Globalization and Economic Growth
D. Selcen Ozturkcan, Florida Atlantic University, USA & Cankaya University, Turkey
Globalization describes the ongoing global trend
toward the freer flow of trade and investment across
borders and the resulting integration of the
international economy. Because it expands economic
freedom and spurs competition, globalization is
believed to raise the productivity and living
standards of people in countries that open themselves
to the global marketplace. Globalization has evolved
since Columbus and de Gama sailed from Europe
more than 500 years ago. This paper surveys the
economic growth associated with globalization.
Doing so, it investigates the dynamics between
openness, poverty, inequality, and globalization. It
also explores the methods that could have been
utilized by the developing countries.
For less developed countries, globalization offers
access to foreign capital, global export markets, and
advanced technology while breaking the monopoly of
inefficient and protected domestic producers. The
greatest beneficiaries of globalization are the long-
suffering consumers in those nations that had been
"protected" from global competition. Globalization
expands the range of choice, improves product
quality, and exerts downward pressure on prices. It
delivers an immediate gain to workers by raising the
real value of their wages. It transfers wealth from
formerly protected producers to newly liberated
consumers, with the gains to consumers exceeding
the loss to producers because the deadweight losses
to the economy are recaptured through efficiency
gains. Faster growth, in turn, promotes poverty
reduction, democratization, and higher labor and
environmental standards.
Third World nations that had tried and failed to
reach prosperity by shunning foreign capital and by
protecting and subsidizing domestic "infant"
industries. Beginning with Chile in the mid-1970s
and China later that decade, Low Developed
Countries (LDCs) from Mexico and Argentina to
India had opened their markets and welcomed foreign
investment. The globalization has not been the result
of a blind faith in markets imposed from above but of
the utter exhaustion of any alternative vision. Beyond
all the impressive numbers about the extent of
globalization, what kind of impact is it having on
national economies? There are at least three
fundamental blessings of globalization on nations
that embrace it: faster economic growth, reductions
in poverty, and more fertile soil for democracy.
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Engagement in the global economy provides
capital to fuel future growth. Most LDCs are people-
rich and capital-poor. In a few countries in Asia, the
level of domestic savings has been high enough to
finance domestic investment, but typically the
domestic pool of savings in an LDC is inadequate.
Global capital markets can fill the gap, allowing poor
nations to accelerate their pace of growth. A poor
country that closes its door or fails to maintain sound
domestic policies will forfeit the immense benefits
this capital can bring. Globalization has become a
magic word these days. Some have been led to
believe that by its magic touch a country can become
rich. Incessant propaganda emanating from interested
quarters has produced this blinding effect on them.
The belief is that all needed to be done is to throw
any country open and by some mysterious process
wealth will flow in. This mystical faith is unaware of
the fact that globalization has always existed since
mankind was able to move from shores to shores with
the development of navigation and other
accompanying technical developments that made
long ocean voyages possible.
Contemporary Findings
Openness of the Economy
Systematic studies confirm a strong link between
openness and economic growth. (One problem with
these cross-country studies of growth and trade is that
trade liberalization is seldom an isolated event. LDCs
liberalize in the context of broader economic reforms,
which often include selling state-owned industries;
reducing government taxation, spending, and
borrowing; and deregulating domestic prices and
production. This poses the challenge of determining
the source of faster growth. Another methodological
challenge is in measuring openness. There is no
standard statistical measure of a nation's openness.
What is clear is a general correlation between
openness, under various definitions, and economic
performance.) A study of 117 countries by Sachs and
Warner (1995) found that open economies grew
much faster than closed economies. Specifically, the
authors found that the developing countries that
maintained open economies throughout the 1970s
and '80s grew at an average annual rate of 4.5
percent, compared with an average growth rate of 0.7
percent for closed economies. As a result, the open
developing economies tended to converge toward the
slower-growing rich economies, while relatively
closed economies did not converge.
Contributions of Free Trade
The international exchange of goods and services
allows a more efficient use of the world's limited
resources, thereby creating more output to be shared
among the population. Consider this fact: the world
economy produced more output in the twentieth
century alone than it produced in total over the entire
preceding years of recorded human history. (In terms
of Figure 1, the area under the GDP line after 1900
exceeds the area under the line prior to 1900).
