Introduction
Globalization
has become a major topic of discussion and concern in economic circles since
the mid-1990s. It is clear that the trend toward more integrated world markets
has opened a wide potential for greater growth, and presents an unparalleled
opportunity for developing countries to raise their living standards. At the
same time, however, the Mexican crisis has focussed attention on the downside
risks of this trend, and concerns have arisen about the risks of
marginalization of countries. All of this has given rise to a sense of
misgiving, particularly among developing countries.
So what is
"globalization"? What are its implications for the conduct of
economic policy, particularly in Africa? What are its potential benefits and
risks? What will developing countries have to do to benefit from it, to avoid
its downside risks? Is there any good reason to fear globalization? To answer
these and other questions, it would be useful first to explain what
globalization is, and what it is not, what has caused it, and what effects it
has had. Situating the discussion in this context will make it easier to
identify the benefits and the true risks of the trend to global integration
and, in turn, to determine the correct policy response.
What is
globalization?
In most
basic terms, the globalization of the world economy is the integration of
economies throughout the world through trade, financial flows, the exchange of
technology and information, and the movement of people. The extent of the trend
toward integration is clearly reflected in the rising importance of world trade
and capital flows in the world economy. An increasingly large share of world
GDP is generated in activities linked directly or indirectly to international
trade. And there has been a phenomenal growth in cross-border financial flows,
particularly in the form of private equity and portfolio investment, compared
with the past. In addition, the revolution in communication and transportation
technology and the much improved availability of information have allowed
individuals and firms to base their economic choices more on the quality of the
economic environment in different countries. As a result, economic success in
today's world is less a question of relative resource endowments or
geographical location than it used to be in the past. Now, it is more a
question of the market perception of the orientation and predictability of
economic policy.
Globalization
is first and foremost a result of the expansion, diversification and deepening
of trade and financial links between countries, especially over the last ten
years. This reflects above all the success of multilateral tariff reduction and
trade liberalization efforts. The Fund has played a key role in encouraging
current account convertibility as a basis for the expansion of world trade, and
more than two-thirds of the Fund's member countries have committed themselves
to this principle by accepting the obligations of Article VIII. Also, economic
thought itself has evolved over time, toward the general acceptance of the fact
that outward- oriented and open economies are more successful than closed,
inward-looking ones. Consequently, more than at any time previously, individual
countries in all parts of the world are liberalizing their exchange and trade
regimes in the conviction that this is indeed the best approach for growth and
development. Moreover, there is a deeper commitment of national authorities
throughout the world to sound macroeconomic policies, and to creating a more
stable environment for investment and the expansion of economic activity.
Finally, with the increasing liberalization of financial markets, and their
growing sophistication, capital markets have become integrated, and capital
flows are now largely driven primarily by considerations of risk and return.
The benefits
of these developments are easily recognizable--increasing trade has given
consumers and producers a wider choice of low-cost goods, often incorporating
more advanced technologies, and facilitated a more efficient use of global
resources. Greater access to world markets has allowed countries to exploit
their comparative advantages more intensively, while opening their economies to
the benefits of increased international competition. The rapid increase in
capital and private investment flows has raised the resources available to
countries able to attract them, and accelerated the pace of their development
beyond what they could otherwise have achieved.
Moreover,
greater openness and participation in competitive international trade have
increased employment, primarily of skilled labor, in tradable goods sectors.
With the expansion of these sectors, unskilled labor has found increased
employment opportunities in the nontradable sectors, such as construction and
transportation. The expansion of merchandise trade may also have lessened
migrationary pressures. On the other hand, the movement of labor across
national boundaries has in many cases lessened production bottlenecks, raising
the supply response of recipient economies, and increasing income in the
supplying countries through worker remittances. Openness to foreign expertise
and management techniques has also greatly improved production efficiency in
many developing countries.
