not least in
institutional development.33 The importance of institutions and governance, as
we emphasize below, is also increasingly seen as a vital element in development.
So, too, is the need to examine the sequencing of reforms, and a recognition
that their simultaneous implementation can be disruptive and even counter-
productive. For example, depending on the tax structure, measures toward pri-
vatization, trade liberalization, or deregulation can, in the short term, conflict
with maintaining fiscal discipline and with objectives of social peace and equity.
Elements of the Political Economy of Reforms
Some interpretations of the Washington Consensus principles pushed too
rapidly for a liberalization of markets and did not pay sufficient attention to
four issues that are closely related to the political economy of reforms:
governance and institutions
the role of empowerment and democratic representation
the importance of country ownership
the social costs and pace of transformation.
Other issues related to the political economy of reforms have long been
part of the discourse on reform and poverty reduction.
Governance and Institutions
For example, the setbacks of the structural adjustment programs in develop-
ing countries of the 1980s, as well as the transition of the 1990s in Eastern
Europe and the former Soviet Union, showed that these elements are at the
heart of the development challenge. In retrospect, it was naive to think that
demand for institutions and state capacity would create its own supply and
that markets would "work" by themselves.34
The State as a Complement to the Market
The state is not a substitute for the market, but a critical complement.
We have learned that markets need government and government needs mar-
kets. We have also learned that government action is crucial to the ability of
people to participate in economic opportunities. These lessons point to the
need for an active state that fosters an environment where contracts are
enforced and markets can function, basic infrastructure works, there is pro-
vision for adequate health, education, and social protection, and people are
able to participate in decisions that affect their lives.
Ideas 217
The Role of the Private Sector
Notwithstanding the importance of an active and effective state, the strongest
force--indeed the driving force--for sustained economic growth is the pri-
vate sector. Within the private sector, small and medium-size enterprises play
a particularly important role in generating employment opportunities for
poor people. The most important small enterprises in poor economies, and
often the most neglected, are farms.35
Problems for Investment Climate
Bureaucratic harassment, corruption, and organized crime are all profoundly
damaging to the investment climate, imposing barriers to entry, adding to oper-
ating costs, and creating uncertainty once the firm is established. This applies
to both large and small firms, but it is especially important for smaller firms and
farms, with their weaker capacity to finance the costs of dealing with regulation
and to use "political contacts" and other means to resist harassment. The
World Bank's Doing Business Report (World Bank 2005) highlights the extent
of the burdens that frustrate private initiative and the progress made by policy
makers in improving the climate for investment. Clear and predictable rules
of the game are necessary, with contract enforcement evenly applied and regu-
lations designed to facilitate, not frustrate, legitimate individual enterprise and
the establishment of competitive firms.
The Role of Empowerment
Development activities function much more effectively if poor people are
empowered--that is, if they have the ability to shape their own lives. This implies
a focus on education and health but also on effective participation that, in turn,
depends on information, accountability, and the quality of local organizations.
Effective participation and social inclusion enhance growth and the sustainabil-
ity of economic reforms. "The recent World Development Report on equity and
development makes a significant contribution by highlighting through its analy-
sis and numerous examples the ways in which equity in opportunity should be
a central concern of policy makers (World Bank 2005d). It shows how improv-
ing access to education, health, and finance and broader civil participation
enhances both the level and quality of growth and development.
Ownership of the Development Agenda
Reform programs forced from outside, with weak societal commitment, are
likely to fail. Ownership of the development agenda by a country and society
is a vital ingredient for its effective implementation. Understanding the polit-
ical economy of reforms in the particular country is crucial. However, there
are areas where our knowledge of the development process, of what works
218 Globalization for Development
and what does not, of the right sequencing of policies and of the responses
from different groups is still weak. Under the same set of macroeconomic
fundamentals, the development process can generate different results, reflect-
ing the specific circumstances and political economy.
Infrastructure
The quality, quantity, and affordability of physical and financial infrastructure,
such as clean water, power, transport, telecommunications, and finance,
strongly influence the ability of individuals to escape poverty and participate
in economic activity. Infrastructure enables individuals, firms, and countries
to extend their opportunities. Entrepreneurship in developing and transition
countries is often smothered by failures in basic communications, inadequate
and unreliable supplies of water and electricity, and inadequate telecommu-
nications and transport. These failures undermine trade opportunities at the
local levels, as well as at the regional and global levels. Infrastructure should be
a priority area for policy makers. As infrastructure investments often require
large, lumpy, long-term claims on budget resources, have intergenerational
consequence, and have significant social and environmental impacts, they are
among the most complex decisions for governments, which may particularly
lend themselves to analyses and multidisciplinary support from multilateral
and regional development finance institutions.
Education and Health
An educated and healthy workforce contributes to development and growth,
with widespread basic education (primary and secondary) being especially
important.36 Not all empirical analyses find such an effect. One reason that the
effects of education have been hard to pin down empirically is that the quality
of education matters as much as the quantity, and yet we are much better at
measuring quantity than quality. Another reason is that, like physical capital,
human capital in inhospitable environments may be relatively unproductive
from a societal standpoint. In an environment of weak institutions, corrup-
tion, or crime, the return to illegal activities may provide the logical option, in
terms of returns on education and getting employment. Although the case is
not fully established empirically, strong basic education and reasonable levels
of health have been a precursor to many development successes, and recent
analyses suggest strongly that additional education does indeed spur develop-
ment. The evidence on the substantial benefits derived from education at the
microeconomic level is less ambiguous: education lifts people out of poverty,
raising their earnings by some 5 to 10 percent per year of schooling.37
Education and health are key factors, but just as important is fostering
mechanisms for participating in the decisions that affect individuals' lives and
Ideas 219
those of their families. Human rights that protect security and health, for
example, and contractual rights that protect livelihoods and assets are essen-
tial. All these elements allow poor people to shape their own lives, invest in
their future, build assets, and be included in the society in which they live.
Good Governance
Stable and effective government institutions, respect for property rights, equal
treatment under the law, the absence of bureaucratic harassment, a lack of
corruption, and protection from organized crime all matter for growth.
Investment and productivity depend on predictability, which in turn hinges
on confidence that government will not act opportunistically or capriciously.
The "soft infrastructure" of an effective legal and judicial system is critical for
achieving economic growth, empowering poor people, and security. Good
governance and controlling corruption also reduces the costs faced by pro-
ducers. Sound supervision and regulation of financial institutions decreases
the costs of capital to businesses and contributes greatly to macroeconomic
stability. Indeed, it has been argued by Rodrik (2003) that institutional qual-
ity and governance are the underlying variables that drive all of the other
growth-enhancing factors.
Gender Equality
Recent research provides evidence that gender equality--not only in health
and education, but also in voice and rights--is an important element in devel-
opment (World Bank 2001; World Bank 2005d). Aside from the obvious
direct benefits for women, equality in these dimensions also has instrumen-
tal benefits in terms of growth and poverty reduction. Cross-country research
suggests that low investment in female education has been a barrier to growth
in the Middle East and North Africa, South Asia, and Sub-Saharan Africa. East
Asia closed the gender gap more rapidly. Even after controlling for income
and other factors, greater participation by women in public life is associated
with cleaner business and government and better governance, which in turn
promotes growth. Inequalities along other dimensions--such as race, ethnicity,
or religion--can also retard development.
Geography
Geography seriously impedes growth for some countries, making development
much more difficult. As Gallup, Sachs, and Mellinger (1999) have argued, if a
country is landlocked, mountainous, and surrounded by poor neighbors, or if
its population centers are in remote areas, it may encounter additional difficul-
ties in developing domestic markets of efficient size, engaging in international
trade, or acquiring technology from abroad. In such cases, it will be especially
220 Globalization for Development
important to build effective infrastructure links and to improve transportation
and communications both domestically and internationally. Regional integra-
tion and customs unions that facilitate trade may also be important in over-
coming geographic barriers. Ecological fragility is another geography-linked
barrier to development: ecological stresses may most directly affect poor people,
and these stresses, too, require specific policy and institutional responses.
The Challenge of Reform for Growth
Putting these factors together to spur sustained growth is a challenge: it
requires proper sequencing and selection of reforms, as well as consistency
over time, neither of which is easy to achieve.
Where to Focus Efforts
Although our understanding of the importance of all these factors has grown
during recent years, to put them together in a way that yields sustained growth
remains a daunting task. One major challenge for governments is to decide
where to focus their efforts as they strive to make the conditions for growth
as favorable as possible. Strategies have to be determined in each country con-
text, but it is clear that administrative capacities of low-income governments
are typically so limited that an assessment of where they should be focused is
essential: these governments simply cannot push ahead effectively on all
fronts at once. At the same time, sequencing is necessary. It is by now widely
recognized that the East Asian financial crisis of 1997�8, which exacted a sub-
stantial toll in poverty and lost output, stemmed in no small measure from
financial and capital-market liberalization that proceeded before the appro-
priate regulatory safeguards were in place.38 Although some sequencing prob-
lems are easy to identify, finding the best sequence of steps in the context of
a particular country is a great challenge, and it remains an area where our
knowledge needs to expand.
Sustained Growth, Not Spurts
The challenge is sustaining robust growth. Rapid growth episodes of a few
years or a decade are not uncommon. For example, countries that successfully
emerge from civil war often experience relatively rapid economic rebounds for
several years.39 What has been much less common is sustained rapid growth
over a period of decades, which is what is necessary to eliminate absolute
poverty.40 The need for consistency underlines the importance of attaining sus-
tained productivity growth. Only a portion of growth is driven by increases in
physical and human-capital intensity of production, which can be difficult to
sustain over long periods. Countries also need rapid growth in productivity.
Ideas 221
Adaptation and Customization
We need to be modest about how much we understand about economic
growth and eschew formulaic solutions in favor of supporting the adapta-
tion and customization of global lessons for national and local conditions
and objectives. Successful economies have demonstrated the importance of
learning by doing and of an active partnership between governments and the
private sector to create an investment climate that supports job creation and
growth. Understanding economic growth has proved to be intractable and
has preoccupied generations of economists, with the renowned economist
Elhanan Helpman going so far as to refer to the "mystery of economic
growth."
Elements of Successful Empowerment
We also still have a lot to learn about empowerment. However, successful
efforts to empower poor people and increase their freedom of choice typically
share four elements:
access to information
participation
accountability
local organizational capacity.
These four elements are closely related. Access to information is crucial for
effective action, but without institutional mechanisms and accountability, cit-
izens may not have the means to take such action. Examples of empowerment
at work include community involvement in running schools, water users
associations, and local health groups. According to the World Bank (2004d;
2005e), mechanisms such as these can play a powerful role in tailoring serv-
ices to the needs of poor people.
Evolution of Development Thinking
Development thinking evolves continually, and this evolution has accelerated
over the past 50 years. In response to the lessons of experience and analysis,
development practitioners have adapted their approaches to promoting
development, and even the goals of development work. We have learned that
strategies that seemed obvious to many at some point--for example, both the
heavily statist and minimal-government free-market approaches--have had
to be reconsidered and changed as part of a continuous learning process. This
is one reason why a careful and measured look at experience is so important
and why the extent of openness to the flow of ideas is vital for growth.
222 Globalization for Development
Global Public Goods
Global action is a vital complement to national and local level policies. One
important area of action is in the provision of global public goods. Public goods
have benefits that are nonexcludable and consumption that is nonrival. These
types of goods (for example, traffic safety) may be underprovided by market
systems. Global public goods have benefits that extend across all countries.41
Demand and Supply of Global Public Goods
Demand for global public goods has grown rapidly with globalization, but
supply is constrained by the difficulty of putting in place coordinating mech-
anisms to pay for the benefits or recoup costs. At the International Confer-
ence on Financing for Development held in Monterrey, Mexico, in 2002,
global leaders established firm poverty reduction targets and highlighted the
need for a clear strategy to strengthen the provision of global public goods.
Action that Can Yield Large Global Benefits
In five areas of particular interest, concerted international action can yield very
large benefits across borders and contribute to individual country poverty
reduction.
Fighting Infectious and Communicable Diseases
As indicated above, infectious diseases in developing countries kill millions
of people, exacerbating poverty and severely disrupting economic life. The
benefits to individuals of advances in this area are vast and go beyond any
attempt at measurement. These benefits, in terms of enhancing the quality of
life, reducing lost workdays, and raising productivity are widely shared, even
in countries or communities where other interventions or investments are
ineffective. Infectious diseases are carried more and more frequently across
borders through trade and travel, so fighting them is increasingly becoming
a direct need for all countries.
Improving the Global Environment
Our water, our land, our forests, and our biodiversity are vital assets, with
potentially catastrophic losses if international protective action is inadequate.
Tropical countries in particular are vulnerable to projected climate change and
environmental degradation, including loss in food production resulting from
global warming, and an expanding range of tropical diseases. Global action
must be complemented by environmental policies on national and local levels.
Rich countries have a special contribution to make here because they dom-
inate energy use and because they are the largest consumers for most natural
Ideas 223
resources and they generate the most pollutants. The demographic and grow-
ing economic weight of developing countries--together with their share of
environmental resources and challenges--means that their participation in
global compacts on the environment is essential (see Goldin and Winters 1995).
Promoting Orderly Cross-Border Movement of Goods and Services
The fall in international transportation and communication costs has led to
a rapid growth in cross-border trade in goods and services. International mar-
kets provide tremendous opportunity to developing countries to expand
trade flows, provided they have market access. The WTO is dedicated to
removing barriers to trade but it faces an uphill battle against protectionist
interests in both developed and developing countries.
Encouraging Global Financial Stability
As discussed in chapter 4, the integration of global capital markets greatly
increased the volume of international private capital flows. This has helped
support a rapid expansion of economic activity in developing countries, but
it has also brought heightened vulnerability to financial shocks and market
contagion, the social burden of which often falls most sharply on the urban
poor. A new framework for harmonizing supervisory practices, relying more
on internal risk management, is being developed by the international insti-
tutions, including the International Monetary Fund, the World Bank, and
others.
Creating and Disseminating Knowledge on Development Issues
Multilateral development agencies must play a lead role in research on devel-
opment and in disseminating the lessons of development experience. Initia-
tives such as the Development Gateway, which provides local to global
connectivity, have the ability to empower local communities, build knowl-
edge networks, and serve citizenry more effectively through enhanced and
low-cost information.42 Such gains through disseminating knowledge are
most effective when knowledge is a public good accessible to all.
The Challenge of Cooperation
The challenge to all of the above pressing priorities is one of cooperation.43 As
noted by Kaul, Grunberg, and Stern (1999), "billions of people do not nego-
tiate directly with each other. In many instances their governments do it on
their behalf, reducing the number of negotiating partners to about 185--still
an unwieldy group for creating cooperative arrangements" (p. 15). Unwieldy
though this process may be, fulfilling the important promise of the global
public goods idea requires the international community to forge ahead with
these efforts.
224 Globalization for Development
Summary
To ignore the development and flow of ideas as a component of economic
globalization is to miss a central feature of the globalization process, a feature
that has important implications for poverty alleviation. Poverty responds to
effective development, and effective development is, in large measure, the
deployment of appropriate ideas in appropriate ways. As we have repeatedly
emphasized here, there is no single model of how this can be done. Rather,
effective development from the point of view of ideas is largely about tailor-
ing existing, global knowledge to evolving local circumstances in ways that
directly and indirectly benefit poor people.
Connection of Flows of Ideas and Other Elements of Globalization
Important connections exist among the global flows of ideas and the other
globalization elements considered in this book: trade, capital flows especially in
the form of foreign investment, aid, and migration. Trade, as we have shown in
Chapter 3, embodies ideas reflected in technologies and processes. The benefits
of foreign investment involve both basic and deep learning. These, in turn,
require threshold levels of skills and education. In the case of migration, inter-
national movements of labor and experts facilitate the less formal processes
of knowledge transfer. The effective deployment of ideas is therefore facili-
tated by the global movements of goods, services, capital, and people.
Importance of Knowledge Management
One important theme to emerge from this chapter is the theme of knowledge
management. There is a fundamental tension here that remains largely unre-
solved from a policy perspective. As we emphasized, knowledge is a global
public good that has great potential to help the poor. However, there has been
a growing tendency, supported by WTO agreements, to advance the privati-
zation of knowledge. In some respects, this can help the poor. In other
respects, this is cause for alarm. In the realms of environmental and labor
standards, international economists have resisted a "one-size-fits-all" ap-
proach to forming policy.44 Ensuring that this is also the case with intellectual
property, so that it supports development, requires attention.
Ideas about Growth and Development
With regard to ideas concerning growth and development, the pendulum has
swung back and forth between the poles of government-led and market-led
policy regimes. This has clarified the features of government and markets in the
processes of growth, development, and poverty alleviation. An emerging con-
sensus in the realm of development ideas, reflected in a coevolution between
Ideas 225
market and state, offers effective institutional frameworks and accounts for
local conditions.
Central Role of Learning
This chapter has sought to highlight the central role of learning and ideas in
development. Policy makers and practitioners require opportunities to
understand what works and what does not, based on evidence and on analy-
sis that draws on the widest possible data, experience and skills. By reducing
the constraints posed by information, education, language, and access, policy
makers at the global, national, and local levels can make a significant contri-
bution to improving the chances that globalization will offer more opportu-
nities for growth and poverty reduction.
Notes
1. Some of the elements considered in this chapter have been previously identified by Meier (2001).
2. These processes have been effectively described by Diamond (1997), who emphasizes the role of
continental East-West axes in facilitating the early diffusion of agricultural technologies.
3. In international economics, the importance of local knowledge was first emphasized by Pack and
Westphal (1986). The concept of local knowledge is well developed throughout the social sciences
as well. See, for example, de Walt (1994).
4. The authors are grateful to F. Halsey Rogers, who contributed this scenario in the course of our
discussions on the role of ideas.
5. Rodrik (2000) emphasizes that "large-scale institutional development by and large requires a
process of discovery about local needs and capabilities" (p. 14).
6. Interestingly, the commitment of Bill Gates to provide unprecedented private support to combat
HIV/AIDS and other preventable diseases also reflects the power of ideas. Gates, at the United
Nations on May 9, 2003, stated "My personal commitment to improving global health started when
I learned about health inequities . . . in the 1993 (World Bank) World Development Report . . . my
wife Melinda and I were stunned to learn that 11 million children die each year from preventable
diseases. That is when we decided to make improving health the focus of our philanthropy."
7. Recall from chapter 3 that estimates of the number of people kept in poverty by rich country pro-
tectionism is at least 100 million.
8. Efforts to argue for agricultural protection in terms of the "multifunctionality" of agricultural
production in the rich (but apparently not the poor) world (for example, Jules 2003) is no less an
exercise of right and might than previous ideologies have exercised.
9. See, for example, chapter 10 of Sen (1999).
10. See, for example, Rischard (2002) and Nowotny (2004).
11. For an example of such evolutionary reform, see the United Nations' recent proposals to reform
to keep pace with evolving peacekeeping and security demands (United Nations 2005).
12. See Mallaby (2004) pp. 7�8.
13. A key original contribution in this area was Sen (1989).
14. In the terminology of microeconomics, the benefits of knowledge are "nonexcludable," and its
consumption is "nonrival." As pointed out by Stiglitz (1999), knowledge is actually a global pub-
lic good. We consider global public goods later in this chapter.
15. See, for example, Stiglitz (1987).
16. See Hoekman, Maskus, and Saggi (2004) as well as chapter 4.
17. The economics of intellectual property protection is a rich area of research. See, for example, the
debate on optimal patent length and breadth in Gilbert and Shapiro (1990).
226 Globalization for Development
18. See Boldrin and Levine (2002, 2004a, 2004b) and also Shapiro (2004), who argues that excessive
issuing of patents in the United States restricts competition and harms innovation.
19. The authors are grateful to Jean-Jacques Dethier for highlighting a number of the points in this
paragraph.