(DeLong, 1998)
Figure 1. World Output and Population
that they do not have to produce themselves.
International trade and investment is simply the
international extension of this division of labor and
specialization, which is one of the key driving forces
behind economic growth. Recognizing this
connection between trade and economic growth is the
key to the debate.
Level of Poverty
As shown in Table 1.1, the total number of
people living on less than a dollar a day in the
developing world has remained roughly constant over
the past ten years, at 1.2 billion. Since the population
in developing countries has been rapidly growing
over the same period, the proportion of the
developing country population living below the
poverty line has actually fallen, from 28 percent in
1987 to 24 percent in 1998. In other words, more
people have moved out of poverty than were born
into poverty over the past decade. Thus, blanket
claims that globalization increases world poverty
simply do not match the evidence.

Table 1. Total number of people Living on less than

a dollar a day (millions)
%
Years change change

Region 1987 1993 1998 ’87-98 ’87-98

East Asia 418 432 278 -140 -33

& the Pacific
Source: DeLong, Estimating World GDP, One Europe 1 18 24 23 2300
Million BC to Present & Central Asia
Latin America 64 71 78 14 22
& Caribbean
Part of this increase in measured output per M.East 9 5 6 -3 -33
capita reflects the shift away from subsistence & Noth Africa
agriculture and production in the home (both of South Africa 474 505 522 48 10
which are not measured in Gross Domestic Product Sub-Saharan Africa 217 273 291 74 34
(GDP) because they are not sold on a market). Yet, Total (billions) 1.2 1.3 1.2 0 0
one should be able to point out that the rest of this
explosive growth in output comes from technological Source: World Bank Development Indicators 2000
progress: scientific advances, better production,
organization, and management methods, and Yet, while such a reduction in poverty is
improvements in the forms of transportation and laudable, it has not been rapid or deep enough. The
communication. In particular, the specialization of number of people living on the slightly higher
production has occurred as people have increasingly amount of $2 a day is almost 3 billion, approaching
focused on specific economic activities and traded half of the world's population. This suggests that
with others for the goods and services they need. many of those moving out of dire poverty have not
Importantly, that trade could be with the neighboring moved far up the income scale. Moreover, World
town, country, or continent. Indeed, trading with Bank estimates based on a "business as usual"
another country is much the same as trading with the scenario of slow growth; predict that 1.2 billion
local store. The local store never buys anything from people will still be living on less than $1 a day in
its customers (and so runs a huge trade surplus with 2008. The number of people living below that
them) and yet it clearly enhances overall welfare by poverty line in sub-Saharan Africa is predicted to
providing its customers with food and other products increase by nearly 40 million over the same period.
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Clearly, much more needs to be done to accelerate
poverty reduction in the coming decades.
Finally, it is important to note that poverty is a
multidimensional phenomenon and is not simply the
same as an insufficient level of monetary income.
Other determinants of poverty include access to basic
sanitation, education, and health services. This
distinction is important because some developing
countries have converged or almost converged with
developed countries in areas such as life expectancy,
even though they have much lower income levels.
For example, in Latin America and the Caribbean life
expectancy averages 70 years and average per capita
income is only $6,868. In contrast, according to the
UN Human Development Report 1999, the average
life expectancy in developed countries is 78 years,
while average per capita income is $23,741. Even
countries as poor as India have a life expectancy (63
years) that was not possible anywhere in the world a
hundred years ago. This shows that the worldwide
dissemination of new technologies and knowledge,
such as medical advances, reduces some aspects of
poverty in developing countries even while monetary
incomes only slowly increase. (The UN recognizes
that health and other social aspects of poverty are not
accurately reflected in monetary measures and thus
constructs its own measure of poverty -- the human
development index (HDI). This measure includes life
expectancy, literacy, school enrollment and incomes.
In 1997, more than half of the 174 countries
measured by the UN had an HDI rank that was higher
than their per capita income would predict).