But there
are also risks to globalization. The ability of investment capital to seek out
the most efficient markets, and for producers and consumers to access the most
competitive source, exposes and intensifies existing structural weaknesses in
individual economies. Also, with the speedy flow of information, the margin of
maneuver for domestic policy is much reduced, and policy mistakes are quickly
punished. Indeed, increased capital mobility carries the risk of destabilizing
flows and heightened exchange rate volatility, in cases where domestic
macroeconomic policies are inappropriate. And finally, it is clear that
countries that fail to participate in this trend toward integration run the
risk of being left behind.
Who benefits
and who loses?
It is
important to recognize that globalization is not a zero-sum game--it is not
necessary for some countries to lose in order that others may gain. But to take
advantage of this trend, countries will have to position themselves properly
through the right policies. Clearly, those economies that open themselves to
trade and capital flows on a free and fair basis and are able to attract
international capital will benefit the most from globalization. Open and
integrated markets place a premium on good macroeconomic policies, and on the
ability to respond quickly and appropriately to changes in the international
environment.
Success in
open markets, and in attracting new investment and advanced technology, also
means that the structure of economies is changing more rapidly than ever
before. As with any structural change, there will be some segments of society
that are at a disadvantage in the short term, even while other segments, and
the economy as a whole, are benefiting. This does not mean, however, that
countries should seek to isolate themselves from globalization. Rather,
governments must fully embrace globalization in awareness of its potential
risks, and seek to provide adequate protection for the vulnerable segments of
society during the process of change.
While
globalization raises the rewards of good policy, it also accentuates the costs
of poor policy. Credibility of economic policy, once lost, has become more
difficult to regain. What is now critical is the perception of markets that
economic policy formulation and implementation is consistent and predictable.
This underscores the importance of flexible and well-informed policy-making, of
solid, well-governed institutions, and of transparency in governance. Countries
with a poor or inconsistent policy record will inevitably find themselves
passed by, both from expanding trade and from private capital flows for
development. These are the countries that run the risk of marginalization.
What policy
response to globalization?
The question
of what policies are needed to benefit from globalization has preoccupied
economic thinking in recent years. In fact, this topic is a central theme of
the most recent edition of the IMF's World Economic Outlook. We studied those
economies that have made the most economic progress in recent years, and have
profited the most from recent trends. We found that success is closely linked
to an appropriate combination of policies with three main objectives: (i)
achieving and preserving macroeconomic stability; (ii) promoting openness to
trade and capital flows; (iii) and limiting government intervention to areas of
genuine market failure and to the provision of the necessary social and
economic infrastructure.
More
importantly, no one set of policies is a sufficient condition for success--indeed,
experience shows that poor policies in one area can obstruct progress, even if
policies in other areas are good. The three objectives of policies complement
and reinforce each other:
macroeconomic
stability, embodied in low inflation, appropriate real exchange rates and a
prudent fiscal stance, is essential for expanding domestic activity, and is a
precondition for benefiting from and sustaining private capital flows;
openness, in
the resolute pursuit of policies to rationalize and liberalize the exchange and
trade regimes, is vital in international competition. This forces the economy
to fully exploit its comparative advantage through trade;
and finally,
the primary role of the government should be the creation of an enabling
environment that encourages foreign and domestic investment, and of a solid
infrastructure to support an expanding economy. The government must also
implement policies that eliminate the structural weaknesses that would be
exposed by the heightened international competition. Not surprisingly, these
elements are generally central to the policy dialogue between the International
Monetary Fund and its members.
The
Challenges of globalization for Africa
Globalization
will continue to reinforce the interdependencies between different countries
and regions. It can also deepen the partnership between the advanced countries
and the rest of the world. And to support this partnership in a mutually
beneficial way, the advanced countries could help to further open their markets
to the products and services in which the developing world has a comparative
advantage. In addition, the reform efforts of the African countries will need
to continue to be supported by adequate financing on concessional terms. In
this regard, I am pleased to note that the Fund has put the ESAF, our
concessional lending facility, on a permanent footing, so that it can continue
to support reform efforts of the poorer countries, especially in Africa.