20. See Goldin, Stern, and Dethier (2003).
21. See Cockburn and Lanjouw (2001) for examples of the hotly contested debate or evidence.
22. New Scientist 2005.
23. See www.vaccinealliance.org for an explanation of what GAVI does.
24. New Scientist 2005.
25. On concerns over cultural homogenization, see Barber (1996). For a flavor of the ideas of the
antiglobalization networks, see the Web site antiglobalization.com. Klein (2000) has become core
reading for those opposing globalization, and Wolf (2004) marshals many of the economic argu-
ments for the proponents of globalization. Chua (2003) raises concerns about globalization in the
context of what she terms "market-dominant minorities." See also, for example, Mander and
Goldsmith (1996) and Helleiner and Pickel (2005) on more "market-dominant minorities."
26. The import substitution idea is skillfully reviewed by Bruton (1998).
27. Wolf (2004) is a modern advocate of this point of view.
28. We consider institutional issues further in the following section.
29. This point has been made by Adelman (2001). See also Stern (2002) and Ranis (2004).
30. We are thus in disagreement with Friedman's (2000) notion of a "golden straightjacket" limiting
policy options. Policy spaces do exist and far from being constrained, these are expanding and are
an important part of the explanation for the acceleration in economic growth and poverty reduc-
tion in recent decades.
31. This section and those that follow draw extensively on Goldin, Stern, and Dethier (2003). See also
Stern, Dethier, and Rogers (2004).
32. See Williamson (1990, 1994), often cited as the author of the Washington Consensus.
33. See, for example, Stiglitz (2000).
34. A theoretical explanation of why these outcomes are not likely was given by North (1990).
35. The emphasis on family farms and on bureaucratic harassment here is attributable to Nick Stern,
who focused on these neglected areas in Stern (2002).
36. See Hanushek and Kim (1995) and Krueger and Lindahl (1999) on the role of education and
Gupta and Mitra (2004) on the role of health.
37. See chapter 7 of World Bank (2003b).
38. See our discussion in Chapter 4.
39. See Collier and Gunning (1995).
40. See Pritchett (2000) and Easterly (2001) for a discussion of why this is difficult to achieve.
41. See Kaul, Grunberg, and Stern (1999) and Kaul and others (2003). The latter authors advocate a
very general definition of global public goods: "Global public goods are goods with benefits that
extend to all countries, people, and generations" (p. 23).
42. See www.developmentgateway.org.
43. The problem of cooperation is discussed by Martin (1999).
44. See, for example, chapter 13 of Hoekman and Kostecki (2001).
8
Toward a
Policy Agenda
G lobalization is currently held out by competing groups as both the
only means by which global poverty can be reduced and as the cause
of poverty. Neither of these contrasting claims is helpful. First, they fail to ade-
quately distinguish among the many aspects of globalization. Second, they fail
to recognize that most dimensions of globalization have both positive and
negative potential for eliminating poverty. Third, they fail to adequately
address the role of policy in influencing outcomes.
In this book, we have focused primarily on the economic aspects of glob-
alization. We bring together, perhaps for the first time, the key flows that
underpin globalization. In examining the links between poverty reduction
and flows in trade, finance, aid, migration, and ideas, we have sought to clar-
ify whether and how economic globalization can work for poor people.
Globalization for Poor People?
To the question "Can globalization work for poor people?" our answer is
"Yes." We have shown that it can, but also that it is far from automatic.
Whether globalization can work for poor people depends crucially on the
policies that accompany it. In our view, it is these policies that are of utmost
importance. Ultimately, the policies determine whether globalization helps
or hurts poor people. This last chapter seeks to develop a policy agenda that
aims to enhance the positive impact of globalization on poor people.
Policy Recommendations
No measure considered and recommended here is a panacea. First, our book
does not cover such vital dimensions of globalization as peace and security,
human rights, culture and the environment. Second, without forceful policy
interventions in the areas of education, health, and empowerment, many mil-
227
228 Globalization for Development
lions of people will continue to perish each year because of poverty in all its
dimensions. However, the struggle to overcome poverty requires advances on
many fronts, and the policies recommended here can contribute to these
gains and an accumulation of "small wins."1
We do not claim that our policy suggestions are original. They draw on the
sources referenced and are "in the air" at conferences or in conversations
among development practitioners and international economists. Our value
added is in prioritizing and bringing together a broad range of policy sugges-
tions in one place and linking them to the dimensions of globalization and
poverty reduction considered in this book.
Levels of Policy Enactment
Policies can be enacted at four levels: global, regional, national, and local or
community. Policies should not be considered as simply part of a global or
national agenda that ordinary people in both developing and developed coun-
tries in their everyday lives cannot affect. The broad range of policies in favor
of a pro-poor globalization is presented in table 8.1, which illustrates the multi-
ple levels at which policies are made. For example, if developed countries com-
mit to reducing their subsidies for agricultural goods as part of multilateral
trade negotiations under the WTO, they engage in a global policy change. If
members of a regional trade agreement issue temporary visas to guest workers
among member countries, they effect a regional policy change. If a country
engages in an effort to ensure universal primary education, it exercises national
policy making. Finally, if a firm or individuals in a local community seek to
reduce their pollution, or to increase the incentives for children to attend
school, they are making local policies that over time will contribute to invest-
ment and growth. All of these policy levels are potentially important in influ-
encing globalization processes in ways that might be beneficial for poor people.
The room for action, therefore, is larger than is often appreciated.
Interaction of Levels in Policy Making
Policy making at the global, regional, national, and local or community levels
interacts in significant ways. For example, developing an effective banking
regulatory system at the national level could support increased liberalization
of trade in financial services at the multilateral or global level. National edu-
cational advancements can support learning from foreign direct investment,
which in turn can be supported by regional investment agreements. And when
certain rich countries refuse to make concessions on global trade talks, saying
that farmers at the local level will protest, they are undermining the opportu-
nities for poor people in local communities of poor countries. Because the
Toward a Policy Agenda 229
KEY TERMS AND CONCEPTS
brain waste multifunctionality
capital accounts plurilateral (WTO terminology)
Doha Development Round Tobin Tax
Equator Principles of good governance virtuous circles
Mode 4 (WTO terminology)
various levels of policy making interact, it is often important to pay attention
to the timing and sequence of policy changes. In some cases, such as univer-
sal primary education and the fight against infectious diseases, however, "tim-
ing" comes down to making dramatic changes as quickly as possible.
Globalization and Policy Formation
Many people believe that globalization has significantly eroded the abilities of
countries and citizens to form national and local policies. We believe this is an
unhelpful characterization of globalization. Although it is true that globaliza-
tion does place some new and significant restrictions on policy, it also creates
new opportunities and spaces for policy engagement. Globalization changes
the ways policies at various levels can be deployed. In many respects, it widens
rather than narrows the range of policy options. The claim made by Friedman
(2000) that globalization puts countries' policy-making abilities inside "golden
straightjackets" misses these points. Globalization does pose constraints, but
it also presents opportunities. Policy still matters for poverty alleviation, and
it matters a great deal. For example, governments can still tax and then spend
revenues; the effectiveness with which they do so matters a great deal to the
poor people of the world.2 Indeed, some international economists view effec-
tive government expenditures as a prerequisite for global integration.3
The diversity of experience for both countries and individuals in dealing
with the same broad external globalization constraints and opportunities points
to the need to focus on the specific questions of how globalization can be
made to work for poor people. The fact that the experiences of both countries
and individual poor people in dealing with the same broad external globaliza-
tion constraints and opportunities are sometimes good but sometimes very
bad shows that we need to focus on how to make globalization work better,
especially for poor people and cultures that are currently marginalized.
We believe that policies about the flows outlined in this book determine the
ways in which globalization processes affect poor people. In the remainder of
TABLE 8.1 Examples of Policies Affecting Globalization Processes and Outcomes
Policy Levels
Globalization
dimension Global Regional National Local or community
Trade Multilateral trade agreements Regional trade agreements Trade-related capacity building Business best practice centers
Finance A plurilateral investment Regional investment Sequenced liberalization of Development of effective banking systems
agreementa agreements various components of the and other forms of financial intermedia-
capital account and focus on tion, addressing priority issues from
building investment climate investment climate surveys
Aid Increased multilateral and Regional capacity building Ensuring policies benefit poor Improved needs assessment, impact eval-
bilateral aid and higher programs people, donors are coordinated, uation, and service delivery
quality aid and corruption eliminated
Migration A multilateral agreement on Mobility of labor provi- Changes in national visa and Refugee support
migration sions in common markets citizenship requirements, fair Improve remittance security and savings
A GATS "Mode-4" visa treatment of foreigners options
programb
Ideas Increased technology trans- Increasing the research Increased government funding Inventories of traditional knowledge
fer to developing countries capacity of regional devel- of basic research, openness to
opment institutions ideas
Other Multilateral efforts to fight Regional infrastructure Universal primary and sec- Municipal water supply and sewerage
examples the spread of infectious investment coordination ondary education upgrades
of activities at diseases
different levels
Source: Authors.
a. Plurilateral in the terminology of the WTO implies that members are free not to take on the negotiated commitments. In the case of investment, see Graham (1996).
b. Mode-4 in the terminology of the WTO refers to the provision of services through the temporary movement of natural persons.
Toward a Policy Agenda 231
this chapter, we will be primarily focused at the global level. However, we want
to emphasize that, because poor people live in countries, regions, and locali-
ties, policies at all these levels can have a significant impact. The role of national
policies are particularly vital. How governments tax and spend; what they do
about corruption; and how they encourage private investment and provide
opportunities for individuals to get educated, be healthy, lead safe lives, and
participate in the choices affecting their lives make an enormous difference to
poor people.
We will proceed by taking up each of our economic globalization dimen-
sions and identifying policy changes associated with them. These policy rec-
ommendations are summarized at the end of the chapter in the form of a
global policy checklist in table 8.2.
Trade: Proposed Policy Changes
The first dimension of globalization considered in this book is international
trade--the exchange of goods and services among the countries of the world
economy. The policy changes we propose for international trade fall into the
following areas:
market access
trade-related capacity building
arms trade
forced labor.
We consider each in turn.4
Market Access
An urgent policy change that would make the international trade dimension
of economic globalization friendlier to poor people is the substantial increase
in market access for goods and services from the developing countries. This
is particularly, but not exclusively, important for labor-intensive manufac-
tured goods, including processed food products and agricultural products.
Agricultural Subsidies
In particular, there needs to be a significant reduction in the agricultural sub-
sidies of the developed countries. As we noted in chapter 3, these subsidies
have been in the US$300�$370 billion range, exceeding the entire GDP of
Sub-Saharan Africa in many years. In recent decades, they have hovered at
over five times the value of all foreign aid.
232 Globalization for Development
Agricultural subsidies are often justified in terms of various external ben-
efits to agricultural production.5 Such arguments are unhelpful for at least two
reasons. First, nearly all economic activity has external benefits of one kind or
another. Second, to the degree that agriculture does have these external ben-
efits, they are present in all countries, not just the rich countries. Subsidies to
support agriculture in the rich world undermine the most important exter-
nal benefit of agriculture in developing countries: poverty alleviation.
Recommendations
What do we mean by "substantial" and "significant?" Any improvement in
market access and reduction in agricultural subsidies is a step in the right direc-
tion. Given the scale of existing distortions and their devastating impact on poor
people, however, bold actions are needed. We make three recommendations:
First, there should be immediate and full market access for the low-
income countries.
Second, there should be the elimination of all tariff peaks and tariff
escalation for the developing countries as a whole within five years.6
Third, the total agricultural protection of the high-income countries
should be reduced to the level of their total foreign aid contributions
within five years (currently this is around US$65 billion, or 20 percent
of the costs of agricultural protection).
All of these changes would go a long way in allowing the trade dimension of
globalization to better help poor people. In rich countries, agricultural pro-
tection costs the average consumer around US$1,000 per year through in-
creased prices and taxes. As lower-income people spend a higher share of their
income on food, these policies are highly regressive. In poor countries, it is
because the policies penalize rural producers and communities, who tend to
be the lowest income groups, that the current policies are also highly regres-
sive, negatively affecting poor people the most.
Increased Market Access: Consequences
In chapter 3, we discussed the problem of the long-term decline in primary
product prices and the problems associated with their volatility. Increases in
market access will reduce the negative impact of these problems:
First, reductions of agricultural subsidies will raise world prices for
these goods. This is because production will decline in those countries
where it is now highly subsidized. In these areas (Europe, Japan, and
the United States) prices for products such as sugar, cotton, dairy, and
Toward a Policy Agenda 233
meat are many times world prices--as prices are lowered to world lev-
els, demand will increase and the use of substitutes (such as synthetic
sweeteners and synthetic textiles) will decrease.
Second, removing tariff escalation (by which more processed products
face higher tariff levels) will make it easier for developing counties to
escape their dependence on exporting raw materials and to vertically
diversify their exports toward processed commodities that have more
value.
Third, reducing protection levels for nontraditional agricultural goods
(such as flowers and fruit) and for manufactured goods will reduce the
pressure on developing countries to concentrate production in primary
commodities, such as coffee and cotton, where they have market
access. By making it easier for developing countries to diversify hori-
zontally into a wider variety of goods, and also to diversify along the
value chain into processed goods (coffee powder rather than beans, or
chocolate rather than cacao and sugar), the risks associated with fluctu-
ations in the primary production of prices and markets will be reduced.
Finally, increases in market access according to legally binding multi-
lateral rules will reduce the uncertainty that all developing countries
face about potential future protection and indiscriminate actions that
can close access to markets. This uncertainty undermines investor con-
fidence and raises the barriers to many potential investments, both in
primary commodities and in nontraditional exports in developing
countries.
For all of these reasons, increased market access will help to mitigate the
problem that many developing countries face in being dependent on primary
products.
Trade-Related Capacity Building
Substantial increases in market access must be combined with efforts to pro-
mote export capacity in low- and middle-income countries. Capacity con-
straints are multidimensional and include infrastructure, market information,
skills, and credit.
Capacity Building: Consequences
Capacity building in all these areas can also help developing countries to im-
plement WTO commitments, to be properly represented at the WTO, to
overcome trade barriers in the form of standards, to effectively negotiate
regional commitments, and to overcome supply-side constraints. They are
234 Globalization for Development
also vital to compensate for the losses that may be incurred in certain devel-
oping countries (such as Malawi and Mauritius) through loss of preferential
access to the markets, such as those of the European Union, which currently
offer preferential access.
Capacity Building Efforts Underway
The two major efforts in this regard already underway should be supported. The
first is the Integrated Framework, discussed in some detail in chapter 3. The
second is a cooperative effort between the OECD and the WTO focused on
developing the Doha Development Agenda Trade Capacity Building Database.
These worthwhile activities provide much needed support for the develop-
ment agenda of the faltering (at the time of this writing) Doha Development
Round. To take advantage of increased opportunities, substantial improve-
ments in market access have to be linked to significant investments in capac-
ity building. The sequencing of the two is vital. Market access without capacity
to benefit undermines the growth and poverty potential of trade reform. And,
conversely, if countries have the capacity to compete but are prevented from
doing so by unfair trading rules, they, too, cannot realize their potential.
Capacity Building: Infrastructure and Software
Countries should be supported in building the "behind the border" hardware,
such as infrastructure (including ports, roads, airports, equipment, and trans-
port), and software, such as customs and marketing and market intelligence
capacity. Translating these improvements in trade capacity into widespread
employment and growth opportunities requires addressing broader country-
wide constraints. In particular, improvements in the investment climate,
including in the legal and judicial system, in the regulatory environment, and
in the overall levels of education and health of the population may be neces-
sary. Firms also require reliable electricity, water supply, and other infra-
structure. This is particularly the case for small firms and family enterprises,
which cannot afford their own generators or other basic infrastructure to take
advantage of new opportunities. Trade opportunities are a necessary but not
sufficient condition for countries to take advantage of economic integration.
Capacity Building: Negotiation
Although often overlooked, the capacity to engage and negotiate in bilateral,
regional, and multilateral trade is a key requirement for a more equitable
globalization. The negotiating playing field is highly uneven. Further effort
should be made to improve the capacity of developing countries, particularly
the smaller and poorer countries, to enter into negotiations on an informed
Toward a Policy Agenda 235
and equitable basis. Too often, whether in bilateral trade agreements or in
Geneva at the WTO, teams of highly qualified and seasoned trade civil ser-
vants and expert consultants from one of the richest countries confront a
handful of junior, relatively unqualified civil servants from one of the poorer
countries.
In the WTO, the increasing complexity and breadth of the negotiations--
many of which take place simultaneously, especially during the crucial final
days of negotiations--make it all but impossible for the majority of develop-
ing countries to even attend all the sessions, let alone negotiate on a fully
informed and capable basis. To help developing countries engage more effec-
tively in trade negotiations, efforts need to be made both to prevent the over-
load of the negotiations across an ever-widening span of issues and to support
developing country trade-policy staff in data gathering, understanding com-
plex texts, analyzing the implications of different options, and negotiating
with other WTO members.
Arms Trade
The notion of gains from trade and the benefits trade expansion can bring
to poverty reduction do not apply to trade in arms or illicit trade.7 Of the
approximately US$25 billion in global arms sales in 2002, about US$17 billion
was in sales to developing countries.8 It is estimated that these trade flows con-
tribute to the deaths of more than 300,000 persons each year and fuel civil
conflicts that set back development processes for up to decades at a time.9 This
is particularly true for human development, because expenditures on arms
rival expenditures on health or education in many developing countries.10
One proposal, recently endorsed by the Foreign Secretary of the United King-
dom, and the Commission for Africa (2005), is an international Arms Trade
Treaty that would tightly control weapons exports to countries with signifi-
cant records of human rights abuses, to criminal organizations, and to con-
flict zones. Efforts of this nature, which provide a multilateral, legal framework
to international arms trade, are not a panacea, but could have substantial
positive effects by reducing mortality rates from armed conflict in the devel-
oping world. For this reason, control of the global arms trade is a politically
sensitive but important area for global cooperation.
Forced Labor
The benefits of any market transaction, including international trade, presume
that the participants in the transaction are engaged as a result of choice, not coer-
cion.11 If coercion is present, the market transaction is unlikely to be beneficial.
This is most certainly the case with forced labor. Workers in many poor coun-
236 Globalization for Development
tries are pressured by circumstances to find jobs that may pay very poorly, but
choose to remain employed in this type of employment because it is superior to
the poverty they fled, often in rural areas. Forced labor, however, is entirely dif-
ferent because freedom of choice has been infringed upon through a violation
of human rights. The WTO has a general exception for the case of prison labor
(Article XXe). This general exception, however, could be extended to all forms
of forced labor to expand the global commitment to human rights as part of the
globalization process. Trade should not be permitted with employers who pro-
duce goods made by individuals who are coerced into employment.
The issue of child labor has become important in discussions of globaliza-
tion and development. On this issue, we want to note that, as emphasized by
Sen (1999), "The worst violations of the norm against child labor come typi-
cally from the virtual slavery of children in disadvantaged families and from
their being forced into exploitative employment" (p. 30). Our suggestions on
forced labor address these worst violations. We do not, however, call for an
outright ban on all forms child labor as part of the multilateral trade system
because this has real risks of making the situation worse for the children
involved. For example, it is entirely plausible that children removed from more
conventional forms of child labor will end up poorer and that, as they and their
families become increasingly desperate, they could end up working in sectors
that are not part of international trade, such as prostitution. Non�forced child
labor is much better dealt with by providing food programs and health services
within school systems, subsidies for school attendance, and other means to
increase the incentives and means to attend school,12 as well as by addressing
the underlying economic and other factors that lead to child labor.
Finance: Proposed Policy Changes
The second dimension of globalization considered in this book is finance in
the form of capital flows. This includes foreign direct investment (FDI), equity
portfolio investment, bond finance, and commercial bank lending.
In chapter 4, we compared these flows and demonstrated the extent to which
private flows to developing countries have grown relative to other flows, cur-
rently accounting for the lion's share of capital flows to middle-income devel-
oping countries. Although a handful of the resource-rich low-income countries
have had substantial private inflows, the majority of low-income countries are
more dependent on remittance flows and aid flows than private investment.
Attracting equity flows--investments in firms and productive capacity that cre-
ates jobs--and reducing the share of their budgets that go to debt repayment
can greatly assist countries to benefit from globalization. The policy changes we
Toward a Policy Agenda 237
propose for capital flows fall into the following two areas: a heterodox approach
to capital account reform and requirements for multinational enterprises.