The Inequality Gap
On the other hand, one of the main claims of the
antiglobalization movement is that globalization is
widening the gap between the haves and the have-
nots. It benefits the rich and does little for the poor,
perhaps even making their lot harder. As union leader
Jay Mazur put it, "globalization has dramatically
increased inequality between and within nations".
The problem with this new conventional wisdom is
that the best evidence available shows the exact
opposite to be true. So far, the current wave of
globalization, which started around 1980, has
actually promoted economic equality and reduced
poverty.
Evidence that rising inequality in some countries
occurs at the same time as rapid globalization does
not prove causation. In fact, the evidence on the
causal relationship between globalization and internal
inequality is mixed. One thing seems clear: there is
no systematic relationship between openness to trade
and inequality. For example, while both Thailand and
Taiwan have witnessed rapid economic growth and
integration into the global economy over the past
thirty years, inequality increased in Thailand but not
in Taiwan. This and similar examples may lead one
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to conclude that there is no simple relationship
between openness and inequality.
In addition, growth in general (whether caused
by trade or other factors) does not automatically
increase inequality. A comprehensive study of 125
countries by the World Bank showed that a 1 percent
increase in GDP is associated with a 1 percent
increase in the incomes of the poor. The study
concluded that "there is no apparent tendency for
growth to be biased against poor income households
at the early stages of development. Thus, blanket
claims about globalization or growth increasing
inequality cannot be substantiated by a careful look at
the evidence. Other factors -- such as domestic social
and other policies -- clearly play a role in how
economic growth and integration in the global
economy affect the distribution of income. The same
study, which is conducted by Dollar and Kraay
(2001), states a finding of a statistically significant
and economically meaningful effect of trade on
growth: an increase in trade as a share of GDP of 20
percentage points increases growth by between 0.5
and 1 percentage point a year.
Figure 2. Real per capita GDP growth (annual rate)
Source: Dollar and Kraay (2001b)
Global economic integration has complex
effects on income, culture, society, and the
environment. But in the debate over globalization's
merits, its impact on poverty is particularly
important. If international trade and investment
primarily benefit the rich, many people will feel that
restricting trade to protect jobs, culture, or the
environment is worth the costs. But if restricting
trade imposes further hardship on poor people in the
developing world, many of the same people will
think otherwise.
The fact is; developing world can be divided into
a "globalizing" group of countries that have seen
rapid increases in trade and foreign investment over
the last two decades -- well above the rates for rich
countries -- and a "nonglobalizing" group that trades
even less of its income today than it did 20 years ago.
One need to be cautious about drawing conclusions
concerning causality, but no one can disagree that
openness to foreign trade and investment (along with
complementary reforms) explains the faster growth or direct investment related to natural resources.
of the globalizers. Today, in contrast, the bulk of capital flows to
Contrary to popular perception, globalization has developing countries is direct investments tied to
not resulted in higher inequality within economies. manufacturing and services.
Inequality has indeed had gone up in some countries One good measure of inequality among
(such as China) and down in others (such as the individuals worldwide is the mean log deviation -- a
Philippines). But those changes are not systematically measure of the gap between the income of any
linked to globalization measures such as trade and randomly selected person and a general average. It
investment flows, tariff rates, and the presence of takes into account the fact that income distributions
capital controls. Instead, shifts in inequality stem everywhere are skewed in favor of the rich, so that
more from domestic education, taxes, and social the typical person is poorer than the group average;
policies. In general, higher growth rates in the more skewed the distribution, the larger the gap.
globalizing developing countries have translated into Figure 3 shows the findings of Dollar and Kraay’s
higher incomes for the poor. Even with its increased (2001) studies with the use of this technique.
inequality, for example, China has seen the most Most worldwide interpersonal income inequality
spectacular reduction of poverty in world history -- can be attributed to the large differences in average
which was supported by opening its economy to incomes between countries, rather than to inequities
foreign trade and investment. in the distribution of income within countries. And
Apart form the above-mentioned causes of since many of the globalizers were initially poor,
inequality, the more recent rise in inequality is also their rapid growth over the past twenty years has
explained by emerging trends, such as the contributed to reducing income inequality between
dissemination of technologies that generate demand countries. Much of the decline in the between-
for skilled labor and therefore increase their country component of inequality can be seen to be
remuneration and reduce both the demand and the due to the rapid growth of the globalizers, most
compensation of unskilled workers. In many notably China and India, whose economies' vast size
developing countries and transition economies, has given them substantial weight in these
privatization and a distribution of industrial assets calculations. (Dollar & Kraay, 2001a & 2001b).
