Globalization is good for the LDCs – but not good enough

The world’s most marginalized areas are chronically poor and their futures look bleak. How will they ever be able to rise out of the trap of practically nonexistent growth and hopeless health prospects, people ask. Many then answer that increasing interconnectedness with the rest of the world, through contemporary globalization, just might be the panacea these countries so desperately seek. This article tries to explore this suggestion by looking at the economic empirics as well as at what ought to be done better in the future.

The Least Developed Countries, the LDCs, are a group of 48 countries that make up 12 percent of the world population but only accounts for less than two percent of world GDP and have HDI values of less than 0.3 on average.Important to note is that most are either landlocked nations or small island developing states, and that three fourths of them are members of the WTO and most of the rest aspire to be . It should be said that progress is being made, for example in Sub-Saharan Africa in spite of what the tracking of the Millennium Development Goals seem to show¹, but it is not being made fast enough.

I here focus on globalization over approximately the last fifty years, thereby excluding the arguably most globalizing process in history: colonialism. In order to minimize this shortcoming, readers are to note that the development of many of the LDCs was adversely affected by and are encouraged to keep the processes of neo-colonialism in mind.
The globalization definition used: the removal of barriers to free trade and the intensification of global interconnectedness. This sounds like a pure economic definition, but as we shall see it includes more.

Is globalization good or bad for the LDCs?

Economic convergence or divergence?

There is no consensus or clear conclusion on if world income inequalities have worsened or improved over the period we look at. Some data point towards divergence and others point towards convergence, possibly with a majority in favor of convergence.² But how about if we isolate the LDCs from the developing countries? As just a minor part of the developing world, it is possible that they were left worse off even if global income equalities improved. FIG 1 shows that during the last 30 years, there has actually been a divergence of about 0.15 percentage points between the LDCs and the rest of the world, and a status quo against the high income countries (implying further evidence for convergence between developing countries and high income countries). Since the mid-1990s though, there has been convergence against both, and these trends might continue. Note, however, that we are talking about very small changes on very, very small shares.

So the evidence is inconclusive regarding the LDCs. Inequality seems neither to have increased nor decreased.

Absolute economic improvements make the picture clearer

We also need to consider absolute improvements: if the LDCs’ living standards have improved due to globalization, surely globalization must be beneficial. So, has there been a reduction in poverty in the world? Here, the answer is more straightforward: yes³. The debate is mostly about how big the decrease is. However, we again need to isolate the LDCs. UNCTAD shows that there was a poverty reduction in the LDCs during 1990–2007, even if it was substantially smaller than for the other developing countries.

But did this come about due to globalization? Measuring globalization’s part in reductions in poverty and inequality (and growth, not discussed here because of space constraints) is hard. However, if we accept that globalization has been a major growth driver during this period, it is hard to imagine the LDCs having reduced poverty without it. For example, according to the influential – and controversial – Jeffrey Sachs , who embraces the almighty two in these circumstances, neo-liberalism and modernization theory, geographical features of the LDCs (e.g. landlockedness, extreme climate, tropical diseases, small sizes, or remoteness to markets) makes these countries heavily disadvantaged and in need of inward investments in order to escape the poverty trap.⁴ If these arguments have validity to them, which might not seem counterintuitive, globalization is good since it promotes foreign direct investment, FDI.

Interconnectedness have made the world a smaller place

Another point in favor of globalization is how it connects the world. Transportation and communication revolutions have shrunk the world into a ‘global village’, where it is increasingly difficult to remain indifferent to distant others. A good example is the massive amount of money raised after last year’s Haitian earthquake, brought to our living rooms by the international media. This interconnectedness also enables political discussions and activism all over the globe, like the global political actions orchestrated by 350.org to fight climate change. The interconnectedness has also had positive implications through the growing reach of organizations protecting the interests of the poor and marginalized, such as the ILO, the WWF and, in some respects, the UN. Interconnectedness also makes it possible for LDCs to skip certain stages of technological development and quickly reap benefits of new technology, e.g. skipping land lines and going straight to cell phones. The ability to do this, however, of course varies greatly.