A Heterodox Approach to Capital Account Reform
Global capital flows take place on countries' capital accounts, which record
their transactions with the rest of the world involving productive and finan-
cial assets of various kinds. The policy of international financial institutions
on capital accounts has evolved in recent years. In late 1997, the International
Monetary Fund (IMF) considered making capital account liberalization an
explicit policy goal to be part of its articles of agreement. However, there is a
distinct lack of consensus on this matter among prominent international
economists and among governments.13 Two of the economies that have been
most effective in avoiding crises in their capital accounts and that have seen
the most stable and high levels of growth over the past decades have been
China and India, and both maintain controls on their capital accounts. With
both practical experience and theory indicating that the case for capital
account liberalization is not proven for developing countries, the global pol-
icy community needs to maintain a tolerant and heterodox posture toward
the issue.
Why does this matter to poor people? As we discussed in chapter 4, and
as has been seen in cases such as the Asian and Argentina crises, mistakes
made in this area can have devastating consequences for poverty levels, edu-
cation, and health. The identification, adoption, and diffusion of best prac-
tice here can play an important role in preventing future crises of this kind
and can help reduce levels of flight capital. However, in the absence of best
practice, it does not make sense to force countries into a one-size-fits-all
mold. For capital account and accompanying financial sector liberalization,
it makes sense to err on the side of caution to prevent costly crises. This
would allow countries to adopt a carefully sequenced and prepared set of
steps toward fully integrating their capital markets and capital accounts with
the world markets.
Corporate Social Responsibility, Standards, and Transparency for MNEs
The polarization of policy discussions about globalization and poverty appears
with some intensity in the case of foreign investment and the role of multi-
national enterprises (MNEs). This is perhaps most apparent in the ongoing
debate over sweatshops and minimum standards. As for the other dimensions
of globalization, the actual relationship between FDI and poverty is more sub-
tle and complex.14 FDI typically provides jobs and offers new products and
238 Globalization for Development
opportunities. However, the extent to which poor people benefit varies greatly
by country, sector, and firm. It also changes over time.
Extractive Industries
For example, whereas in South Africa the mining industries at the outset col-
luded with the government to force vibrant rural communities off their land
and introduce the world's most systematic migrant labor system, the descen-
dants of these same companies today in some areas are among the standard
setters for foreign investors in developing countries. The South African case
highlights the particular problems associated with mining and other extrac-
tive industries.
In line with a recent major review of extractive industries, we recommend
adopting widespread safeguards and revenue review and transparency mech-
anisms to ensure that decent employment conditions are guaranteed and that
the taxes and other public revenues derived from the investments are prop-
erly managed. The World Bank recently has made such undertakings and its
private sector arm, the International Finance Corporation, has, in a similar
vein, encouraged the adoption of the Equator Principles of good governance.
The Extractive Industries Transparency Initiative (supported by the British
government) and the civil society initiative Publish What You Pay are indica-
tive of the new attention focused on providing transparent means of account-
ing for revenues, with a view to enhancing the poverty reduction impact of
the underlying investments.15 These initiatives and a growing range of corpo-
rate responsibility charters are examples of new standards of behavior for
investors. In our view, these should be adopted more widely, with the support
of source and destination governments and international agencies.
Guidelines for Behavior of MNEs
There have been many proposed guidelines about the behavior of MNEs.16
Currently, these include (but are not limited to) the United Nations Human
Rights Commission's Norms on the Responsibilities of Transnational Corpo-
rations and Other Business Enterprises, the United Nations' Global Compact,
and the Organisation for Economic Co-operation and Development's Guide-
lines for Multinational Enterprises.17
These existing schemes have two limitations. First, none of them is bind-
ing. Second, they are not all de minimis. Debate continues as to whether it
is advisable and practical to establish a small set of binding requirements
that limits the range of acceptable MNE behavior in a few key dimensions.
These requirements would be multilateral in character. Key areas that could
be addressed are forced labor, corruption, transfer pricing, and health and
safety.
Toward a Policy Agenda 239
It will always be difficult to develop and maintain a consensus for global
economic integration in the face of well-publicized exploitation of host coun-
tries by MNEs, no matter how rare these are alleged to be. However, there
appears to be little appetite on the part of either source or destination coun-
tries, the international agencies, or the companies themselves for de minimis
requirements on investment and MNEs. In branded consumer products, con-
cerns of the brand being contaminated have led global firms (such as Nike)
to club together to support independent inspections of their production facil-
ities. A growing number of global firms that are concerned about reputational
risk are, for this and other reasons, adopting their own or more credibly, col-
lectively or independently validated standards. Such voluntary arrangements
are not a substitute for global and national standards, but they should, through
scrutiny and example, be actively supported, as they contribute to improvements
in practice.
Foreign Aid: Proposed Policy Changes
The third dimension of globalization considered in this book is foreign aid,
which includes the transfer of funds in the form of concessional loans and
grants and the provision of technical assistance and capacity building. The
policy changes we advocate for aid are
doubling the amount of aid
untying aid and its allocation to country-driven poverty reduction
strategies,
harmonizing donors' activities to reduce the heavy management bur-
den on recipient countries
the widespread use of evidence-based evaluation and learning processes
to increase aid effectiveness and knowledge sharing
debt relief funded out of additional commitments.
Increasing International Aid
Reaching the Millennium Development Goals (see box 5.2) requires that aid
flows be doubled to around US$100 billion per year. We have noted that aid
alone cannot bring development. Making aid effective requires further
improvements in national policies, as well as supportive trade and other poli-
cies at the global level to provide the greatest benefit. In chapter 5, we showed
that foreign aid commitments have stagnated. For example, both the years
1972 and 2000 saw per capita aid to the low-income countries below 1995
US$10 per capita. For most low-income countries, aid is more important than
total portfolio investment, FDI, and remittances. It is vital both to increase
240 Globalization for Development
and to make more predictable commitments of aid to low-income countries.
What sort of difference would such a doubling make in current dollar terms?
In 2002, the per capita U.S. dollar value of foreign aid to the low-income
countries was US$12. This needs to rise to at least US$24, roughly equivalent
to an incremental cost to U.S. citizens of six cappuccinos per year.
Untying International Aid
The decline in aid flows in recent decades has come at precisely the time when
the impact of benefits derived from it has increased sharply. If countries are will-
ing to take the steps necessary to reform, then assistance in the form of capac-
ity building, financial assistance, and analytical support yields strong results. A
critical lesson of past decades is that the countries themselves must be respon-
sible and be fully behind their actions, that is, the commitment of the recipient
countries is essential. This requires not only that aid be allocated without con-
ditions that require that the donor's firms, consultants, or equipment be used,
but also that it is aligned and accounted for in the recipient countries' budget
process and national growth and poverty reduction strategies. Aid flows should
be uncoupled from requirements that the recipient countries purchase items
from donor countries, whatever these items might be.
Harmonization, Alignment, and Predictability
Alignment behind country-driven programs reduces the cost to recipients of
creating new projects and programs for the donors and spending their very
scarce resources and time to support individual donors' requirements. This
management burden imposed on recipients is considerable, with ministers
and other key staff often spending too much of their time meeting donors'
needs rather than their domestic constituents' needs. The harmonization
agenda needs to be pursued vigorously to ensure that, instead of each donor
requiring very burdensome reporting and chaperoning, these administrative
requirements are done collectively. Wherever possible, this should be through
reinforcing and building the recipient countries' own existing systems, rather
than creating additional systems to satisfy donor requirements. The reinforce-
ment of country systems should cover not only the accounting and fiduciary
reports required by donors, but should also extend to the governance and
environmental, social, and other safeguards that increasingly dominate the
discussions between aid donors and recipients.
A vision that ensures that the recipients share a concern to embrace these
safeguards--and that part of the aid program is concerned with transform-
ing these safeguards from externally imposed to internally built processes--
means that external agencies are helping low-income countries to develop a
Toward a Policy Agenda 241
sustainable approach that will allow them over time to reduce transactions
costs, build domestic capacity, and eventually withdraw. Improving the qual-
ity of aid behind government programs also requires that aid be made more
timely, predictable, and support multiyear programs. For example, support
for investment in rural infrastructure such as roads and water, or for recur-
rent expenditures in education and health such as salaries for teachers and
nurses, cannot be turned on and off year by year, with leads and lags that
reflect donor-driven processes and priorities rather than recipients' needs.
Increased Evaluation and Knowledge Sharing
The often neglected and perhaps the most important element in aid is the role
that it plays in learning and the evolution of policy. This role has many dimen-
sions. It has also, as we illustrated in chapter 5, been associated with some of
the most controversial aspects of aid, as donors in past decades sought to use
aid to promote their own ideologies and geopolitical agendas. Although this
risk remains, chapter 7 on ideas showed that there is a convergence around
development ideas and an increasing recognition of the need for country speci-
ficity. Policy makers and citizens are more effectively able to engage in policy
discussions and make policy if they are informed by the wealth of experience
of other countries. By providing access to these lessons of experience--both the
successes and the failures--donors can support the introduction of new per-
spectives and ideas. Equally vital, and similarly too often neglected, is assistance
in establishing statistics and data, designing projects that can be assessed against
their objectives, and then incorporating the result of a rigorous examination of
the lessons of these evaluations into future program and project design. Data
that help inform policy makers, such as those contained in national household
surveys and in surveys of the obstacles facing small business, provide vital infor-
mation for policy makers and help prioritize overcrowded reform agendas.
We recommend that building evaluation and learning into aid programs be
an explicit objective rather than an afterthought. For policy makers and for the
public at large in developing countries, the key questions are what works, what
does not, and how scarce resources--time and money--can be better mobilized
to achieve growth and poverty reduction. Long menus of required steps, which
are beyond the reach of even the wealthy countries, are not helpful. Rigorous
analysis of what works and what does not and how things may be improved,
based on lessons of the countries' own experiences as well as on comparative data
and the lessons of others, are vital tools. Globalization offers great potential in
terms of drawing on the lessons of others and not repeating their mistakes. For
this potential to be realized requires a determined effort on the part of develop-
ing countries, and also of aid agencies and other international players.
242 Globalization for Development
Debt Relief
Many poor countries continue to spend more of their budget on debt service
than on water supply, rural roads, health and education, or other productive
investments. This situation has real costs for the world's poor people and
undermines these highly indebted countries' abilities to grow and reduce
poverty. Although it is not difficult to pin blame on both the countries them-
selves and the public and private lenders for creating excessive debts, it is also
the case that the current problems for many are the legacy of past regimes that
today's leadership are trying to put behind them. The Heavily Indebted Poor
Country (HIPC) initiative described in chapter 5 offers the most comprehen-
sive approach yet to support the poorest and most indebted countries that are
prepared to make a fresh start. The July 2005 G-8 agreement to cancel the
approximately US$40 billion debt of HIPC countries to the international
agencies and to make up the lost earnings to the World Bank and the African
Development Bank marks a major step forward.
Determinants of Countries Eligible for Increased Debt Relief
Following the agreement in November 2004 to cancel up to 80 percent of Iraq's
official (Paris Club) debt of almost $40 billion, the G-8 leaders in mid 2005
agreed to cancel a similar amount of debt owed by 18 highly indebted poor
countries. Increased debt relief for countries that have crushing debt burdens
and that have demonstrated that they can use it effectively is vital. This should
extend beyond the poorest 30 countries, to the many other low-income coun-
tries whose repayments of debts from previous eras undermines their abilities
to make a fresh start in poverty reduction. The important determinant should
be the effective use of the savings. The programs should be designed to mini-
mize moral hazard but also to provide funds for those that assiduously have
made sacrifices to repay past debts. To ensure that countries that have not
taken excessive debt or have already repaid debt do not suffer, it is vital that
debt relief be financed out of additional money being made available by the
rich countries. This means it should be in addition to any increased aid already
committed and now allocated to debt relief. Various proposals to finance addi-
tional aid, including the United Kingdom's International Finance Facility
(IFF), a tax on airline tickets, and the Tobin Tax have been investigated, and
pilot programs for the IFF and the airline tax are being implemented.18
Together with a commitment of the rich countries to raise their aid level to the
0.7 percent goal agreed to over 30 years ago, these financing mechanisms
reflect a welcome new commitment to increasing the quantity and quality of
aid that must be delivered.
Toward a Policy Agenda 243
Migration: Proposed Policy Changes
The fourth dimension of globalization considered in this book is migration,
which we define as the temporary or permanent movement of persons between
countries. Migration is an ancient globalization flow, and over the ages its form
and impetus have changed significantly. With increased restrictions on move-
ments, the global community is at a policy crossroads. Research and policy
debate has been dominated by concerns of the rich countries. The challenge is
to ensure that policies are developed to meet these concerns, but also to
enhance the impact of migration when seen from a developing-country per-
spective. The policy changes we propose for migration fall into the following
areas:
multilateral coordination for migration policy
temporary movement of natural persons for service delivery
management of outflows of skilled people
management of remittances
reduction of brain waste and enhancement of diaspora networks
research agenda.
Multilateral Coordination of Migration Policy
One in 34 persons in our world society is a migrant, falling into one of the cat-
egories of migration we presented in chapter 6. However, as noted by Klein,
Solomon, and Bartsch (2003), "there is no comprehensive and harmonized
system regulating international migration through which the movement of
people can be managed in an orderly and cooperative way" (p. 2). As we
noted in chapter 6, international migration can offer substantial benefits to
poor people, but it can also involve heavy costs, especially to vulnerable pop-
ulations. Further, migration is attracting the participation of international
criminal organizations in both smuggling and trafficking activities. Moves to
reform and harmonize the global migration system on a multilateral basis
can reduce the injustices and improve the efficiency of current, piecemeal
arrangements. Particular areas of concern here include dual citizenship, low-
skill migration programs, managing remittances, and enforcing human rights
for migrants.
Multilateral Coordination Avenues
As the Global Commission on International Migration (2005) has concluded,
greater multilateral coordination of migration policy could proceed through
a number of avenues. The Berne Initiative, launched in 2001, has engaged in
extensive consultation with a view to developing nonbinding guidelines for best
244 Globalization for Development
practice to manage the international movement of people "in a humane and
orderly way." As such, this initiative is worth supporting. The Global Com-
mission on International Migration was established in December 2003 by the
UN Secretary-General, who identified "migration as a priority issue for the
international community" and sought to "provide a framework for the formu-
lation of coherent, comprehensive and global response to migration issues."19
Although this international commission is supported by an ad hoc alliance of
countries rather than the UN as a whole, and although it excludes some key
countries, it nevertheless reflects a growing recognition of the importance of
migration as a neglected dimension of international politics and development
policy. Clearly there will be no quick fixes, but every effort should be made to
build on this momentum to improve the multilateral system for migration.
Strengthening the Voice of Migrants
One of the reasons why migration policy at the national and global level, despite
its importance, has lagged behind the evolution of other key dimensions of
globalization is the fact that migrants are relatively disenfranchised. Once they
have left, they typically are unable to vote and have less influence on the poli-
tics of their home country than those who remain behind. Meanwhile, as new
arrivals in their host country, they are usually excluded from the domestic pol-
itics of their host. Strengthening the voice of migrants is a key challenge.
Temporary Movement of Workers
Under the auspices of the WTO, liberalization of trade in services has occurred
in a number of areas of interest to developed countries. However, as recog-
nized some time ago by Streeten (1995), "A consistent policy of free trade in
goods and services would remove all restrictions on migration of people who
can provide services, at least on temporary immigration while the service is
provided" (p. 187). Under the WTO's General Agreement on Trade in Ser-
vices (GATS), this temporary movement of persons composes Mode 4 of ser-
vice delivery. Although there is a protocol under the GATS for Mode 4
service delivery, this "refers almost exclusively to higher-level personnel, espe-
cially to intra-corporate transferees, whose mobility is basically an adjunct to
foreign direct investment" (Winters and others 2002a, b). In other words, it
is designed to benefit developed rather than developing countries, which have
a key interest in the mobility of medium and less-skilled service providers, as
well as some skilled service providers.20
What needs to be done in this area is to immediately pursue a multilateral
system of identifying individuals seeking temporary movement, provide them
with national security clearance, and grant them multi-entry GATS visas.21
Toward a Policy Agenda 245
This is a necessary step to harness temporary migration for poverty allevia-
tion; no doubt it will require a new GATS protocol dedicated to the issue. As
Walmsley and Winters (2003) have shown, the gains for developing countries
from an increase of only 3 percent in their temporary labor quotas would
exceed the value of total aid flows and be similar to the expected benefits from
the Doha Round of trade negotiations, with most of the benefits to develop-
ing countries coming from increased access of unskilled workers to jobs in
developed countries.
Managing the Brain Drain
As we discussed in chapter 6, the widespread recognition that capacity con-
straints are a critical obstacle to development is reflected in growing attention
to the need for education and training facilities and opportunities for devel-
oping country nationals. At the same time, high-income countries increas-
ingly reach out globally in their search for much needed professional skills,
offering new opportunities to precisely those who could provide leadership
and scarce skills in their home countries. At the top end of the labor market,
and in an evolving range of specialized areas--such as information technol-
ogy and medicine--the restrictions imposed on migration are significantly
reduced or even waived in favor of programs that seek to recruit foreign
nationals. A range of financial and other incentives also provide magnets to
skilled graduates. This "brain drain" has assumed a centrality in policy dis-
cussions and research on migration, which reflects the importance that high-
income countries attach to attracting skilled labor.
Impact on Donor and Host Countries
Highly skilled people have better access to politicians, lawyers, the media, aca-
demics, and others who make policy. Indeed, a growing number of these
influential groups are first- or second-generation migrants. The selective ad-
mission of skilled people offers great benefits to the host countries. Its impact
on the donor countries is less clear and, as we discussed in chapter 6, involves
the direct costs of the loss of skills. From a government perspective, education
and other wide-ranging costs are neither compensated for by the service of
professionals, nor by their tax revenues and pensions. Donor counties also do
not benefit directly from the impact of these skilled people on the dynamics
of growth.22 As the reverse flows of ideas, money, and skilled people into the
Indian high-tech sector show, these are not necessarily one-way losses. Gov-
ernments can also influence the decisions of skilled people not to leave and to
keep their capital in the country to some degree by shaping the overall envi-
ronment for skilled people, by providing a safe and secure working environ-
246 Globalization for Development
ment, by reaching out to their skilled people and seeking their involvement in
decision making, and through other incentives. However, given the gaps in
earning power and the attractions of cosmopolitan environments, this hold-
ing power is limited, particularly for the small and poor countries.
Policies of Restricting Recruitment
A recent British parliamentary investigation into migration and development
concluded that "it is unfair, inefficient and incoherent for developed coun-
tries to provide aid to help developing countries to make progress . . . on
health and education, whilst helping themselves to the nurses, doctors and
teachers who have been trained in, and at the expense of, developing coun-
tries."23 The British government, to increase the coherence between its aid and
skilled migration policies, has committed itself to restricting its recruitment
of essential skilled health professionals. Our recommendation is that such
policies be extended in the light of careful analysis to be undertaken of the
costs and benefits of such skilled migration for the sending country. Where
the extent of recruitment and the resulting critical shortages are shown to
have a serious impact on development objectives, such restrictions on gov-
ernment recruitment could go beyond doctors and nurses. It is important also
to include teachers, engineers, accountants, and others whose services are vital
if developing countries are to achieve essential education, governance, and
infrastructure improvements and create the virtuous circles that will encour-
age skilled people to stay at home.
Incentives that Capture Costs and Benefits
For human liberty, economic, and enforceability reasons we do not believe
that it is practical to include recruitment agencies or private firms in binding
commitments, although for many skilled people they provide the bridge for
migration. Consideration, however, should be given to developing tax and
other incentives that serve to better capture the costs to the source country and
the benefits to the destination country of recruitment of skilled people. In
particular, the often extensive public investment in education and training
could be calculated and reimbursed, at least in part, through additional aid or
other transfers. For example, every surgeon recruited from abroad implies a
saving of over US$1 million in education investments and a cost to the donor
country of this amount. For developing countries, in addition to the direct
impact of the loss of skills, migration represents a reverse flow to the rich coun-
tries of public investments that for many exceeds the flows derived from aid.