that increased asset concentration reinforced this
trend. In some developing countries, labor market Figure 3. The globalizers and worldwide inequality
deregulation eroded real wages, and the traditional
redistributive function of government was severely
limited due to reduced tax collection and elimination
of transfer systems induced by liberalization
initiatives. (United Nations Report on the World
Social Situation, 2001)
Although globalization can be a powerful force
for poverty reduction, its beneficial results are not
inevitable. If policymakers hope to tap the full
potential of economic integration and sustain its
benefits, they must address three critical challenges.
A growing protectionist movement in rich countries
that aims to limit integration with poor ones must be
stopped in its tracks. Developing countries need to
acquire the kinds of institutions and policies that will
allow them to prosper under globalization, both of
which may be different from place to place. And
more migration, both domestic and international,
must be permitted when geography limits the
potential for development.
International capital flows, measured as foreign
ownership of assets relative to world income, grew Source: Dollar and Kraay (2001b)
during the first wave of globalization and declined
during the Great Depression and World War II; they
did not return to 1914 levels until 1980. But since Another way of looking at global inequality is to
then, such flows have increased markedly and examine what is happening to the extreme poor --
changed their nature as well. One hundred years ago, those people living on less than $1 per day. During
foreign capital typically financed public the Great Depression and World War II, the number
infrastructure projects (such as canals and railroads) of poor increased particularly sharply, and it declined

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somewhat immediately thereafter. The world
economy grew strongly between 1960 and 1980, but
the number of poor rose because growth did not
occur in the places where the worst-off live. But
since then, the most rapid growth has occurred in
poor locations. Consequently the number of poor has
declined by 200 million since 1980. Again, this trend
is explained primarily by the rapid income growth in
China and India, which together in 1980 accounted
for about one-third of the world's population and
more than 60 percent of the world's extreme poor.
While globalization has raised living standards
for many, it has made life more difficult for those
dislocated by change and it threatens to leave part of
the world behind. It is no coincidence that the
disappointing economic performance in much of
Sub-Saharan Africa reflects a failure to integrate into
the world economy and, thus, to trade successfully
and attract investment. Another challenge of
globalization is to address the concern in wealthier
nations that international competition will harm
living standards. There is ample evidence that
stagnant wages in the United States and
unemployment in Europe have other causes-
technological change, poor education, Europe's
inflexible labor markets, high taxes and an aging
workforce.
Policies to Implement for Benefiting
from the Globalization
To enjoy the benefits of globalization at the
maximum possible extend, “the Golden Straitjacket”,
the so called “progrowth policies”, a country must
either adopt, or be seen as moving toward, consists of
the following golden rules: making the private sector
the primary engine of its economic growth,
maintaining a low rate of inflation and price stability,
shrinking the size of its state bureaucracy,
maintaining as close to a balanced budget as possible,
if not a surplus; eliminating and lowering tariffs on
imported goods, removing restrictions on foreign
investment, getting rid of quotas and domestic
monopolies, increasing exports, privatizing state-
owned industries and utilities, deregulating capital
markets, making its currency convertible, opening its
industries, stock, and bond markets to direct foreign
ownership and investment, deregulating its economy
to promote as much domestic competition as
possible, eliminating government corruption,
subsidies and kickbacks as much as possible, opening
its banking and telecommunications systems to
private ownership and competition, and allowing its
citizens to choose from an array of competing
pension options and foreign-run pension and mutual
funds. (Friedman, 1999, p.86-87). It is also very
critical that for a poor nation to invest in education
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and not destroy the incentives for its citizens to
acquire ideas from the rest of the world, it can rapidly
take advantage of the publicly available part of the
worldwide stock of knowledge. If, in addition, it
offers incentives for privately held ideas to be put to
use within its borders (for example, by protecting
foreign patterns, copyrights, and licenses, and by
permitting direct investment by foreign firms), its
citizens can soon work in state-of-the-art productive
activities.