Overall, I think it is fair to argue that globalization has been good for the LDCs, even if all of its promises have not been fulfilled (consider FIG 2, which shows progress at the same time as the urgent need for swift development in the LDCs). However, there is much room for improvements that could make globalization work better for the LDCs.

Potential for improvement

International economic institutions need to be reformed

Playing a major role in the globalized world are the international economic institutions, mainly the World Bank and the IMF with their major influences over developing countries’ policies, and the WTO with its major influence over international trade rules (the OECD is not explicitly discussed since it mainly exerts it influence through the aforementioned institutions). These institutions are commonly seen as neo-liberal flag-bearers and zealous propagators of free markets and curtailment of national sovereignty; many argue that globalization could have brought more benefits to the poorest had these institutions not been so inclined towards market fundamentalism.

One of them is Joseph Stiglitz, a former World Bank chief economist, who calls for less resistance towards certain government market interventions; for increasing discussions of different possible policies rather than the promotion of a single, standard, Western solution indifferent to local circumstances and with strong antidemocratic tendencies; for the displacement of the conditionalities of the Structural Adjustment Programmes (and successors) resulting in unequal growth at best and hunger riots at worst; for corrections on a global trading system forcing developing but not developed countries to open up markets; and for the remaking of trade rules on intellectual property such as the TRIPs agreement, leading to bio-piracy and price hikes on crucial drugs.⁵

The world-renowned free market proponent Jagdish Bhagwati , on the other hand, argues that the conditionalities are loose and often evaded, that trade liberalization is readily embraced by developing countries, and that these actually have higher tariffs etc. than developed countries. However, he agrees that the WTO should focus only on trade and that, yes, there is a democratic deficit at its negotiation tables. Therefore and overall, I think it is worth listening to Stiglitz, and many others, and begin reformations of these institutions.⁶

Transnational corporations can do a lot better⁷

Transnational corporations, TNCs, are often claimed to be the real winners – and villains – of globalization⁸. No doubt, TNCs’ FDI has made major contributions to developing countries through providing capital and market access, but they are also regularly criticized for adverse economic effects on host economies and local people – so what is their net impact?

One common criticism is that some TNCs have virtually no positive spillover effects on host countries or even that they “leak” financially by sending home most profits made. Another criticism is that the TNCs’ intra-corporate transactions enable them to pay less tax in the host countries, so called transfer pricing. Relating to taxes, TNCs are often accused of making developing countries participate in a race to the bottom regarding tax levels, pollution levels, labor rights etc., in competing for establishments. TNCs have also lobbied the WTO for rules restricting member states from imposing restrictions on them.

The most common criticism, however, is that TNCs exploit low cost labor. Sweatshops, such as the infamous maquiladoras in Mexico near the U.S. border, vividly illustrate this point. Counterarguments are that TNCs actually pay salaries above local averages, have no control over conditions at local suppliers, and because of highly competitive markets do not have the surpluses to increase wages further. I find the latter parts hard to believe, but even if true, corporations can still do a lot together. A recent Greenpeace “who-can-pledge-the-most” campaign, Detox , resulting in sportswear giants Nike, Puma and Adidas promising reduced use of toxic chemicals, demonstrates this. Of course, Corporate Social Responsibility, CSR, practices should already have been in place.

The most important argument in favor of TNCs is of course that the number of jobs in host economies increases. Jobs are created both directly and indirectly, with the latter depending on the degree of local linkages established – if the TNCs use only foreign suppliers or employees, the effect on the host economy might be minimal. Indeed, the net effect may be negative if the TNC drives local firms out of business instead of stimulating them. Quality of jobs also matters: capacity building ones are preferred over low-skilled.

Another important argument is growth-enabling technology transfer. The degree to how beneficial this is depends on how much of the “know-why” is transferred along with the “know-how”, how appropriate the technology is to local circumstances, to what degree safety and environmental principles are enforced, and of course that the TNCs do not actively try to suppress the transfer.