Greater coherence between migration and aid policies is urgently required.
This would include further investment in education and training in poor coun-
Toward a Policy Agenda 247
tries to raise the supply and competence levels of skilled people. Attention
should also be given to raising the incentive to stay, as there is some evidence
that certain students see higher education as a stepping stone to migration.
Reducing Brain Waste
Although much needed attention has recently focused on the brain drain, a
neglected dimension of this problem is the underutilization of the skills of
migrants in rich countries, or brain waste. This is particularly the problem for
migrants who are escaping persecution and refugees, as they have not been
directly recruited by head hunters due to their skills, but the problem extends
well beyond refugees. In the United States, for example, the anecdotes from con-
versations with taxi drivers who are engineers or accountants are borne out by
the data: a minority (typically a third to a half) of migrants who entered the
United States with a bachelor's degree undertake work requiring such a degree,
and examining the relatively well educated among some categories of migrants,
such as the Mexicans and Poles, the probability is only around 20 percent that
they will enter a skilled job that matches their qualifications.24 This reflects the
issues of brain drain, including the need to keep and utilize skilled people in the
source countries and create an investment climate where potential migrants can
prosper. It also reflects the coherence of aid and migration policies in rich coun-
tries and their ability to absorb migrants into the labor market and society.
Enhancing Diaspora Benefits
Migrants can and sometimes do play a vital role in investing, transferring tech-
nology, and serving as informal and even formal marketing agents for their
home countries. The scant evidence on this suggests that although there is
much spontaneous generation of such flows, policies in the host and home
countries, at the local and the national levels, can make a significant difference
to the beneficial impact of diasporas. The role of the Indian technology dias-
pora was discussed in chapter 6. Initial research suggests that countries that
give more migrants tend to benefit most from return investment flows from
the host countries.25 In Western Europe, there are determined efforts to en-
courage diasporas from the Balkans to invest and even to return home to offer
training and share the skills and technologies they have learned abroad. Poli-
cies to support such formal and informal networks as well as to encourage
such investment and technology flows are to be encouraged.
Managing Remittances
Migrants' remittances are increasingly recognized as a highly significant
financial flow, with officially recorded flows well over double aid flows, and
248 Globalization for Development
second only to foreign investment as a source of external financing for devel-
oping countries.
Remittance Flows
Although remittance flows, like other capital flows, are highly unevenly dis-
tributed among developing countries, they tend to be more evenly distrib-
uted than other flows and also more stable. To the extent that the supply of
migrants increases in bad times and these migrants send back more money,
remittance flows are also countercyclical. Officially recorded global flows of
remittances rose sharply to approximately US$270 billion in 2006, of which
developing countries received approximately US$200 billion. Growth in
remittances was particularly strong in low-income countries, notably India.26
Remittances are expected to continue to grow, and in 2006 already are esti-
mated to approximately US$24 billion in India, US$25 billion in Mexico and
US$15 billion in the Philippines. In part, the surge in recent years in reported
remittances may be attributed to the growing scrutiny of flows and the restric-
tions placed on informal channels, due to security concerns. The reduction in
the costs of remittance flows through regulated channels is also thought to
have contributed to the switch from informal to formal channels.
Financial Infrastructure Support for Remittances
Improving the benefits of migration includes strengthening the financial
infrastructure supporting remittances. With average fees estimated at 13 per-
cent (and often much higher), increased competition and the provision of
lower-cost remittance services would greatly benefit both the sender and the
beneficiary of the transfer. Increased competition can be fostered in a variety
of ways, including through a facilitative regulatory and compliance frame-
work. The preclusion of exclusive bilateral monopolies between official remit-
tance agents and the licensing of a wider variety of certified competitors is to
be encouraged. New e-commerce technologies, including in foreign exchange
markets and in electronic cards, offer great potential to reduce the overall
transactions costs. Similarly, increased competition and scrutiny may be ex-
pected to reduce the highly regressive structure of the markets; the smaller the
transaction, the greater the cost relative to the amount transferred, which dis-
criminates against lower-income migrants and those who wish to make
smaller but more frequent transfers. The availability of accessible remittance
services near the workplace or residence of migrants and near the destination
of the people to whom the funds are to be transferred, which offer simple
processes in languages understood by the migrants, will also greatly facilitate
remittance flows. Such services will also encourage the movement of remit-
Toward a Policy Agenda 249
tances from unofficial unregulated networks into regulated flows, which is
important for addressing security as well as developmental concerns.
Policies to Enhance Impact of Remittances
In addition to reducing costs and facilitating remittance flows in other ways, a
range of possible policy measures may be expected to enhance the develop-
ment impact of remittance flows. Before recommending tax measures, official
savings associations, and other government-led mechanisms to increase the
beneficial impact of remittances, care must be taken to ensure that these mea-
sures will be welcomed by the migrants themselves. If such measures are not
welcome, migrants will reduce their remittances or revert to unofficial chan-
nels or other strategies. Remittances are private, person-to-person flows, and
coordination and policy interventions should be formulated with this in mind.
Need for Research
More empirical research is needed before we can with certainty identify the
extent to which remittances have grown or whether the net impact of migra-
tion on the donor countries is positive. The net impacts should not be measured
in terms of remittances alone, but rather the overall context. This point is per-
haps most starkly illustrated by the flow of remittances during the apartheid
period in South Africa, when higher levels of remittances reflected the increas-
ingly destructive impact of apartheid on the lives of families that were forcibly
separated
Research and Data
As the British Parliamentary Investigation into Migration has recently noted,
"Policy should not be designed on the basis of hunches and anecdotes . . . the
evidence-base urgently needs improving."27 The absence of reliable data and
the paucity of research on migration are striking. This fundamentally frus-
trates any attempt to examine the issue with a development perspective.
Whereas there are literally thousands of researchers and research papers and
a wide range of data sets focused on trade, capital flows, aid, and development,
the number of researchers residing in developing countries dedicated to inter-
national migration issues can be counted on two hands. This may be contrasted
with the rapid growth of academic work examining migration issues from the
perspective of the rich countries. For example, in the United Kingdom alone,
a number of research institutes have been created in the past few of years to
address European migration issues, with an investment that we estimate
exceeds all the work being conducted in developing countries on cross-border
migration issues.
250 Globalization for Development
Developing a development perspective on migration is urgently needed.
Recent efforts in the World Bank and in a number of developing countries to
create capacity to analyze these issues require support if the necessary data and
analysis are to be provided to inform much-needed policy reforms at the
national and global level. With such research will also come a better under-
standing of the interrelationship of flows, and the extent and manner in which
trade, capital flows, and aid are a substitute or complement to flows of migrants.
Research on remittances has grown most rapidly, with the scale of these flows
finally attracting deserved attention by both researchers and officials. However,
much more work is needed to address the questions of who migrates and why;
what the short- and long-term costs and benefits are to the home community
and country; and how temporary migration, brain drain, brain waste, and the
links between diasporas and trade and investment can be enhanced to the ben-
efit of poor people. Migration can again become one of the most powerful forces
for poverty reduction, and migration policies offer great potential for enhancing
the beneficial effects of globalization for the world's poor. Research to inform
better policies is urgently required to realize this development potential.
Ideas: Proposed Policy Changes
Ideas are potentially the most powerful influence on development. Global-
ization and technical progress have meant that ideas are transmitted and ex-
changed as never before. The key question is how this potential may be
harnessed to accelerate poverty reduction. What policies should countries
adopt to facilitate the evolution of ideas and their generation, transmission,
adaptation, and adoption? Knowledge management is often seen as a partic-
ularly difficult challenge for firms; for countries it is even more daunting.
However, ignoring or giving only passing attention to knowledge manage-
ment and the transmission of ideas is not a solution. The policy changes we
propose for ideas fall into the following areas:
increasing the voice of developing countries
knowledge management
intellectual property harmonization
rights to key pharmaceuticals
technology transfer.
Increasing the Voice of Developing Countries
An essential ingredient for ensuring a more inclusive globalization is that the
ideas generated by developing countries must be given greater weight than
Toward a Policy Agenda 251
they are given now. This is especially important in global consultation and
decision-making forums where decisions that have direct consequences for
the citizens of developing countries are made.28 Without adequate represen-
tation and voice, decisions reached are less informed, less legitimate, and less
effective.
Effectiveness of Global Institutions
In addition to ensuring that global institutions more adequately represent the
different participants, it is also vital to ensure that those institutions that are
representative, such as the United Nations, are effective and strengthened. The
importance of leveling the playing field in the negotiations at the WTO was
stressed above. The governance of the World Bank and the IMF reflects agree-
ments and the balance of power of 60 years ago. There is widespread recogni-
tion of the need for enhancing the participation of developing countries, in
light of their increased significance globally and their role as the primary
recipients of Bank and IMF programs. Although progress has been made in in-
creasing the participation of developing countries in formulating programs--
as, for example, with the Poverty Reduction Strategy Paper approach--
and in enhancing the capacity of the multistakeholder boards, the struc-
tural issues of voting rights and board representation remain intractable.
While improvements in the effectiveness of the UN system and the Bretton
Woods Institutions will contribute to more effective global management,
the issue of more effective global governance goes well beyond these insti-
tutions and is a key challenge of our time.
Country Voice on the Global Level
Much of the discussion on global governance has centered on the Bretton
Woods Institutions, but the question of developing country voice is much
wider. At the global level, the 2005 Report of the Secretary General of the
United Nations, In Larger Freedom, identifies the need for fundamental
reform of global governance to ensure the following freedoms:
freedom from fear (through security council reform and the establish-
ment of a peacebuilding commission)
freedom from indignity (through human rights commission reform
and the establishment of a human rights council)
freedom from want (through the implementation of the Monterrey
Consensus to reduce poverty by half by 2015 and achieve other UN
Millennium Development targets).
252 Globalization for Development
In the realm of economic governance, the extent of participation of developing
countries has varied from universal or almost full participation in standard-
setting bodies, to much more limited participation in the Bank for International
Settlements (BIS), which has 55 member central banks, the G-10, and the
Financial Stability Forum which brings together 25 high-income governments
and international institutions.
Need for Inclusive Solutions
Over the past decade, the economic and political muscle of the developing
countries has increased both because of their rapid economic growth and
because of rising awareness of global fragility and interdependence. The
need for inclusive solutions has been highlighted first by the economic
crises of the late 1990s and then by the security crisis associated with ter-
rorism following September 2001. The expansion of the G-7 to include Rus-
sia and now also frequently China, and the creation of new forums such as
the G-20 and G-24, has given more voice to large developing countries.
These and other outreach efforts are useful, but as Bhattacharya and Griffith-
Jones (2004, p. 205) point out, "it is important to go beyond consultation
to full representation of developing countries in bodies that deliberate and
set international norms and action plans" that affect the global community.
Similarly, the current arrangements by which the richest countries agree
among themselves the leadership appointments for key global institu-
tions disenfranchises developing countries. The principles of transparency
and good governance that governments are applying with increasing fre-
quency to themselves and at the corporate level should also apply in global
governance, thereby reinforcing the legitimacy and effectiveness of the
global institutions.
Knowledge Management
Knowledge management embraces a wide range of activities designed to
enhance countries' abilities to acquire, absorb, and take advantage of new
information and ideas. The range of activities includes acquiring knowledge
in the following ways:
by establishing links
by being open to ideas available elsewhere (for example, through trade,
foreign investment, and licensing)
by creating knowledge locally through research and development
by building on indigenous knowledge.
Toward a Policy Agenda 253
Policies for Enhancing Knowledge Acquisition
The policies suggested under our discussion of trade and capital flows apply
equally here: greater openness to trade and investment, and ensuring that trade
and investment are associated with the transfer of technologies and expertise,
are all policies that contribute to deepening knowledge acquisition. So, too,
does closing the digital divide and the combination of open access to the Inter-
net and developing a regulatory environment that allows competitive entry
into the telecommunications sector, reducing high-speed connectivity charges.
Creating and adapting knowledge locally--by investing in public sector re-
search and creating incentives for private sector research and collaboration--
is vital. It can be encouraged by establishing a facilitative intellectual property
environment, as we discuss below.
Absorbing information builds on the fundamentals of literacy and numer-
acy, but to generate adaptation and innovation also requires the development
of an inquisitive spirit and the ability to evaluate ideas and information. Expo-
sure to the experiences of others provides helpful insights to development
practitioners. Equally important is the careful evaluation of the impact of
those experiences. By diligently examining the extent to which policy initia-
tives and interventions reach or fall short of their objectives, and by pro-
moting a culture of critical analysis and open admission of weaknesses and
strengths, governments can set the standards for the acceleration of learning.
Equally, international partners and global and regional institutions have a
major responsibility to engage in research and make available the benefits of
their global and long-term experience in development.
Including Poor Communities in Knowledge Sharing
As we discussed in chapter 7, knowledge management requires the acquisition
of ideas and information (as a spillover from trade and investment and also
directly through research and data collection), absorbing information (through
educated analysis and increasing the learning from own and others' experi-
ence), and communicating knowledge to ensure that it is widely shared. In
addition to investments in education and research, governments can facilitate
the sharing of knowledge and make special efforts to overcome the exclusion
of poor people and poor communities from information. Global institutions
and partners have a responsibility to assist with the distillation and dissemina-
tion of the wide-ranging lessons of experience and research. A particular chal-
lenge is to make this available to developing countries in ways and languages
that can be understood not only by a small leadership group who read Eng-
lish but also by wider audiences, ranging from school children to development
254 Globalization for Development
practitioners such as those who design and implement policies in provincial
and local governments.
Communication, Knowledge, and Risk Management
In recent years, the role of communication and knowledge in risk manage-
ment has become better understood. Timely and effective information flows
on issues important to poor people can help them to manage their risks and
maximize their opportunities. Such practical efforts include providing mar-
ket prices to poor farmers through village mobile phones, broadcasting weather
information and disaster warnings on local radios, and highlighting the risks
of HIV/AIDS and the benefits of public health measures in community infor-
mation campaigns. In these and other respects, knowledge really does pro-
vide power to poor people to improve their lives.
The Knowledge Assessment Methodology
The Knowledge Assessment Methodology helps countries understand their
strengths and weaknesses in transitioning to knowledge economies.29 It is
now available for 128 countries and provides useful means for countries to
identify their performance and potential in terms of their needs and capa-
bilities along a wide variety of dimensions. Although still under develop-
ment, this and other initiatives, such as those that focus on the development
of African science and math capacity and the African Virtual University,
provide the basis for a rapid scaling up of knowledge in support of the
acquisition, adoption, and communication of ideas to support poverty
reduction and growth.
Further Intellectual Property Harmonization
As we discussed in chapter 7, knowledge is typically a global public good.
However, there is an ongoing process of knowledge privatization in the form
of increased intellectual property protection.30 This is taking place at the WTO
under the Agreement on Trade-Related Aspects of Intellectual Property
Rights (TRIPS), at the World Intellectual Property Organization (WIPO),
and in regional trade agreement negotiations in "TRIPS-plus" formats. From
a development perspective, the TRIPS Agreement is controversial.31 Interna-
tional economists and lawyers have significant disagreements on the long-run
benefits of restricting knowledge transfer to developing countries.32 The
majority of developing countries, supported by many leading scientists and
Toward a Policy Agenda 255
academics, have argued that intellectual property protection needs to be
applied in a manner that allows developing countries greater access to research
and new technologies. Given this lack of consensus on the benefits and the costs
to developing countries of meeting TRIPS implementation requirements,33
an intensive examination of the issues by an independent panel accompanied
by a temporary moratorium of further commitments demanded of developing
countries has been suggested.34 Correa (2003) notes this should include re-
gional and bilateral agreements where "TRIPS-plus" obligations are being
negotiated that go beyond the existing commitments made by developing
countries. The argument is that demands for harmonization are now ahead
both of intellectual capacity in many countries and of demonstrated benefits.
A moratorium for a predetermined fixed period of time may therefore be
worth considering to allow expert evaluation to enable policy decisions to be
made on a more credible basis of considered research into the issues.
Establishing Rights to Key Pharmaceuticals
As we mentioned in chapter 7, patents are a central concern for the impact
of intellectual property protection on poor people, particularly in the case
of pharmaceuticals for HIV/AIDS, tuberculosis, and malaria.35 In 2001,
WTO members reaffirmed certain "flexibilities" with regard to access to phar-
maceuticals needed to address public health crises. This included the pro-
duction of generic drugs under compulsory licensing arrangements under
Article 31 of TRIPS. Article 31(f) limits the use of these generic drugs to the
domestic markets of the producing countries. Matthews (2004) notes the
problem here:
This has the practical effect of preventing exports of generic drugs
to countries that do not have significant pharmaceutical industries
themselves. Only about a dozen developing countries, among them
China, India, Brazil, Argentina and South Africa, have the level of
manufacturing capacity capable of producing significant quantities of
off-patent generic drugs. For countries with insufficient manufacturing
capacity, the only realistic sourcing mechanism is importation. (p. 78)
Unfortunately, importation of this kind is restricted under TRIPS Article 31(f).
A 2003 WTO decision on this issue allowed poor countries to import off-
patent, generic drugs under specified conditions and directed the WTO
TRIPS Council to prepare an amendment based "where appropriate" on the
256 Globalization for Development
decision. An agreement regarding this amendment was reached in 2005, and
this is to be ratified by the end of 2007. It remains, however, both for sup-
porting legislation in WTO member countries to be fully enacted and for the
provisions of the amendment to be tested in practice. Indeed, Matthews
(2006) notes that "it is perhaps surprising that no developing country has yet
used the new mechanism to allow the importation of generic medicines fol-
lowing the issuance of a compulsory license in a developed country prior to
patent expiry" (p. 130). It has become clear that capacity building is necessary
to support use of the system, and the World Bank, among others, has been
active in this regard. Perhaps, the compulsory licensing option will be help-
ful in harnessing knowledge in the form of pharmaceuticals to alleviate health
crises and promote human development, but sustained commitment by all
parties will be a necessary condition.
Increased Technology Transfer to Developing Countries
The global transfer of ideas in the form of technology is one of the most
important development processes. For decades, the apparently growing gulf
between developed and developing countries has raised concerns regarding a
"technology divide." In recent years, leading developing countries such as
Brazil, China, India, and South Africa have demonstrated that certain coun-
tries cannot only overcome but even leap ahead in selected areas. Partly as a
result of these advances, developing countries increasingly are looking to each
other for ideas and collaboration.
Although learning from the deliberate policies put in place by those
countries that have increasingly developed and adapted technologies, the
overwhelming majority of developing countries will remain dependent on
technology transfer. Article 66.2 of the WTO TRIPS Agreement commits
developed countries to providing "incentives to enterprises and institutions
in their territories for the purpose of promoting and encouraging technology
transfer" to the least-developed countries. This commitment needs to be im-
plemented in practice and applied to a wider set of countries. As outlined by
Maskus (2003) and Hoekman, Maskus, and Saggi (2004), this can occur through
a variety of measures. These measures include the following:
incentives for corporations and nongovernmental organizations to
transfer mature patent rights or to provide technical assistance
public support for research into the specific technology needs of devel-
oping countries
university training for students from the low-income countries in
science and technology
Toward a Policy Agenda 257
finance to enable the participation of developing country representa-
tives in standard-setting bodies
public purchase of patents on certain technologies for free use in devel-
oping countries.
In addition, we would suggest that the rich countries consider the possibility
of creating incentives--for example, through negotiating patent extensions
on technologies primarily destined for high-income groups in return for low-
ering or waiving patent fees and restrictions on technologies destined for low-
income markets. These and other steps can better ensure that international
technological development is more likely to help poor people.
A Global Policy Checklist
Having described our policy agenda in some detail, it is useful to present its
elements in a more concise format. We do so in table 8.2. Without significant
progress toward the changes described by the entries in table 8.2, it will be
much less likely that we can count on the globalization dimensions discussed
in this book bringing positive benefits to poor people.