Conclusion
Globalization, which is understood with
reference to a country’s foreign trade to GDP ratio or
by composite criteria of ratios of foreign trade and
foreign direct investments to GDP ratios, is said to
have certain benefits to the globalizing country. Here
is a confusion of cause and effect. An analysis of the
forces at work does not reveal benefits flowing from
the single source of globalization. As a matter of fact,
globalization appears more an effect rather than the
cause of economic growth. At any rate it has to wait
upon the development of those domestic forces,
which create the favorable climate for economic
growth. It has an accelerating effect on growth at an
advanced stage of development. These are well-
known forces of good governance, favorable
investment climate, development of financial
institutions, and the development of physical and
social infrastructures. In other words, the country
desirous of globalizing to a higher level has to
develop its own domestic economy to benefit from
globalization. The economic benefits to a country
from globalization may rightly be viewed as
economic benefits generated by economic growth
primarily with own steam. It has to be self-generating
process that links up for global benefits.
The evidence today still suggests that increased
global integration of the 1990s will be seen
eventually as one of the brightest events for millions
of the world's poor. New jobs in international
companies and export sectors have raised incomes of
millions in the past two decades, and most of these
have been for people with below-average incomes –
certainly below average by global standards if not
also by the standards within the countries themselves.
Furthermore, many of the countries that have
achieved rapid growth via global integration were
relatively poorer countries in East Asia such as
China, Malaysia, Thailand, Indonesia, Korea, and
Taiwan; or were relatively poorer countries in Europe
such as Ireland and Poland. Globalization alone is
unlikely to solve the problems of much of the world's
poor, yet a reaction against globalization is even less
of an answer.
Globalization has become a lightening rod for
many legitimate concerns about modern society
including poverty, inequality, unemployment, and
environmental degradation. Yet, there is no clear
evidence that globalization per se is to blame for
rising global poverty or inequality. Indeed, higher
levels of trade and investment tend to increase
economic growth and bring other positive spillover
effects (such as access to new, better technologies).
Rather than blanket claims against globalization,
there emerges a pattern in which some countries
successfully reap the benefits of the global economy
while others are being left behind. Those that fall
behind fail on a range of indicators. The causes of
their marginalization are more deep-seated and
complex than simply globalization and include
factors such as a lack of investment, poor education,
weak infrastructure and institutions, and civil and
political unrest. Focusing on globalization as a cause
of poverty and inequality distracts policymakers from
the real challenges of development. Yet, removing
the blame from globalization does not justify a purely
laissez-faire approach to the global economy.
Countries need active policies to spread the burdens
of adjustment and expand the winners circle if they
are to maintain political support for globalization and
reap the significant benefits it can bring.
To conclude, I am convinced that globalization is
good and it's especially good when you do your
homework, ... keep your fundamentals in line on the
economy, build up high levels of education, respect
the rule of law. ... When you do your part, I am
convinced that you will get the benefit.
Independent.
Mazur, J. (2000). Labor's New Internationalism.
Journal of Foreign Affairs, Jan/Feb.
Nye, J. S. (Apr 13, 2000). Look Again,
Globalization isn’t Bad for the Poor. International
Herald Tribune.
Pollin, R. (2000). Globalization, Inequality and
Financial Instability: Confronting the Marx, Keynes
and Polanyi Problems in Advanced Capitalist
Economies. Political Economy Research Institute
Working Paper Series Number 8.
Romer, P.M. Economic Growth. The Fortune
Encylopedia of Economics. Available on the web at
http://www.stanford.edu/~promer/Econgro.htm
Sirico, R. A. (1998). Free Trade and Human
Rights: The Moral Case for Engagement. Trade
Policy Briefing Paper No. 2.
Sachs, J. & Warner, A. (1995). Economic
Reform and the Process of Global Integration.
Brookings Papers on Economic Activity 1.

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