To me, it is clear that TNCs can have benign impacts on developing countries, but that there are numerous points to address in order to increase the probability of this. But again, we need to isolate the LDCs. The result is strikingly disappointing: according to the UNCTAD’s World Investment Report 2011, the amount of FDI going into the LDCs is miniscule and has been falling over the last years. So the first step is for TNCs to establish themselves in the LDCs to a higher degree.

Foreign aid needs to be given on the basis of past performance

A large feature of globalization is foreign aid, which has brought benefits to millions of people but also has had its (spectacular) shortcomings⁹. There are several ways in which foreign aid could be made to function better. For example, aid and development economist William Easterly makes a compelling case for aid to be tied to past performances in promoting growth, rather than to empty promises from (corrupt) governments, and by making sure aid doesn’t disproportionately benefit particular ethnic groups, spurring ethnic conflict. For him, the incentives for recipients to use the aid for long-term investments and good policies have often been lacking in the past, and aid institutions have not punished bad behavior enough because of internal budget considerations.¹⁰

Climate change – the largest threat to the LDCs?

Not only do the LDCs’ geographical locations impede growth prospects, they also make the countries more susceptible to the harmful effects of climate change than most other countries. Climate change will lead to, among others, even more economic hardships, health and water stress, worsening of tropical diseases, and, for the island LDCs, the threat of literally being washed away¹¹. The reason I consider this here is of course that globalization through higher world trade, transport, travel and others have dramatically raised emissions of greenhouse gases to levels much higher than what would otherwise have been the case. Hopefully, in a globalized world the people of the LDCs, the ones least responsible for the problem, can be helped, maybe even relocated, by the international community. And, hopefully, here the hyped technology transfer can make a real contribution by deploying solar and wind energy generation. But the prospects look bleak. However, globalization might also be our best bet on fighting climate change, because global problems require global solutions.

Conclusion

Globalization has been good for the LDCs but there is potential for much more. Improvements benefitting the LDCs would be:
• to democratize and equalize international economic institutions and make them more open to differing local conditions;
• to ensure that TNCs are not being made too powerful, are made more accountable, and having them adopt CSR practices;
• to reform foreign aid practices towards looking at progress made rather than promises;
• and to have a global community committed to mitigating and adapting to climate change in a concerted manner.

By: Tim Isaksson

Notes

¹ For an explanation on this statement, mainly resting on the indicators and mathematical methods used to illustrate progress towards the goals and how this underscores progress actually made in Sub-Saharan Africa, and thereby demoralizes local populations and discouraging foreign direct investment, see Easterly (2009).

² For arguments in favor of divergence, see Easterly (2001: 59ff) and Bhalla (2002: 26). For arguments in favor of convergence, see Bhagwati (2004: 67), Bhalla (2002: 3, 174, 178) and Hillebrand (2008: 728, 733f).

³ See for example Bhagwati (2004: 65ff) and Bhalla (2002: 11). Stiglitz (2003: 5) is a notable exception.

⁴ See for example Sachs (2005: 47).

⁵ Stiglitz (2003: xii, xivf, 5–8, 247).

⁶ Bhagwati (2004: 5f, 104f, 182f, 232).

⁷ The following discussion is based on Dicken (2007: 454, 460–471) and Bhagwati (2004: 164f, 171f).

⁸ How big the TNCs really are is a contested question that mostly hinges on the method of comparison. By comparing the companies’ sales with countries’ GDP, many TNCs appear to be larger than many developing countries – see for example Anderson & Cavanagh (2000). Many, however, argue that this is a wildly erroneous method and that a better measurement of the size of TNCs is of their value added, which gives much lower figures than sales. See for example De Grauwe & Camerman (2002).

⁹ See for example Stiglitz (2003: 5) and Bhagwati (2004: 164).

¹⁰ Easterly (2001: 38, 118, 274).

¹¹ See for example Mastaler (2011: 65, 71–74), Huq et al (2004: 25-31= and (Stiglitz, 2003: 223).

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Images and charts

FIG 1: World Bank. World databank, http://databank.worldbank.org, qcquired 2011-09-15

FIG 2: UNDP. International Human Development Indicators, http://hdr.undp.org/en/data, acquired 2011-09-15