Summary and Assessment
The post�World War II period of accelerated global integration has been asso-
ciated with unprecedented progress on key dimensions of development. This
is mainly because of countries adopting better national policies and directing
cross-border flows of ideas, people, capital, and goods to meet the challenges
faced by their citizens. Some examples of these leaps in development include36
Health. Over the past 40 years, life expectancy at birth in developing
countries increased by 20 years. It is likely that the previous 20-year
increase in longevity took millennia. The improvement resulted partly
from higher incomes and better education, particularly of women and
girls, but also in large measure from improved knowledge and under-
standing about the prevention and treatment of disease, and new pro-
grams to share this knowledge and put it into practice. The pandemic
of HIV/AIDS has reduced life expectancy by 20 years in some countries
of the world. However, with our improved knowledge of the preven-
tion and treatment of disease, the combination of effective actions at
the country and global levels holds the hope of reinstating that surge in
longevity to all countries.
258 Globalization for Development
Education. Over the past 30 years, illiteracy in the developing world
has been cut nearly in half, from 47 percent to 25 percent of all adults.
Steady expansion of school enrollments worldwide and increases in
education quality made key contributions to this improvement, as did
better infrastructure and nutrition. These commitments need to be
renewed and sustained.
Income poverty. The number of people subsisting on less than US$1
per day rose steadily for nearly two centuries, but in the past 20 years it
has begun to fall. As a result of better and more market-oriented eco-
nomic policies through much of the developing world--but most
importantly in China and India--the number of poor people world-
wide has fallen by over 300 million, even as the world's population has
risen by about 1.8 billion since 1980. The challenge is to widen these
achievements, to read the poor people in Africa and elsewhere.
Engines of Progress
Driving much (though not all) of this progress in income poverty has been an
acceleration in economic growth rates in the developing world. Since 1965, the
per capita gross domestic product (GDP) of the developing world as a whole
has increased by an average of over 2 percent per year, more than doubling
the income of the average developing-country resident. Since 1990, develop-
ing countries' economies have on average grown faster in per capita terms than
those of OECD countries. Again, this is a huge change by historical standards
and substantially higher than growth rates achieved by the developed countries
in the 19th century and most of the 20th century.
This progress in health, education, and income is not accidental. Govern-
ments, with the support of the development community and civil society orga-
nizations (CSOs), have accelerated growth and poverty reduction by
improving their policies, institutions, and governance, and through well-
designed projects and programs. The challenge is to extend the progress that
has already improved the well-being of so many people to all regions and coun-
tries. To do so, the development community must learn from past failures, and
must understand the origins of the successes. Like aid recipients, who have
often followed weak policies or allowed institutions to deteriorate, donors also
have made mistakes that slowed development. We must design policies at the
global, regional, national, and local or community levels that ensure that the
benefits of globalization reach the billion and more people who are currently
marginalized and who have not benefited from the fruits of globalization. The
policies discussed in this chapter will make this outcome more likely.
Toward a Policy Agenda 259
Peace and Security
As we stated in the introduction to this book, our purpose has been to assess
the links between the dimensions of economic globalization and global po-
verty. Necessarily, then, we have chosen to ignore some important issues that
deserve, and sometimes are receiving, full treatment elsewhere. The most im-
portant of these issues is that of peace and security. The relationship between
increased economic interdependence and conflict is complex, and there is con-
flicting evidence on the nature of this relationship.37 However, it is clear that
aspects of globalization more broadly conceived can indeed exacerbate conflict.
This is the case, for example, in global criminal and warlord networks.38 Naim
(2005) has highlighted the extent to which illegal trade has accompanied glob-
alization. Illicit trade of commodities for arms fuels conflicts and leads to devel-
opment in reverse. Focusing attention on illegal flows that undermine
development requires placing this in the context of managing globalizations
benefits, rather than engaging in protectionism. These are issues that require
attention.39
Addressing these problems involves a concept we have touched upon at var-
ious points in this book: global public goods. As noted by Hamburg and Holl
(1999) and Mendez (1999), the prevention of deadly conflict as part of efforts to
provide peace and security inherently involves benefits that are nonexcludable.
Because they are nonexcludable, there are no direct specific incentives for coun-
tries that are not part of the conflict, so these efforts tend to be underprovided.
Ensuring the benefits of globalization for the poorest, then, will require sub-
stantially more efforts to provide this and other global public goods.
Coherence
Coherence across the dimensions outlines in this book is a vital for globaliza-
tion to work more effectively for development. The flows of trade, finance,
aid, migration, and ideas can converge, providing a powerful force for poverty
reduction, or they can flow in opposing directions, causing turbulence and
diluting their potential benefits. Development is multidimensional, as are the
ways in which the global economic flows can support development.
Hope and Tasks for the Future
Our recommendations are not novel. Nor do we consider them to be a panacea.
However, through our analysis and prioritization of practical actions, we
hope to contribute to ongoing discussions of globalization and poverty. Glo-
balization can work for poor people if we pursue the right policies. Let us all
act to ensure that the huge opportunities globalization offers lead to a better
life for all.
TABLE 8.2 A Global Policy Checklist
Globalization
dimension Policy area Description
Trade Market access A sharp increase in market access for labor-intensive goods and services from developing countries, including the
commitment to a rapid reduction in tariff escalation and agricultural subsides in the rich countries of the world.
Trade Trade-related capacity The substantial and sustained increase in trade-related capacity building for low-income countries that is
building explicitly linked to increases in market access. This capacity building needs to address meeting WTO commit-
ments, full WTO representation, the effective negotiation of regional agreements, and supply-side constraints.
Trade Arms trade The adoption of a multilateral agreement to create legally binding arms controls and to ensure that all govern-
ments control the arms trade according to the same international standards, which restrict exports to countries
with significant records of human rights abuses, to criminal organizations, and to conflict zones.
Trade Forced labor The extension of the World Trade Organization's general exception to commitments in the case of prison labor
(Article XXe) to all forms of forced labor.
Finance Heterodox capital account The maintenance of a heterodox approach to capital account reform in the absence of consensus on best prac-
reform tice. There should not be a one-size-fits-all approach to capital account liberalization.
Finance Corporate social responsi- The development of norms for corporate social responsibility and the application of standards and policies
bility and standards. that encourage best practice by foreign and domestic public sector investors.
Aid Increasing volume and The rapid doubling of aid flows, with a commitment to continued increases to achieve the agreed target of 0.7 per-
stability of aid flows cent of GDP, as well as the transfer of a higher share of these increased resources to developing countries.
Aid Untying aid The decoupling of aid commitments from requirements to purchase consultancy or other services or goods
from the donor country.
Aid Harmonization and The coordination and harmonization of aid flows with those of other donors, and the alignment of these with
alignment recipient governments' own priorities.
Aid Evaluation and knowledge The inclusion of impact evaluation in projects and transparency in sharing results to ensure that lessons of
sharing development are widely shared.
Aid Debt relief The acceleration of debt relief to ensure that all developing countries that have the necessary commitments to
sustainable policies benefit, with this debt relief funded by additional financial commitments from the rich
countries.
Migration Multilateral migration Reform and harmonization of the global migration system on a multilateral basis to protect migrants' rights
policy and improve efficiency and security. Particular areas of concern include dual citizenship and voting rights,
low-skill migration programs, managing remittances, and the enforcement of human rights for migrants.
Migration Regularization of the tem- The establishment of a multilateral system of identifying individuals seeking temporary movement, providing
porary movement of per- national security clearance to them, and granting multi-entry visas to them under the General Agreement on
sons for service delivery Trade in Services.
Migration Brain drain The adoption and expansion of measures by destination countries to limit the recruitment of highly skilled pro-
fessionals from countries facing shortages in these areas, particularly those facing public health emergencies;
and the ensuring of greater coherence between aid and migration policies, through investing in capacity build-
ing and incentives to retain vital skills.
Migration Brain waste and diaspora An increase of the matching of skilled personnel with opportunities by increasing the rights of employment.
The promotion of diaspora networks and encouragement of return investment and technology transfer.
Migration Remittance services An increase of competition in remittance services, the end of monopolies, and the encouragement of entry
into money transfer systems that facilitate migrants' use of officially recorded channels, including through elec-
tronic smart cards and other technologies.
(Continued)
TABLE 8.2 A Global Policy Checklist (Continued)
Globalization
dimension Policy area Description
Migration Data and research Increased funding for research and data collection, with view to understanding costs and benefits of migration
and enhancing development impacts.
Ideas Increase voice of develop- More adequate representation of the ideas coming from developing countries in bilateral, regional, and
ing countries global discussions, negotiations, and institutions to ensure that decisions that affect the developing coun-
tries better reflect their views and interests.
Ideas Support of the knowledge Support of countries' efforts to develop coherent knowledge strategies focused on acquisition, absorption, and
economy communication of ideas and information. Use of knowledge assessment methodologies can help identify
weaknesses across key dimensions, including hardware (telecommunications, infrastructure) and software
(education, Web access, media access, and so on).
Ideas Intellectual property har- Evaluation of the costs and benefits to developing countries of the current intellectual property negotiations in
monization TRIPS, and to build common agreement to ensure that intellectual property rules support access for develop-
ing countries to key health and other technologies.
Ideas Establishing rights to key The swift and permanent establishment of the right of countries without pharmaceutical manufacturing
pharmaceuticals capacity to access generic pharmaceuticals to fight AIDS, tuberculosis, and malaria. This would include a fast-
track procedure for national health emergencies.
Ideas Increased technology The extension of developed-country TRIPS commitments on technology transfer to a larger number of devel-
transfer to developing oping countries and an honoring of this commitment through a variety of specific means.
countries
Toward a Policy Agenda 263
Notes
1. On small wins in the social sciences, see Weick (1984). Weick notes that "it seems useful to con-
sider the possibility that social problems seldom get solved because people define these problems
in ways that overwhelm their ability to do anything about them. Changing the scale of a problem
can change the quality of resources that are directed at it. Calling a situation a mere problem that
necessitates a small win moderates arousal, improves diagnosis, preserves gains, and encourages
innovation. Calling a situation a serious problem that necessitates a larger win may be when the
problem starts" (p. 48). For recent works emphasizing policy closely related to ours, see Dervis �
(2005) and Stiglitz (2006).
2. For the case of the OECD countries, for example, see chapter 12 of Wolf (2004).
3. This point is made by Rodrik (1998b), for example. Rodrik states that "The scope of government
has been larger, not smaller, in economies taking greater advantage of world markets" and sug-
gests that "the reasons have to do with the provision of social insurance" (p. 1028).
4. We take up policy proposals in the area of trade-related intellectual property under the ideas
dimension of globalization later in the chapter.
5. The term generally employed to describe the external benefits of agricultural production is multi-
functionality. See, for example, Jules (2003).
6. Wolf (2004) has referred to tariff escalation as a "long-standing scandal" (p. 206). It is time to end
this scandal.
7. This point has been made by Wolfensohn (2002) and Reinert (2005).
8. See Grimmett (2003). The five largest exporters of arms to the developing world were, in order of
importance, the United States, the United Kingdom, Russia, France, and China.
9. In its first World Report on Violence and Health, the World Health Organization (2002) estimates
that there were 320,000 deaths due to civil conflict in 2000. See Collier and Sambanis (2003) and
Naim (2005).
10. See Oxfam (2004b).
11. The importance of freedom in market transactions has been emphasized in chapter 1 of Sen
(1999). He notes that "a denial of opportunities of transaction, through arbitrary controls, can be
a source of unfreedom in itself" (p. 25).
12. One model of this approach is Brazil's Bolsa Escuela program.
13. Former IMF Managing Director Stanley Fischer (1998) argued in favor of capital account liber-
alization. However, Jagdish Bhagwati (1998), Dani Rodrik (1998a), Paul Krugman (1999), Barry
Eichengreen (1999), Kaplan and Rodrik (2001), and Joseph Stiglitz (2000, 2002a) all strongly
questioned the goal of capital account liberalization and called for capital controls of one kind or
another. These range from market-friendly taxes on short-term capital inflows (Eichengreen
1999) to more stringent controls on capital outflows (Kaplan and Rodrik 2001). For a recent dis-
cussion in the context of poverty reduction, see Cobham (2002).
14. For a recent review of the debate from a pro-market or liberal perspective, see chapter 11 of Wolf
(2004).
15. The view that extractive industry investments mainly have a negative impact in resource-rich
countries may be found in the report of the Extractive Industries Review (2004) external review
conducted for the World Bank; the World Bank's response argues that strengthened policies
can mitigate the risks and enhance the benefits. See www.ifc.org/ifcext/eir.nsf. See Extractive
Industries Transparency Initiative at www.eitransparency.org and Publish What You Pay at
www.publishwhatyoupay.org.
16. For an early review, see chapter 21 of Dunning (1993).
17. On the last of these, see OECD (2003a).
18. A Tobin Tax is a small tax on foreign exchange transactions proposed by Tobin (1978). The orig-
inal purpose is to reduce the volatility of flexible exchange rates by throwing "sand in the wheels
of international finance," but it has been identified as a means of raising funds for a variety of
global goods.
264 Globalization for Development
19. United Nations (2003) and speech of UN Secretary-General on December 9, 2003, in Geneva.
20. As pointed out by Puri (2004), there is an important gender element here: "For the majority of
women, Mode 4 provides the only opportunity to obtain remunerative employment with temporary
movement to provide services abroad. It has been found to have a net positive effect on the econ-
omy and poverty reduction in the home country. There are dramatic examples of how remittances
from female domestic service suppliers from Bangladesh, Ethiopia, and Sri Lanka; nurses from
Jamaica, Malawi, and the Philippines; nurses and doctors from India and South Africa; agricul-
tural service suppliers from Honduras and Mexico; and personal care providers from Caribbean
and Latin American countries have substantially improved women's status in their home country
and augmented their command over resources" (p. 8).
21. Similar (and other) proposals are considered in Walmsley and Winters (2003). Although this pro-
posal might strike the average citizen as extreme, we need to emphasize that the developing coun-
tries have negotiated to their advantage the liberalization of trade in services through FDI. It
stands to reason that, if Citibank can provide financial services in the Philippines, then Philippine
nurses should be able to provide nursing services in the United States.
22. Economists increasingly recognize the role of skilled people and their contribution to innovation
as essential to endogenous growth.
23. United Kingdom, 2004, House of Commons, Migration and Development, Paragraph 7.
24. See Mattoo, Neagu, and Ozden (2005); and Ozden and Schiff (2005).
25. See �zden and Schiff (2005).
26. This section on remittances draws on Ratha (2004) and World Bank (2004d). See World Bank
(2005f) for analysis of remittances.
27. House of Commons, International Development Committee, 2004.
28. This section draws extensively on conversations with Amar Bhattacharya and on Bhattacharya
and Griffith-Jones (2004).
29. See http://www.worldbank.org/kam.
30. This trend has been widely noted. See, for example, Maskus and Reichman (2004).
31. Even Keith Maskus, perhaps the most prominent proponent of the potential benefits of TRIPS
for developing countries, confines his claim to "middle-income and large developing countries."
See, for example, Maskus (2003).
32. McCalman (2001) estimates the annual transfers from the developing world to the developed
world (primarily the United States) to be on the order of billions of U.S. dollars. For some devel-
oping countries, these transfers offset entirely the static "gains from trade" due to standard trade
liberalization in the Uruguay Round.
33. See, for example, Finger and Schuler (2000).
34. This section benefits from discussion with Bernard Hoekman. Recently, a group of NGOs issued
a "Geneva Declaration" calling for a moratorium on new patent treaties. See International Cen-
tre for Trade and Sustainable Development (2004).
35. For a review of the issues, see Correa (2002).
36. This list is drawn from Goldin, Rogers, and Stern (2002), to which readers are referred for a fuller
discussion of the achievements in development in recent decades.
37. For reviews and analysis, see Barbieri and Schneider (1999); Gartzke, Quan, and Boehmer (2001);
and Collier and Sambanis (2003).
38. See, for example, Cooper (2002) on the role of conflict trade.
39. See Hick (2001), and Naim (2005).
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284 Globalization for Development
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Index
A agricultural subsidies, 11, 63, 68, 263n5
absorptive capacity, 107�8, 200�201 European Union, 64
adjustment programs, 126�27, 133 impact on poverty, 13
Advisory Centre on WTO Law, 70 reduction in, 231, 232
AERC. See African Economic Research agriculture sector, 139
Consortium (AERC) Africa, 19n8, 138�39
Afghanistan, 113, 165 aid and support for as share of GDP,
aflatoxin, 64 146f5.6
Africa, 29, 30, 88, 172 cotton farmers, 54�55, 77n18
agriculture sector, 138�39 exports, 35f2.12, 36, 36n18, 45�46n16,
aid contribution to national income, 64, 65b3.2
118 Green Revolution, 137�39, 196�97
OCP program, 136�37, 149n40 multifunctionality of agricultural pro-
per capita income, 22, 45n1 duction, 232, 263n5
recruitment of medical personnel from, rice production, 51�52, 77nn11�12
175b6.2 and rich country protectionism, 197,
trade and FDI inflows, 34 225n8
wages as spillover effect in, 97 technologies for, 193, 225n2
See also HIV/AIDS; Sub-Saharan Africa and telecommunications, 54
African Development Bank, 117 aid agencies, 116�19, 120t5.3, 143,
African Economic Research Consortium 148nn9�10
(AERC), 139 aid and aid flows, 2, 13�14, 50�51, 114,
African Virtual University, 254 147
AFRICAP, 90b4.2 to Bangladesh, 65b3.2
Agency for International Development, to China, 132
117 compared to other financial assistance,
Agency for International Trade 125
Information and Cooperation, 70 complementary relationship with trade,
Agreement on Textiles and Clothing 69�70, 78nn38�40
(ATC), 65b3.2 development models and role of,
Agreement on Trade Related Aspects of 127�29
Intellectual Property Rights (TRIPS), in education sector, 124, 148n15
209, 254�56, 257, 264n31 effectiveness of, 125, 129�33,
agricultural laborers, 48, 170, 171 149nn33�34, 149n37
285
286 Globalization for Development
aid and aid flows (continued) Australia, 96
forms of, 113, 121, 123f5.3�5.4, competition for highly-skilled workers,
126�27, 130�31, 148nn18�19 161
and goals of development assistance, economic migrants, 158, 160
124�25, 148n15 foreign-born population, 158, 189n17
implications for future, 144, 146�47 immigration policies, 156
increase in, 17, 239�40 visa-free migration, 167
innovative programs, 135�39 Austria, 189n25
and levels of policy enactment, 230t8.1 autarky, 6, 194
patterns of, 148n19 automotive sector, 94
as percent of GDP, 13, 17, 20n23, 121, Axworthy, L., 46n28
122t5.4, 123f5.3, 144
to post-conflict countries in need of
reform, 135 B
responsibilities of recipient countries, backward links, 59�60, 94, 95b4.3, 98
240 balance of payments, and capital flows,
Sub-Saharan Africa, 123f5.4 79�81, 108n3, 109nn4�5
and transaction costs, 121�22, 122 banana industry, 73
to weak state, 134�35 Bangladesh, 162, 174
See also foreign aid BURO Tangail, 90b4.2
Aid as Imperialism, 120 clothing industry, 52�53, 76n13
airline tax, 242, 263n18 exports from, 65b3.2
Aitken, B. J., 96 Grameen Bank's Village Phone
Alesina, A., 148n19 Program, 54
Amnesty International, 78n42 and remittances, 191n73
antiglobalization protests, 209, 215 banking sector, 141
Arab Republic of Egypt, 113, 161, 177 managing risk in, 104, 105�6,
Argentina, 83b4.1, 89, 92, 111n44, 141 111nn45�46
arms trade, 72, 74, 78nn41�42, 235, microfinancing, 90b4.2
263nn8�9 role of foreign short-term lending in
Arms Trade Treaty, 235 financial market failure, 91,
art, cross-border sales of, 74 109�10nn23�24
Asia, 23 support for development of, 105�6,
financial crisis, 82, 83b4.1, 84, 92, 111nn45�46
99�100, 104�5 See also commercial bank lending
migrants to the United States, 153, Bank Rakya, Indonesia, 90b4.2
188n11 Barber, C., 163
Asiatic Barred Zone, 188n11 barriers to trade, 6, 8, 48, 223
assistance. See aid and aid flows; foreign See also protectionism
aid Bell, D., 197
asylum seekers, 156, 158, 163�64, 187, Benton, B., 137
189nn27�33 Berne Initiative, 243�44
channels of, 159t6.3 Bhagwati, Jadish, 263n13
distinguished from refugees, 165, Bhattacharya, A., 252
190nn37�39 Bhavnani, R., 130, 148n18, 149n32
protection from abuses, 183�85 bias, 1, 49, 76n6
remittances of, 164, 189n33 Blomstr�m, M., 96
Index 287
Boldrin, M., 204, 206 and standards and regulations, 66
bond finance, 11�12, 80, 84�85, 103�4, See also trade-related capacity building
109n7, 111n44 capital accounts, 79, 83b4.1, 110n24, 237,
bond portfolio investments, 80�81 263n13
bond spreads, 103 capital flows, 6, 37�40, 106�8, 223
border protection, 152 developing world as exporter of, 87,
Borensztein, E., 110n37 109n14
Borjas, G. J., 180, 190n52, 192nn93�94 global and domestic, 87�88, 109n16,
Botswana, 132, 197 109nn18�19
Bourguignon, F., 26, 28 growth gains from, 79, 108n1
Boyce, J. K., 127b5.1 impact of, 81, 88, 109nn18�19, 110n27
brain drain, 14, 172�73, 190n61, 191n63 to middle-income countries, 84�85,
and FDI, 174�76 109nn7�9
impact on heavily populated countries, outflows, 38b2.2
173 as percent of GDP, 85, 86f4.3
managing of, 245�47 proposed policy changes for, 236�39,
wealth transfer from, 173�74, 191n73 260t8.2, 263n13, 263n15
brain waste, 247 reasons for increase in, 85, 1090n9
branded consumer products, 209, 239 recent trends in, 81�86
Brazil, 83b4.1, 89, 141, 263n12 types of, 80, 105
Bretton Woods Conference, 7, 115, 116, for widgets, 38b2.2
119 capitalism, 215
and human rights, 198 Capital Markets Authority, 101b4.4
institutions established by, 6, 8b1.2 Card, D., 192n93
Brown, M., 173 cash transfers, 113
Bruton, H. J., 5, 77n21 Caves, R. E., 96, 109n18, 110n30
BURO Tangail, Bangladesh, 90b4.2 Central America, 73
central banks, 12
central planning, 131
C Centre for Trade Policy and Law, Canada,
Calvo, G. A., 85 70
Canada, 96 CGIAR. See Consultative Group for
competition for highly-skilled workers, International Agricultural Research
161 (CGIAR)
economic migrants, 158, 160 chain migration, 170�71, 190n53
foreign-born population, 158, 189n17 charities, 136
immigration policies, 156 Chen, S., 28
inflow of migrants, 155f6.1 child development, 129, 148n27
capacity child labor, 19n8, 52, 236
to absorb, evaluate, and adapt ideas, children, malnutrition of, 31�32
200�201 China, 87, 132, 194
to deal with migrant abuse, 183 capital accounts, 237
for global idea flows, 42�43 decline in poverty, 28, 45n7
impact of brain drain on, 173 EPZs in, 60b3.1
capacity building, 2, 129, 139, 233�34 impact of ban on maritime expeditions,
and impact of aid, 13�14 5, 19n10
288 Globalization for Development
China (continued) comparative advantage, 10
migration competition
Chinese Exclusion Act, 188n111 impact on poverty alleviation, 48,
economic migrants, 158, 160 53�55, 76n4, 77n15, 77n18
impact of brain drain on, 173 and remittances, 248�49
to Silicon Valley, 182 computer sector, 94
and poverty reduction, 111n49 conflicts, 235, 259, 263n9
Chinese Exclusion Act, 188n11 Consultative Group for International
Chuhan, P., 109n7 Agricultural Research (CGIAR),
Citibank, 263n21 137�39
citizenship, 160 consumer products, 239
civil society organizations (CSOs), 198, consumption, 4, 110n27, 176
258 contagion behaviors, 91, 99, 102, 198�99
Claessens, S., 102, 109n7 corporate social responsibility, 237�38
Clemens, M., 130, 148n18, 149n32 Correa, C. M., 255
Clifford, J. M., 114 corruption, 108, 111n51
coffee prices, 68 Costa Rica, 56
Cohen, D., 149n46 Costa Rican Investment Board, 95b4.3
Cold War, 115, 117, 119�24, 164, 189n29 cotton industry, Zimbabwe, 54�55, 77n18
Collier, P., 129 counterfeiting, 74
Colombia, 73, 113 Crafts, N., 22, 45n8
Colombo Plan, 148n11 credit rating agencies, 89
Colonial Development Act, 113, 114 Crook, C., 109�10n23
Colonial Development Corporation, 114 cross-border movements, 159t6.3, 166,
colonial systems, 6, 114�15, 152�53 223
Columbus, Christopher, 196b7.1 CSOs. See civil society organizations
commercial bank lending, 12, 20n19, 81, (CSOs)
99, 103f4.6, 104�5 Cuba, 192n93
as primary source of capital to low- culture
income countries, 82 homogenization of, 209
as source of capital flows, 85, 86 impact on host-country, 80, 109n5
as source of foreign capital, 84 currencies, 104, 105, 110n28, 111n45
commercial banks, 90b4.2, 91, cut flower export industries, 73
109�10nn23�24
commercialization, of MFIs, 90b4.2
commercial service exports, 35f2.12, 36, D
45�46n16, 51 Dailami, M., 218
Commission for Africa, 78n42, 139 debt, 140
commodities, 66�67, 259 debt flows compared with equity flows,
commodity price index, 68, 78n35 106
commodity prices, 67�68, 68 debt swaps, 111n44
in 20th century, 67f3.5 external debt, 111n44, 141, 141f5.5
declines in, 68, 75 international relief efforts, 142�43,
impact of foreign aid on, 69 149nn46�47
community development, 178�79 See also bond finance; commercial bank
community-directed drug distributors, lending
137 debt issuance. See bond finance
Index 289
debt relief, 17, 252 historical overview of economic devel-
debt-service-to-export ratios, 142, 149n47 opment of, 21�24, 45n1
debt-to-export ratio, 140 and ideas, 40�43
Declaration on the Rights of the Child, increasing voice of, 250�52
156, 189n14 life expectancy in, 128, 129, 148�49n28
decolonization, role of aid in, 114 loss of highly-skilled workers, 173
de Ferranti, D., 49�50 need to find inclusive solutions for rep-
deficits, United States, 12, 87 resentation of, 252
De Gregorio, J., 110n37 net inward debt flows, 103�5
de la Torre, A., 85, 109n9 Point Four program, 117, 148n10,
Democratic People's Republic of Korea, 148n11
194 portfolio equity flows to, 99�100
Democratic Republic of Congo, 132 poverty in, 24�33, 45n8, 45n10, 45n12,
destination countries 50�51
benefits and costs for, 179�82, 191n88, proposed policy changes
191�92nn91�94, 192n96 in capital flows, 236�39, 260t8.2,
effect of immigration on labor market, 263n13, 263n15
181�82, 193nn93�94 to foreign aid to, 239�42,
fiscal impact of migration on, 180, 260�61t8.2, 263n18
191n91 to ideas, 250�57, 262t8.2,
protection of migrants, 184b6.3 264nn31�32
role of migration in pension systems, to migration policy, 243�50,
180, 191�92n92 261�62t8.2, 263�64nn20�22
Deutsche Bank, 90b4.2 in trade, 231�36, 263n5, 263nn8�12
developed countries remittance flows to, 37�40, 176,
agricultural subsidies, 231 178f6.3, 248
and demands of refugee system, 165, research application in, 206�7
190n40 role of foreign short-term lending in
as importers of capital from developing financial market failure, 91,
countries, 109n8 109�10nn23�24
and trade-related capacity building, 70, and technology transfer, 256�57
78n40 trade
developing countries, 10, 89, 101, 204, characteristics of trade relationship
206 with poverty, 50�51
absorptive capacity of, 200 costs of trade protectionism, 66,
and agricultural trade, 63�64 78n34
arms trade flows to, 235 impact of trade and FDI on, 33�36
buildup of foreign exchange reserves market access policy changes,
in, 109n14 231�33, 263nn5�6
capital flows to, 12, 37�40, 85 proposed policy changes to, 231�36,
evolution of ideas on economic man- 263nn5�6, 263nn8�12
agement, 210�13 trade-related capacity building,
as exporters of capital, 87, 109n9, 69�70, 78nn38�40
109n14 unsustainable debt, 140
external debt, 141f5.5 development agencies, 223
and FDI, 12, 33�36 development agenda, ownership of,
GDP, 108n1 217�18
290 Globalization for Development
Development Gateway, 223 and market-based economy, 214�15,
development models, and role of aid, 226n30
127�29 relationship of FDI and education, 97,
development thinking, evolution of, 221 110n37
Deverajan, S., 129 relationship to geography, 219�20
diagnostic trade integration studies, economies of scale, 6, 7, 19n12
71b3.3 The Economist, 68, 78n35, 190n61, 191n63
Diamond, J., 225n2 Ecuador, 73
diasporas, enhancing benefits of, 247 education, 160, 203, 245, 247, 258
disaster relief, 126, 148nn18�19 advances in, 128�29, 148n27
discrimination, 4, 27b2.1 aid for, 124, 148n15
diseases, 207, 222 and brain drain, 173
malaria, 207 as dimension of poverty, 4
measles, 206�7 as factor that determines spillover
and pharmaceuticals, 255�56, 264n36 effects, 96�97
riverblindness, 136�37, 149n40 of females, 129, 148n27, 219
See also HIV/AIDS impact on development, 218�19
diversity lottery, 189n19 impact on migration, 172, 190n61,
Dobson, W., 93, 104, 108n1 191n63
Doha Development Round, 208, 234, investment in, 246�47
245 link to foreign aid, 114
Doing Business Report, 217 of refugees, 189n33
Dollar, D., 129, 148n19 relationship to child quality outcomes,
domestic investment, 13 129, 148n27
Dominican Republic, 178 relationship to health and poverty,
donor assistance, 120�21 32�33, 45n12
donor countries and school fees, 133, 149n37
and coordination of aid flows, 143�44, students, as migrants, 159t6.3, 167
145b5.2, 149n50 See also learning; training
impact of highly-skilled workers on, Eichengreen, B., 20n21, 83b4.1, 106,
245�46, 264n22 110n28
drug trade, 74 on capital accounts, 263n13
on costs of financial crises, 91�92
on risk management, 111n46
E electronics sector, 94
East Asia, 29, 60�61, 162, 189n25 El Salvador, 39, 164, 177
economic growth, 26, 33, 213, 220, 221, emergency relief, 134
258 employment
evolution of development community's in EPZs, 60b3.1
ideas on, 210�13 low-skilled migrants, 182
and financial sector development, 87, and use of local suppliers of MNEs,
198n18 59�60
historical overview of, 21�24, 45n1 using Mode 4 program, 263�64n20
ideas about, 213�15, 224�25, 226n30 See also workforce
impact of aid agencies on, 118�19 empowerment, 4�5, 19n7, 217, 221
impact of equity portfolio investment entrepreneurship, 12, 218
on, 99�100 environmental concerns, 18, 222�23
Index 291
EPZs. See export processing zones (EPZs) and infant mortality, 31
Equator Principles of good governance, regional composition of, 29
238
equity investment companies, 90b4.2
equity portfolio investment, 11, 12, 80 F
debt flows compared with equity flows, Fairries, D., 5
106 fair trade commodities, 37n37, 78
equity markets, 101, 102 Fairtrade Labelling Organizations
impact of, 88, 99�100, 102 International, 78n37
role of equity in market prices, 100 family migrants, 16, 189nn20�22, 189n21
as source of capital flows, 84�85, famine, 126
109n7 FDI. See foreign direct investment (FDI)
Eritrea, 177 females, 32�33, 45n12
Erramilli, M. K., 97 education of, 129, 148n27
Ethiopia, 68 employed in export industries, 53
Europe, 153, 157, 172, 173 employed in garment industry, 52�53,
European Bank for Reconstruction and 76n13
Development, 116 employment under GATS, 244�45,
European Union, 62, 64�66, 165, 169 263�64nn20�21
evaluation, building into aid programs, and gender equality, 219
241 health and poverty of, 32�33, 45n12
exchange rate regimes, 12 status of women, 263�64n20
export processing zones (EPZs), 52, 60, Fernandez-Arias, E., 107
60b3.1 fertility rates, 191�92n92
export quotas, 52 finance, 2
exports, 46n19, 47�48, 53 and levels of policy enactment, 230t8.1
agricultural, 35f2.12, 36, 36n18, types of, 11�13
45�46n16, 63 financial crises, 12, 20n21, 83b4.1, 89
from Bangladesh, 65b3.2 Argentina, 92, 141
commercial services, 35f2.12, 36, Asia, 82, 83b4.1, 84, 89, 92, 99�100,
45�46n16 104�5
Homes, 57�59 costs of as percent of GDP, 91�92
manufacturing sector, 35�36, 37, low-tech vs. high-tech, 83b4.1
45�46n16, 51, 57�59 Mexico, 83b4.1, 84, 89, 141
from middle-income countries, 34 Russia, 174
as percent of GDP, 9, 10f1.1 financial sector, 12, 100, 237
and preferential market access, 61 asymmetry of information in, 89
and productivity, 49, 56, 76n5, encouraging global financial stability,
77nn21�22 223
weapons, 235 impact of market failures on poor,
external debt, 111n45, 141, 141f5.5 91�92, 110n27
extractive industries, 98, 238, 263n15 long-term trend of development of,
Extractive Industries Review, 263n15 106�7
Extractive Industries Transparency market failures, 88�92,
Initiative, 238 109�10nn23�24, 110nn27�28
extremely poor, 26, 27f2.5, 28, 53 market for global and domestic capital
estimates of (1981�2001), 28f2.6 flows, 87�88, 109n16, 109nn18�19
292 Globalization for Development
financial sector (continued) and remittance flows, 39, 176
microfinance institutions, 90b4.2 as source of capital flows, 84, 85�86, 88
reforms in, 92, 110n28 and total trade flows, 50�51
role of foreign short-term lending in foreign exchange reserves, 109n14
market failure, 91, 109�10nn23�24 foreign exchange transactions, 263n18
support for remittances in, 248�49 France, 156, 161
See also equity portfolio investment Francois, J., 78n36
Finger, J. M., 208 Frankel, J., 19n14
Fischer, Stanley, 263n13 free-market approach, 131
Fix, M., 191n91 Friedman, Milton, 120
flight capital, 88, 111n44, 237 Friedman, T. L., 215, 226n30, 229
Florida, R., 192n96 Fukuyama, F., 149n34
food aid, 115
Food and Agriculture Organization, 137
food crops, 137�39 G
food products, 67�68 Gallup, J. L., 219
food standards, 64�66 Gambia, 173
forced labor, 235�36, 263nn11�12 garment industry, 52�53, 64, 65b3.2,
Fordism, 19n12 76n13
foreign aid, 69, 114�15 Gates, Bill, 225n6
and the Cold War, 119�20 GATS. See General Agreement on Trade
compared to agricultural subsidies, in Services (GATS)
231, 232 GATT. See General Agreement on Trade
compared to total trade flows, 50�51 and Tariffs (GATT)
historical developments, 118t5.2 Gaza, 165
major developments of, 120t5.3 GDP. See gross domestic product (GDP)
as percent of GDP, 123f5.3 gender, 219
post-Cold War, 120�24 disparities in incomes, 27b2.1
proposed policy changes to, 239�42, and empowerment, 4�5, 19n7
260�61t8.2, 263n18 See also females
role of, 38�39 General Agreement on Trade and Tariffs
Sub-Saharan Africa, 134�35, 149n38 (GATT), 65b3.2
tied nature of, 115 General Agreement on Trade in Services
in wake of World War II, 115�19, (GATS), 244
148nn9�11 generalized system of preferences (GSP),
See also aid 78n39
foreign direct investment (FDI), 11, 12, generic drugs, 255, 264n36
37, 111n45, 124 Geneva Convention on Refugees, 156,
and brain drain, 174�76 163, 165, 183�84, 189n14, 189n27
costs of hosting, 98, 110n40 geography, 219�20
definition, 80, 109n4 Germany, 156, 161, 189n25, 192n93
impact of, 33�36, 82�83, 84, 109n18 Ghana, 173, 175b6.2
inward, 59�60, 77n26 Global Alliance for Vaccines and
Japan's share of, 7, 9 Immunizations, 207
overview, 92�93 Global Commission for International
recipient countries, 93�94 Migration, 243�44
relationship to poverty, 97, 98, 237�38 global economy, 195
Index 293
Global Environment Facility, 136 gross domestic product (GDP), 169,
global inequality, 26, 28 190n52
global initiatives, 251, 253 agricultural aid as share of, 146f5.6
global public goods, 16, 18, 41�42, aid as percent of, 13, 17, 20n23, 121,
222�23, 226n41 122t5.4, 123f5.3, 144
Glover, S., 192n93 capital flows as share of, 85, 86f4.3
GNI. See gross national income (GNI) costs of crises as share of, 92
gold, 196b7.1 deficit as share of, 87
Goldin, I., 120�21, 218 developing countries, 23�24, 26f2.4,
Goldsmith, A., 149n38 108n1
Goldstein, M., 105 exports as share of, 9, 10f1.1
Goletti, F., 77nn11�12 FDI as share of, 93
goods and services, 10, 19n16, 223 and financial crises, 20n21
governance, 210 highly-indebted countries, 140
Equator Principles of good governance, increase in, 258
238 market capitalization as share of, 101
global governance, 198, 251�52 per capita remittances as share of, 39,
and institutions, 216�20 40f2.14
and media, 202 Sub-Saharan Africa, 63
government total world GDP, 23�24, 26f2.4
confidence in, 128, 210�13 gross national income (GNI), 38
expenditures as prerequisite for global- group lending, 90b4.2
ization, 229, 263n3 Group of Eight, 142�43, 242
impact on brain drain, 245 growth theory, 200
improvement in policies of, 258 Grunberg, I., 41b2.3, 223, 226n41
relationship to markets, 212�13 GSP. See generalized system of prefer-
role in financial market failures, 91 ences (GSP)
role in TRIMs, 95b4.3 Guam, 167
South Africa, 143 Guantanamo Bay, Cuba, 189n32
See also state Guatemala, 68
government capacity, 134 guest workers, 156, 183
Grameen Bank's Village Phone Program, Guyana, 173
Bangladesh, 54
Great Britain, 96, 117, 179, 189n25
competition for highly-skilled workers, H
161 H-1B visas, 161, 167, 189n24
economic history, 6, 7b1.1, 22 Haddad, M., 96
and foreign aid, 114, 115 Hamburg, D. A., 259
Foreign Secretary, 78n42 hammer mills, 55
limiting recruitment of medical per- Hanson, J. A., 108, 110n24
sonnel, 183 harmonization, 250�51, 254�55,
shortage of low-wage labor, 156 264nn31�32
as source of migrants, 153, 154t6.1 Harrison, A., 96
Great Depression, 155 Haskel, J. E., 96
Green Revolution, 137�39, 196�97 Hatton, T. J., 188n9, 188n12, 190n60
Griffith-Jones, S., 252 Hawkins, E. K., 120
Grimmett, R. F., 265n8 Hayter, T., 120
294 Globalization for Development
hazardous waste, 50, 73, 78n43 HIPC. See Heavily Indebted Poor
headcount index, 28�29 Country (HIPC) initiative
health and health care, 160, 183, 196, history
218�19 modern globalization and global
advances in, 128�29 poverty, 9
banana workers, 73�74 overview of economic development of
budgets for, 206 developing world, 21�24, 45n1
community-directed drug distributors, stages of modern era of globalization,
137 6�9, 19nn12�15
and costs of generating income, 74 HIV/AIDS, 175b6.2
food standards, 64�66 and life expectancy, 132, 197, 225n6,
impact of female education on, 32�33, 257
45n12 meeting challenges of, 207�8
impact of trade on, 50, 70, 72�75, public health strategies for, 196
78nn41�43, 78n45, 78n47 Hoekman, B. M., 256
infant mortality, 30�33, 45n10 Holl, J. E., 259
malnutrition, 31�32, 68 Home-Town Associations, Mexico, 18�79
as measure of poverty, 4 Hong Kong (China), 65b3.2
migration of medical professionals, Honohan, P., 108, 110n24
host countries
175b6.2
cost of hosting FDI, 98, 110n40
mortality rates, 207
foreign culture in, 80, 109n5
progress in, 257
impact of highly-skilled workers on,
Sub-Saharan Africa, 207
245�46, 264n22
See also diseases; HIV/AIDS; public
and MNEs, 94�96, 239
health
and spillover effects, 96�97, 110n34
Heavily Indebted Poor Country (HIPC)
technology transfer to, 94�96
initiative, 142�43, 242
HTME. See high-technology manufac-
Helpman, Elhanan, 221 tured exports (HTME)
high-income countries Hufbauer, G. C., 93, 104, 108n1
asylum in, 164, 189n33 humanitarianism, 160, 164, 190n37
average aid flows per person human resources development, 95b4.3
(1960�2003), 116t5.1 human rights, 15, 42, 46n28, 197�98, 219
and highly-skilled workers, 160�61, 245 abuse of low-skilled workers, 163b6.1
increase in aid donations, 144 and forced labor, 236
migration to, 159t6.3, 160�61, 189n24 Human Rights Watch, 163b6.1
as ODA recipients, 14n2 human trafficking, 74, 166, 190nn44�45,
rate of telecommunication connec- 243
tions, 43f2.15, 46n30 Hung-hsi, Emperor of China, 5
highly-skilled workers, 49�50, 186 Hunt, J., 192n93
and brain drain, 173�74, 245�47
impact on innovation, 181�82
migration to high-income countries, I
159t6.3, 160�61, 189n24 ideas, 3, 15�16
visas as road to permanent residency, 161 about growth and development,
and wealth transfer, 173�74 199�201, 213�15, 224�25, 226n30
high-technology manufactured exports absorption, evaluation, and adaption
(HTME), 57�59 of, 200�201
Index 295
connection with other globalization income poverty, 4, 258
elements, 224 indentured servants, 166, 188n7, 190n49
for developing countries, 40�43 India, 132, 175
on economic management, 210�13 capital accounts, 237
and human rights issues, 42, 46n28 as FDI recipient, 93�94
influence on history, 193�99, 225n2, growth in remittances, 248
225nn5�8 migration
and levels of policy enactment, 230t8.1 abuse and exploitation of low-skilled
measuring flow of, 42�43, 46n30 migrants, 162
power of, 199�200 economic migrants, 158, 160
proposed policy changes to, 250�57, education of migrants from, 172
262t8.2, 264nn31�32 of highly-skilled professionals, 160
protection of, 203�4 impact of brain drain on, 173
role in globalization, 42 migrant diasporas, 151
See also technology transfer to Silicon Valley, 182
ideologies, 120, 197�99 and wealth transfer, 173�74
IF. See Integrated Framework (IF) software industry, 47, 76n5
illegal immigrants, 151�52, 164, 180 textile and clothing sectors, 65b3.2
illegal trade, 259 Indonesia, 83b4.1, 96, 143
illiteracy, 202�3 Bank Rakya, 90b4.2
IMF. See International Monetary Fund cost of financial crisis, 92
(IMF) EPZs in, 60b3.1
immigration policies, 14, 230t8.1 industrialization, relationship to migra-
and humanitarian obligations, 160 tion, 153, 188nn8�9
to limit migrant flows, 155, 156, industrial nations, 78n41
188n13 inequality, global, 26, 28
proposed changes to, 243�50, infant mortality, 30�33, 45n10
261�62t8.2, 263�64nn20�22 information
imports, 10 asymmetry of in financial markets, 89
health-related, 50 and credit rating agencies, 89
and maquiladora export sector, 59f3.2 gaps in, 95b4.3, 201, 202
pharmaceuticals, 255�56, 264n36 and institutional reform, 202
and productivity, 49�50, 55�56, 76n6 role in migration decisions, 170
import-substitution model, 6, 211 information and communications tech-
income, 4 nology, 7, 160
and compromise of health and safety, 74 infrastructure, 218, 220, 234
from export sector, 48 In larger Freedom, 251�52
garment industry, 52�53 innovation, 195
gender disparities in, 27b2.1 combined with global knowledge, 196
impact of aid agencies on, 118�19 in growth theory, 200
impact on rates of migration, 169, and highly-skilled migrants, 181�82
190n52 impact of ideas on, 200
per capita incomes, 21�22, 45n1 and patent protection, 206
remittances as percent of, 178 relationship to intellectual property
sources of, 77n28 rights, 204
Vietnam's rice sector, 51�52, See also technology
77nn11�12 insecticides, 73, 78n45
296 Globalization for Development
Institute of International Finance, 87, 100 International Trade Centre, World Tr
institutional development, 194, 225n5 Internet, 198, 199
institution building, 132 intra-firm trade, 33, 98, 110n40
institutions, 219 investment climate, 217
and governance, 216�20 Iran, 165
importance of, 211�12 Iraq, 242
institutional reform, 202 Ireland, 161
role of, 213 Irish National Linkage Program, 95b4.3
Integrated Framework (IF), 71b3.3, 234 isolationism, 155
intellectual property, 18, 203�9, 226n18 Italy, 189n25
as category of idea, 15
definition, 20n27
harmonization of, 254�55, J
264nn31�32l Jamaica, 39, 173, 175b6.2, 177
reform of, 209 Japan, 22, 161
intellectual property rights, 139, 203�6, MNEs in Thailand, 95�96
208, 226n18, 254�55 protectionism in, 64
internal migration, 188n1 share of FDI, 7, 9
International Action Network on Small textile and clothing sectors, 65b3.2
Arms, 78n42 Johannesburg stock market, 101
International Bank for Reconstruction John, R., 19n12
and Development, 8b1.2 Jordan, 39, 177
International Centre for Settlement of
Investment Disputes, 8b1.2
International Centre for Trade and K
Sustainable Development, 204 Kabeer, N., 53
International Covenant on Civil and Kaminsky, G. L., 105
Political Rights, 42 Kanbur, R., 114, 120
International Development Association, Kaplan, E., 263n13
8b1.2 Kapur, D., 76n5
International Finance Corporation, 238 Kash, D. E., 206
International Finance Facility, Great Kaul, I., 41b2.3, 223, 226n41
Britain, 242 Kaynes, John Maynard, 6, 7b1.1
International Forum on Globalization, 1 Kenyan Societies Act, 101b4.4
International Institute of Tropical Kingston, W., 206
Agriculture, 19n8 Klingebiel, D., 102
International Labour Organization, 73 knowledge
International Monetary Fund (IMF), 6, 7, benefits of, 225n14
8b1.2, 71b3.3 characteristics of, 201
banking crisis statistics, 109�10n23 combination of global knowledge and
debt relief estimates, 149n46 local innovation, 196
on developing country borrowing, 141 creating and disseminating of, 202,
and financial crises, 83b4.1 223
role in facilitating aid post-WW II, gaps in, 201, 202
115�17, 148n9 impact of media on, 202�3
International Organization for Migration, increase sharing of, 241, 253�54
189n31, 190n44 management of, 203, 224, 252, 253
Index 297
policies for enhancing acquisition of, literacy, 32�33, 155, 188n13, 195
253 Little, I. M. D., 114
as promoter of reform, 202 loans. See commercial bank lending
public good characteristics of, 203 lobbying, 198
role in risk management, 254 local inputs, 59, 77n26, 94�96
traditional, 208 local suppliers, 94, 95b4.3, 96
Knowledge Assessment Methodology, 254 Long-Term Agreement Regarding
knowledge transfer, 254�55, 264n32 International Trade in Cotton
Kohl, Helmut, 126 Textiles (LTA), 65b3.2
Kokko, A., 96, 97 low-income countries
Korea. See Republic of Korea and agricultural subsidies, 63
Kosovo, 190n38 average aid flows per person
Kostecki, M., 70, 78n40 (1960�2003), 116t5.1
Krueger, J., 78n43 capital flows to, 82�84, 85, 86f4.3,
Krugman, Paul, 263n13 109n8, 236�37
debt relief, 142�43
development of equity markets in, 102
L domestic investment in, 88
labor force. See workforce and family migration, 160
labor-intensive goods, 62 and FDI flows, 33�34, 93
Lall, S., 56, 57 financial status of migrants from, 168
Landes, D. S., 20n29 flight capital, 88
Latin America, 49�50, 83b4.1 as foreign aid recipients, 113
LDCs. See least-developed countries and HTMEs, 57�58
(LDCs) increase in aid to, 239�40
Leach, J., 206 list of, 44
learning, 225 per capita income, 24, 168
building into aid programs, 241 rate of telecommunication connec-
development of, 215�21 tions, 43f2.15, 46n30
empirical evidence of success of, 57�58 low-income low-skill trap, 97, 110n37
for HTME's, 58�59 low-skilled workers
link to productivity, 56, 77n22 abuse and exploitation of, 162�63
and spillover effects, 96�97 employment of, 182
least-developed countries (LDCs), 71b3.3, migration of, 154�55, 157, 159t6.3,
78n39 161�63, 170�71, 187, 190n53
Lebanon, 39 low-technology manufactured exports, 58
legal issues, in migration, 19n14, 156, 166 Luxembourg, 179
Leiderman, L., 85
Levine, D. K., 204, 206
life expectancy, 29�30, 45n8, 128, M
148�49n28 machinery, upgrades in, 49
in developing countries, 128, 129, macroeconomic stability, 126, 132, 211
148�49n28 Maddison, A., 22, 30
and HIV/AIDS, 132, 197, 225n6, 257 Mahmud, S., 53
increases in, 195 maize processing sector, 55
Lindauer, D. L., 211 Majnoni, G., 108, 110n24
Lindblom, C. E., 194 malaria, 207
298 Globalization for Development
Malawi, 175b6.2 Measles Initiative, 206�7
Malaysia, 57�58, 60b3.1, 83b4.1 media, impact on provision of informa-
Mali, 177�78 tion, 202�3
malnutrition, 31�32, 68 medical professionals, 175b6.2, 183
Mamingi, N., 109n7 medical supplies, 50
managerial capitalism, 19n12 Meier, G. M., 41, 199, 200
manufacturing sector Mekong Delta, 190n44
exports, 35�36, 37, 45�46n16, 51, Mellinger, A. D., 219
57�59 Mendez, R. P., 259
garment industry, 52�53, 76n13 mercantilism, 194, 196b7.1
high-technology, 57�59 Mexico, 53, 97
and inward FDI, 59�60, 77n26 agricultural subsidies, 171
and trade-induced learning, 56 bond finance, 103�4
maquiladora export sector, 58�59 financial crisis, 83b4.1, 84, 141
maritime expeditions, and globalization, Home-Town Associations, 178�79
5, 19n10 HTMEs, 57�58
market access, 68, 69, 146, 234 maquiladora export sector, 58�59
duty free, 69, 78n39 migration
exploitation of, 69, 78n39 impact of brain drain on, 173
foreign markets, 50, 76nn7�8 major exporter of labor, 157
and poverty alleviation, 61�66, 75 undocumented migrants from, 166
preferential, 61 to United States, 171
recommended policy changes in, remittances to, 248
231�33, 263nn5�6 Meyer, B., 173
security of, 68, 78n36 MFIs. See microfinance institutions
market-based economies, 214�15, (MFIs)
226n30, 258 microcredit networks, 54
market failures, 12, 88�92, microfinance institutions (MFIs), 89,
109�10nn23�24, 110nn27�28 90b4.2
markets, 47 Middle East, 88, 156, 157, 161�62
as complement of state, 216 middle-income countries, 24, 34, 88,
primacy of, 211, 212t7.2 141
relationship to government, 212�13 and agricultural subsidies, 63
relationship to states, 215 average aid flows per person
role in poverty alleviation, 51�53, (1960�2003), 116t5.1
77nn11�12 capital flows to, 84�85, 86f4.3,
market-stealing effects, 96 109nn7�9
Marshall Plan, 115, 148n9 development of equity markets in, 102
Martin, J., 35�36, 42 and family migration, 160
Martin, W., 78n36 flight capital, 88
Maskus, K. E., 20n27, 256, 264n31 foreign aid, 93, 113, 123f5.3
Massey, D. S., 188n8 and HTMEs, 57�58
Matthews, D., 255, 264n36 list of, 44�45
Mauritius, 53, 60�61, 90b4.2 migration from, 169
McCalman, P., 264n32 rate of telecommunication connec-
McCulloch, N., 78n47 tions, 43f2.15, 46n30
McKay, A., 78n47 trade and FDI for, 33�34
Index 299
migration, 2, 14�15, 20n25, 151, 188n1 sources of migrants, 153, 154t6.1,
Asian migrants in colonial era, 153�54, 188nn8�9
188n11 strengthening voice of migrants, 244
asylum seekers, 159t6.3, 163�64, structure of migrant flows, 157
183�85, 187�88, 189nn27�33 students, 159t6.3, 167, 188
benefits and costs for sources countries, temporary movement of workers,
171�79 244�45, 263�64nn20�21
to Canada, 155f6.1 trans-Atlantic flow, 152�53, 188n7
chain migration, 170�71, 190n53 typology of, 158�67
costs of, 168, 190n49 undocumented migrants, 159t6.3, 166,
decline of mass migration, 154�55, 182�83, 184b6.3, 187, 190n41,
188n12 190nn44�45
diversity lottery, 189n19 utility maximization, 167�68, 190n47
economic migrants, 158, 160, visa-free migration, 159t6.3, 166�67,
189nn17�18 188
enhancement of benefits and mitiga- See also destination countries; highly-
tion of negative effects of, 17�18 skilled workers; low-skilled work-
exclusions of, 188n11 ers; quotas; remittances; source
fall and rise of in 20th century, 155�56,
countries
188n13
migration hump, 169, 190n52
family migrants, 160, 189nn20�22,
Mill, John Stuart, 199
189n21
Millennium Development Goals, 143�44,
global system of, 152
145b5.2, 149n30
historical overview, 152�57
mining industries, 238, 2263n14
impact of source countries on emigra-
Minot, N., 77nn11�12
tion, 171
MNEs. See multinational enterprises
impact on income, 169, 181, 190n52,
192nn92�93 (MNEs)
intra-European, 167 mobile phones, 43
legal framework of, 156, 189n14 Mobutu Sese Seko, 127b5.1
and levels of policy enactment, Mode 4 (WTO terminology), 20n25,
230t8.1 230t8.1, 244, 264�65n20
of low-skilled workers, 159t6.3, 161�63, models of development, and role of aid,
187 127�29
major channels of, 159t6.3 Mody, A., 86
multilateral coordination of policy, money laundering, 74
243�44 monopolies, 204
need for research and data on, 249�50 monopsony, 48, 53, 55, 76n4
overview, 151�52 Montiel, P. J., 107
permanent settlers, 158, 159t6.3, 160, moral hazard, 91, 242
185�86, 189n17 Moran, T. H., 95�96
points system, 156, 158, 189n18 Morduch, J., 90b4.2
proposed policy changes to, 243�50, Morocco, 96
261�62t8.2, 263�64nn20�22 Morrissey, O., 97
refugees, 159t6.3, 165, 183�85, 187 Morrisson, C., 26, 28
role of information in decisions to mortality rates, 207
migrate, 170 Mozambique, 119, 132
300 Globalization for Development
multifunctionality of agricultural produc- Nordas, H. K., 53
tion, 232, 263n5 North Africa, 156
Multilateral Investment Guarantee North America Free Trade Agreement,
Agency, 8b1.2 171
multinational enterprises (MNEs), 33, 36, NSE. See Nairobi Stock Exchange (NSE)
110n40 Nussbaum, M. C., 19n7
behavior guidelines, 238�39 nutrition, improvement of, 52
and corporate social responsibility,
237�38
impact in developing countries, 109n18 O
intrafirm trade, 98, 110n40 Ocampo, J. A., 35�36, 42, 67
and inward FDI, 59�60 OCP. See Onchocerciasis Control
Japanese MNEs in Thailand, 95�96 Programme (OCP)
potential benefits to host country, ODA. See official development assistance
94�96 (ODA)
spillover effects, 96�97, 110n34 OECD. See Organisation for Economic
technology employed by, 94, Co-operation and Development
110nn30�31 (OECD)
transparency for, 237�38 official development assistance (ODA),
37, 63, 113�14, 125, 147n2
effectiveness of, 121, 129�30
N impact of policies on, 129�30
Naim, Mois�s, 74 inflows by region, 119f5.2
Nairobi Stock Exchange (NSE), 101, share of GNI, 122t5.4
101b4.4 value compared to remittances, 176
Narayan, D., 149n34 oil-exporting countries, low-skilled work-
natural disasters, 126 ers in, 161�62
Ndikumana, L., 127b5.1 Onchocerciasis Control Programme
Nemagon, 73, 78n45 (OCP), 136�37, 149n40
the Netherlands, 114�15, 152, 156 openness ratio, 60
network externality, 190n53 Organisation for Economic Co-operation
net worth, 110n28 and Development (OECD), 8, 13,
New Zealand, 156, 158, 167 62�64, 172, 192n93, 258
NGOs. See nongovernmental organiza- original equipment manufacturer status,
tions (NGOs) 96
Nguyen, D. T., 97 outsourcing, 36
Nicaragua, 73, 177 Oxfam, 51, 52, 68, 77n12, 78n42
Niger, 32
Nigeria, 143
noncredit financial services, 90b4.2 P
nonexcludable nature of public goods, Pakistan, 65b3.2, 66, 165, 191n73
222 Paris Declaration on Aid Effectiveness,
nonfood products, 67�68 124
nongovernmental organizations (NGOs), Parra, M. A., 67
8, 51 partnerships
nonrival nature of public goods, 222 government-private sector, 221
nontariff barriers, 6, 8 public-private, 16, 207
Index 301
Passel, J., 191n91 to enhance impact of remittances, 249
patent ladders, 209 and equity in opportunity, 217
patents, 205t7.1, 209, 226n18, 264n36 globalization and policy formation,
on HIV/AIDS drugs, 208 229, 231, 263n3
pharmaceuticals, 206, 208 intellectual property, 204�5
peace, 18, 259 interaction of levels in policy making,
pension systems, 180, 191�92n92 228�29
per capita income, 118 levels of enactment of, 228, 230t8.1
developing world, 21�22, 45n1 and productivity gains, 56
and life expectancies, 29�30, 45n8 proposed changes to
low- and middle-income countries, 24 capital flows policies, 236�39,
and patent protection, 209 260t8.2, 263n13, 263n15
Pereira, S. C., 96 foreign aid policies, 239�42,
permanent settlers, 158, 159t6.3, 160, 260�61t8.2, 263n18
185�86, 189n17 ideas, 250�57, 262t8.2, 264nn31�32
Peru, 53 migration policies, 243�50,
pesticides, 73�74, 138 261�62t8.2, 263�64nn20�22
pharmaceutical companies, 136, 149n40 trade policies, 231�36, 263n5,
pharmaceuticals, 206, 208, 255�56, 263nn8�12
264n36 recommendations of, 227�28, 260�62,
Philippine Overseas Employment Agency 263n1
(POEA), 184b6.3 regressive nature of, 232
Philippine Overseas Labor Office on trade in goods and services, 244
(POLO), 184b6.3 See also immigration policies
the Philippines, 53, 157, 160, 263n21 pollution, 64
and economic migrants, 158, 160 POLO. See Philippine Overseas Labor
EPZs in, 60b3.1 Office (POLO)
HTMEs, 57�58 Pomerantz, P. R., 42
impact of brain drain on, 173 poor, 51
protection of migrants, 184b6.3 costs of, 168, 190n49
and remittances, 191n73, 248 definition, 25�26, 27f2.5, 77n28
training of nurses, 175b6.2 estimates of (1981�2001), 28f2.6
value of remittances, 177 experiences of, 27b2.1
Pischke, J., 192n93 globalization and policy formation for,
plurilateral investment agreement, 229, 231
230t8.1 headcount index, 28�29
POEA. See Philippine Overseas impact of market failures on, 91�92,
Employment Agency (POEA) 110n27
Point Four program, 117, 148nn10�11 and knowledge sharing, 253�54
Poland, 132 and tariffs, 61, 77n28
policies, 15 traditional knowledge, 208
areas of action to support globalization, See also extremely poor
16�18 population
challenges for policy makers, 214, 215, age distributions, 25ff2.3
226n30 foreign-born, 39, 158, 189n17
concerning infrastructure, 218 growth of, 23, 24f2.2, 118
to enhance aid effectiveness, 146 headcount index, 28�29
302 Globalization for Development
population (continued) impact of ideas on, 15, 40�43
low-income countries, 93 impact of migration on, 14�15, 17�18
refugees, 165 impact of remittances on, 37�40,
portfolio investment, 37f2.13, 38, 38b2.2, 177�78
50�51, 83�84 impact of trade on, 47�51, 76,
portfolios, changes in, 79, 108n3 76nn1�8, 78n47
poverty, 3�5, 68, 119 activities with negative impact, 70,
composition of, 28�29 72�74, 75, 78nn41�43, 78n45,
decline in China, 28, 45n7 78n47
definition, 147 increase in international trade, 10
in developing world, 24�33 market access, 61�66, 75
and global inequality, 26, 28 market expansion, 51�53,
and health concerns, 148�49n28 77nn11�12
impact of debt burdens on, 141 relationship of aid and trade, 69�70,
impact of remittances on, 176 78nn38�40
increase in due to financial crises, 12, trade-supported productivity, 60�61
20n21 implications of analysis of aid flows for,
movement above poverty line, 130, 144, 146�47
149n30 importance of public policies on,
multidimensionality of, 131, 149n3 129�31
relationship to globalization, 1�3, 9�16 and information imperfections of
relationship to trade, 10�11 financial markets, 90b4.2
and rich country protectionism, 197, policy agenda, 16�18
225n7 and portfolio equity, 102
and trade, 9, 10f1.1, 66 post-Cold War, 120�24
poverty alleviation, 108, 128 and primary product problems, 66�69,
and absorptive capacity, 107�8 75
China, 111n49 strategies for, 222�23
and civil society organizations, 198 in Vietnam's rice sector, 51�52,
diversity of approaches to, 213 77nn11�12
economic growth as force for, 214 poverty indicators, 29�33, 45n8
and FDI, 12, 93, 97, 98, 110n37 Poverty Reduction Strategy Papers
garment industry, 52�53, 76n13 (PRSPs), 71b3.3
HIPC debt relief initiative, 142�43 Prasad, E., 84, 108n1, 111n45
impact of aid on, 13�14, 37�40, preferential market access, 61
120�24, 127b5.1, 131�33, price-earnings ratios, 109n7
149nn33�34, 149n37 primary commodities, 48, 66�67
impact of capital flows on, 11�13, The Principles of Development Aid, 120
37�40, 81 Pritchett, L., 92, 211
impact of competition on, 48, 53�55, private capital, 132, 136
76n4, 77n15, 77n18 private goods, 41b2.3
impact of declines in commodity prices private investment, 13
on, 68 private market economy, 16
impact of development assistance on, private sector, role of, 217
124�25, 148n15 production
impact of education on, 97, 110n37, efficiency of, 211
218 and FDI, 80
Index 303
and health of workers, 50 Raynolds, L. T., 78n37
multifunctionality of agricultural pro- Reagan, Ronald, 126
duction, 232, 263n5 real (price adjusted) wages, 55
systems of, 6, 19n12, 35�36 reforms
productivity and aid, 126�27, 133, 135
HTMEs sector, 58�59 to capital accounts, 237, 263n13
and imports, 55�56 and development, 132
increases in, 49�50, 76n5 in financial sector, 92, 110n28
and learning, 56, 77n22 of global governance, 251�52
and malaria control, 207 immigration policies, 156
and trade, 55�59, 60�61, 77nn21�22 and information flows, 202
protectionism, 11, 197, 225n7, 259 political economy of, 216�20
and developing countries, 66, 78n34 and poverty alleviation, 146
European Union, 64 and rice sector, 51�52
impact of, 68 Sub-Saharan Africa, 134�35, 149n38
PRSPs. See Poverty Reduction Strategy in weak states, 134
Papers (PRSPs) refugees, 155, 158, 187
public goods, 41�42, 64, 201, 203, 225n14 asylum cases granting refugee status,
See also global public goods 164, 189n30
public health, 129, 136�37, 148�49n28, distinguished from asylum seekers, 165,
149n40, 208 190nn37�39
See also health and health care; education of, 189n33
HIV/AIDS Geneva Convention, 156, 189n14
public policies, 41b2.3, 129�31, overview of, 159t6.3, 165
148�49n28, 149n32 protection of, 163, 183�85
See also policies UN definition of, 1889n14
public-private partnerships, 16, 207 regressive tax, 61
Puerto Rico, 167, 168 Reinert, K. A., 141
purchasing power parity dollars, 4, 19n4, Reinhart, C. M., 85, 105
26, 45n5 Reisen, H., 99, 109n18
Puri, L., 263�64n20 remittances, 171
of asylum seekers, 164, 189n33
economic importance of, 176, 177t6.4
Q inflows of, 14, 17�18
quotas, 68 managing of, 247�49
for immigrants, 188n13, 189n22 as percent of GDP, 39, 40f2.14
and market access, 64, 65b3.2 policies to enhance impact of, 249
rice exports, 52 research on, 249�50
temporary labor, 245 role of, 39, 40f2.14
textile and clothing sectors, 65b3.2 to source countries, 176�79, 191n75
taxes on, 173, 191n73
reparations, 116
R replacement equipment manufacturer
Radelet, S., 130, 148n18, 149n32 certification, 96
Ramamurti, R., 76n5 Republic of Korea, 60b3.1, 83b4.1, 161,
rates of return, 109n7 191n73, 194
Ravallion, M., 28, 45n7 Republic of Yemen, 161, 177
304 Globalization for Development
research and development, 203 security
AERC, 139 human, 42, 46n28
agriculture sector, 139 and market access, 66, 78n36
on development, 223 progress in, 259
investment in, 206�7 and remittance flows, 248
by MNEs, 94, 110n31 Sen, A., 209, 236, 264n11
on national migration issues, 249�50 service sector, 80, 182, 244, 263�64n20
resettlement of refugees, 163, 165, shipping costs, 19n14
189nn27�28 Short-Term Agreement Regarding
rice exportation, 51�52, 77nn11�12 International Trade in Cotton
risk management, 104, 105�6, Textiles (STA), 65b3.2
111nn45�46, 254 Sierra Leone, 173
riverblindness, 136�37, 149n40 Singapore Economic Development Board,
Rodrigo, G. C., 56 95b4.3
Rodrik, D., 219, 225n5, 263n3, 263n13 Singapore Institute of Standards and
Rogers, H., 120�21 Industrial Research, 95b4.3
Roll Back Malaria partnership, 207 SITC. See Standard International Trade
Romer, Paul, 194, 199 Classification (SITC)
Rousseau, P. L., 99 Sj�holm, F., 96
Roy, D., 60 Skills Development Fund, 97
Slaughter, M. J., 96
rural areas
Smith, Adam, 196b7.1
and agricultural subsidies, 63�64
smugglers of people, 151�52, 243
as residence of dollar poor, 51�52
social capital, 131, 149n34
telecommunications in, 54
social indicators, 128
Russia, 83b4.1, 89, 174
social insurance, 263n3
Rwanda genocide, 165, 190n37
social planners, 211
social problems, 263n1
social responsibility, 237�38
S social welfare programs, 180, 191n91
Sachs, J. D., 219 software sector, 49, 76n5, 234
safety, 50 Somalia, 164, 173
of banana workers, 73�74 Soto, M., 99, 109n18
and costs of generating income, 74 source countries
food standards, 64�66 and brain drain, 14, 171n73, 172�73,
trade activities with negative impact 190n61, 191n63
on, 70, 72�74, 75, 78nn41�43, effects of migration of highly-skilled
78n45, 78n47 workers on, 183
Saggi, K., 256 overview of, 171�72, 190n60
Saudi Arabia, 162 and remittances, 176�79, 191n75
savings, 88, 242 sourcing networks, 94�95
Schmukler, S., 85, 102, 109n9 South Africa, 143
school fees, 133, 149n37 HIV/AIDS, 197
schools, as deterrent to child labor, 236, medical professionals in, 175b6.2
263n12 mining industries, 238, 263n15
Schultz, T. P., 148n27 South Asia, 29, 31, 161
Schumpeter, J., 200 Southeast Asia, 22, 45n1, 161
science, 18 South-South trade, 76n8
Index 305
Spain, mercantilism in, 196b7.1 tariff protection, 61�62, 68
spillover effects, 96�97, 106, 110n34, 136 tariffs
Sri Lanka, 53, 60b3.1 clothing and textile sectors, 65b3.2
stages of globalization, 5�9, 21 impact of protectionist policies, 68
Standard International Trade Classification and market access, 61�62, 77n28
(SITC), 45�46n16 Tawney, Richard, 215
standards and regulations, and market taxes
access, 64�66, 78n33 impact on taxpayers of illegal immi-
state grants, 180
privatization of state-owned assets, 85, Tobin Tax, 242, 263n18
86, 109n9 technical assistance, 69, 78n40, 113�15,
relationship to markets, 215, 216 117, 148nn10�11
role in economic management, 210�13 technology, 5, 18, 56, 95b4.3, 101
Steil, B., 102 agricultural, 193, 225n2
Stern, M. A., 41b2.3, 223, 226n41 and brain drain, 175
Stern, N., 120�21, 197 environment-friendly, 138
Stiglitz, J. E., 225n14, 263n13 HTMEs, 57�59
Streeten, P. P., 31�32, 45n4, 244 impact on poverty alleviation, 53
structural adjustment programs, 216 link to exports, 56, 77n21
students, as migrants, 159t6.3, 167, 188 and productivity, 49, 55�56, 76n6,
Subramanian, A., 60 77n21
Sub-Saharan Africa, 63, 142 telecommunications, 54, 77n15
and AERC, 139 transmission of, 42
aid to, 123f5.4, 134�35, 149n38 and transportation costs, 7
costs of health care in, 206 used by MNEs, 94, 110nn30�31
HIV/AIDS, 207�8 and use of local suppliers, 59�60
infant mortality, 31, 45n10 technology divide, 256
net portfolio equity inflows in, 101 technology transfer, 79, 81, 94�96, 98,
pest control, 138 256�57
poverty reduction in, 66 TeleCommons Development Group,
trade and FDI inflows, 34 Canada, 77n15
subsidies telecommunications, 42�43, 54, 199, 218
and market access, 62�64 Teubal, M., 56
See also agricultural subsidies te Velde, D. W., 97
Sumarto, S., 92 textile industry, 64, 65b3.2
Summers, L., 200 Thailand, 57�58, 83b4.1, 95�96, 191n73
Suryahadi, A., 92 Thatcher, Margaret, 126
sweatshops, 237 tied assistance, 115, 200
Sweden, 117 Tobin Tax, 242, 263n18
Switzerland, 179, 189n25 Tonga, 39
Szirmai, A., 77n22, 109n5, 114 total world gross domestic product,
23�24, 26f2.4
Toyotism, 19n15
T trade, 2, 10�11
Tansini, R., 96 and child labor, 236
tariff escalation, 50, 61�62, 68, 232, 233, complementary relationship with aid,
263n6 69�70, 78nn38�40
306 Globalization for Development
trade (continued) U
global trade negotiations, 16�17 Uganda, 52, 132
in hazardous waste, 73, 78n43 UN Convention on the Protection of the
illegal, 74 Rights of all Migrant Workers and
impact on poverty, 33�36, 47�51, Their Families, 184b6.3
76nn1�8 UNCTAD. See United Nations
intra-firm, 33, 98, 110n40 Conference on Trade and
and levels of policy enactment, 230t8.1 Development (UNCTAD)
procompetitive effects of, 53, 54�55 undocumented migrants, 159t6.3, 166,
and productivity, 55�59, 77nn21�22 187�88, 190n41, 190nn44�45
proposed policy changes in, 231�36, exploitation of, 182�83, 184b6.3
263n5, 263nn8�12 UNDP. See United Nations Development
role of, 39�40 Programme (UNDP)
South-South, 76n8 UNHCR. See United Nations High
total trade flows, 50�51
Commissioner on Refugees
See also arms trade; barriers to trade
(UNHCR)
trade liberalization, 47, 76, 78n47
United Arab Emirates, 162
impact on poverty, 66
United Kingdom. See Great Britain
and quotas, 64, 65b3.2
United Nations, 136
rice exportation, 51�52
and human rights, 198
and worker skills, 49, 76n6
resettlement of refugees, 163
Zimbabwe, 54�55
role in emergency relief, 134
trade-related capacity building, 11, 69�70,
United Nations Conference on Trade and
71b3.3, 75, 78nn38�40, 233�35
Development (UNCTAD), 6, 7,
trade-related investment measures
(TRIMs), 95b4.3 8b1.2, 55, 62, 71b3.3
trade-related technical assistance, 69 United Nations Development Programme
training, 97, 174, 203, 246�47 (UNDP), 8, 71b3.3, 137, 214
transaction costs of aid, 121�22 United Nations High Commissioner on
transactions Refugees (UNHCR), 184, 190n40
by choice vs. by coercion, 235�36, United States, 103
263n11 costs of health care in, 206
foreign exchange, 263n18 deficits, 12, 87, 108
transfer agents, 191n75 Department of Homeland Security,
transfer funds, 179, 191n87 190n41
transfer pricing, 98, 110n40 migration, 155f6.1, 157
transition countries, 120 from Asia, 153, 188n11
transparency, 191n87, 237�38 from Cuba to Miami, 192n93
Transparency International, 127b5.1 diversity lottery, 189n19
transportation costs, 7, 19n14, 223 economic impact of, 180, 191n88
TRIPS. See Agreement on Trade Related education of migrants, 247
Aspects of Intellectual Property from Europe, 153
Rights (TRIPS) foreign-born population, 158,
Truman, Harry, 117 189n17
Tsang, E.W.K., 97 H-1B visas, 161, 167, 189n24
Turkey, 156 immigration policies, 156
Turner, Ted, 207 from Japan, 188n11
Index 307
literacy test for migrants, 155, approaches for post-conflict in, 134,
188n13 135
make up of workforce, 182 experience of Sub-Saharan Africa,
quotas on, 189n22 134�35, 149n38
student visas, 167 wealth transfer, 173�74, 191n73
visa-free, 167 Weick, K. E., 263n1
protectionism in, 64 welfare gains, 66, 78n34
textile and clothing sectors, 65b3.2 West Africa, 19n8, 136�37, 149n40
Universal Declaration of Human Rights, Western Europe, 22, 190n38
42, 156, 160, 189n14, 189n20 WHO. See World Health Organization
UN Millennium Declaration, 39 (WHO)
Uruguay, 32, 96 widgets, 38, 38b2.2
utility maximization, 167�68, 190n47 Williamson, J. G., 188n9, 188n12, 190n60
Winters, L. A., 78n47, 245, 264n21
Wolf, M., 1, 204
V Wolfensohn, James, 78n41
vaccination campaigns, 207 women
value added, 62 status of, 263�64n20
value chains, 50, 76n7 See also females
values, globalization of, 42 Woolcock, M., 149n34
Velling, J., 192n93 workforce, 179, 182�83, 184b6.3
Venezuela, 96 abuse and exploitation of, 162�63,
Vietnam, 51�52, 77nn11�12, 93�94, 97, 182�83, 184b6.3
132, 189n21 agricultural laborers, 48, 170
virtuous circles, 246 banana workers, 73
visas education and health of, 218
competition for highly-skilled workers, effect of immigration on destination
161 countries, 181�82, 192nn93�94
H-1B visas, 161, 167, 189n24 export sector workers, 47�48
visa-free migration, 159t6.3, 166�67, forced labor, 235�36, 263nn11�12
188 garment industry, 52�53, 76n13
highly-skilled workers migration to
high-income countries, 159t6.3,
W 160�61, 189n24
Wachtel, P., 99 low-skilled workers, 159t6.3, 162�63
wages, 97 migrants from Asia, 153�54, 188n11
avoiding low-income low-skills trap, 97 policies to restrict recruitment, 246
export sector workers, 47�48 skilled vs. unskilled workers, 49, 76n6
gaps in, 154, 188n12 telecommunications industry, 54
impact of migration on, 172, 181, temporary movement of workers,
190n60, 192nn93�94 14�15, 20n25, 244�45,
Wallace, W., 65 263�64nn20�21
Wallich, C., 218 undocumented migrants, 182�83,
Walmsley, T. L., 245, 264n21 184b6.3
Washington Consensus, 126, 216 Vietnam's rice sector, 51�52
weak states virtuous circles, 246
allocation of aid to, 133�34 and visa-free migration, 166�67
308 Globalization for Development
Zimbabwe, 54�55 World Development Report, 201
See also agricultural laborers; child World Development Report on Equity and
labor; employment Development, 217
working conditions, as dimension of World Health Organization (WHO), 33,
poverty, 5, 19n8 73�74, 137
World Bank, 6, 7, 8b1.2, 71b3.3, 117 World Intellectual Property Organization,
aid in education sector, 124 254
on banking sector, 104, 109�10n23 World Report on Violence and Health,
on bond investment, 103 263n9
as conduit for aid, 13 World Trade Organization (WTO), 8,
costs of Asian crisis, 92 71b3.3, 136
on developing country equity markets, and trade-related capacity building, 70,
101 78n40
Doing Business Report, 217 and TRIMs, 95b4.3
and equity investments, 100 TRIPS, 209, 254�56, 257, 264n31
and extractive industries, 263n15 World War II, 115�19, 148nn9�11
and financial sector, 87, 109n19, WTO. See World Trade Organization
110n24 (WTO)
on foreign exchange reserves buildup,
109n14
on global integration of equity invest- Y
ments, 100 Yugoslavia, former, 164
and impact of trade protectionism on
poverty, 66
International Finance Corporation, Z
238 Zaire, 127b5.1, 132, 165, 190n39
OCP program, 137 Zambia, 119
on remittances, 191n75 Zejan, C., 96
role in facilitating aid post-WW II, Zimbabwe, 54�55, 77n18
115�17 Zohir, S. C., 53, 77n13
"This book is essential reading for anyone interested in globalization and development.
It provides important new insights and perspectives into how global flows of finance,
trade, migrants, and ideas shape development and advances the debate by identifying
urgently needed policy changes for a more inclusive globalization."
Joseph Stiglitz, Winner of the Nobel Prize for Economics and Professor of Economics,
Columbia University
"Globalization may need defense, but it also needs reform. The authors tell us the story
so far and go on to propose ways and means of getting to a happier ending. The ways
identified, based on fine empirical assessment, certainly deserve our serious attention."
Amartya Sen, Winner of the Nobel Prize for Economics, Lamont University Professor and
Professor of Economics and Philosophy, Harvard University
"This book cuts through the confusion of many discussions of globalization. In particular,
it gives a clear definition in terms of the basic flows that embody interaction among
countries, including trade, migration, and so on. This provides a clear analytical frame-
work for analyzing the impact of globalization on development and thus on reducing
poverty. It is a first-class piece of work and a `must-read' for those seeking clarity on
one of the great issues of our time."
Sir Nicholas Stern, Head of Government Economic Service, United Kingdom
"This book draws on a wealth of cross-country experience and knowledge to demonstrate
that globalization has the ability to contribute to poverty alleviation, but only under
certain circumstances. As such, it provides invaluable insight to development practitioners
and policy makers alike. It contains not only a lucid analytical framework in which to
analyze these tradeoffs, but also some invigorating ideas on how globalization can be
made to work for the poor. In this, it is a vital read for anyone concerned about a fairer
sharing of our communal prosperity."
Trevor A. Manuel, Minister of Finance, South Africa
"Ian Goldin has been at the centre of action in the debate on globalization and development
for a long time. His collaboration with Ken Reinert on this subject is a must for those
who are looking for both courageous conceptual design and practical solutions."
Kemal Dervis, United Nations Development Programme Administrator and former
Minister of Finance, Turkey
ISBN 0-8213-6929-6