Moreover, the Fund and the World Bank have recently begun implementing the
framework for action to resolve the external debt problems of heavily indebted
low-income countries (HIPC), including their large multilateral debt. Three
African countries--Burkino Faso, Côte d'Ivoire, and Uganda--are among the first
countries to be considered under the Initiative.
The
challenge facing the developing world, and African countries in particular, is
to design public policies so as to maximize the potential benefits from
globalization, and to minimize the downside risks of destabilization and/or
marginalization. None of these policies is new, and most African countries have
been implementing them for some time. In particular, sub-Saharan Africa has
made substantial progress toward macroeconomic stability:
there has
been continued improvement in overall growth performance. Average real growth
has increased from less than 1 percent in 1992 to over 5 1/2 percent in 1996,
and this positive trend is expected to continue;
there has
been some success in bringing down inflation--many countries have already
achieved single digit inflation rates, and for the region as a whole, average
inflation is expected to fall from the peak of 60 percent in 1994 to 17 percent
in 1997;
countries
have also reduced their internal and external imbalances. The external current
account deficit has fallen from an average of 15 1/2 percent of GDP in 1992 to
about 9 percent projected for this year, while the overall fiscal deficit has
been cut from almost 12 percent of GDP to 6 percent over the same period.
African governments
have also made considerable strides in opening their economies to world trade.
A good indicator of this is the fact that 31 Sub-Saharan African countries have
accepted the obligations of Article VIII of the Fund's Articles of Agreement,
almost all of them since 1993. Most countries have moved ahead with trade and
exchange liberalization, eliminating multiple exchange rates and nontariff
barriers, and also lowering the degree of tariff protection. A recent
qualitative study by the African Department of the Fund indicates that the
number of countries in Sub-Saharan Africa with a "restrictive"
exchange regime declined from 26 in 1990 to only 2 in 1995, while the number of
countries with a "substantially liberal" trade regime rose from 26 to
38 over the same period.
Finally, the
restructuring of many African economies is gaining momentum. Throughout the
continent, government intervention in economic activity is on the wane.
Administrative price controls are being reduced and agricultural marketing has
been widely liberalized. The process of restructuring and privatizing state
enterprises has been underway for some time in most countries, though with
varying speed and degrees of success. And finally, fiscal reform is gaining
ground--African countries are taking firm steps to rationalize their tax
systems, to reduce exemptions, and to enhance administrative efficiency. At the
same time, they are also reorienting expenditures away from wasteful outlays
towards improved public investment and spending on key social services,
particularly health and basic education.
But, as I
pointed out earlier, it is essential to achieve the right combination of
policies. While Africa is clearly on the right track, there is still some way
to go. I see five main areas where African countries need to achieve greater
progress in order to speed up their participation in globalization:
maintaining
macroeconomic stability and accelerating structural reform
As the
continent enters the "second phase of adjustment", the emphasis must
be to maintain economic stability and to reinforce the implementation of
structural policies that will make the economies more flexible, encourage
diversification, and reduce their vulnerability to exogenous shocks. These
include further reforms in the areas of public enterprise activity, the labor
markets, and the trade regime. Governments must also ensure that public
services--including transportation networks, electricity, water, and
telecommunications, but also health services and education--are provided in a
reliable and cost-efficient fashion.
ensuring
economic security
Establishing
the right framework for economic activity addresses the second requirement of
policy--removing the sense of uncertainty that still plagues economic
decision-making in most of Africa. The direction and orientation of future
policy must be beyond question. This requires the creation of a strong national
capacity for policy formulation, implementation and monitoring. Moreover, the
transparency, predictability and impartiality of the regulatory and legal
systems must be guaranteed. This goes well beyond the respect of private
property rights and the enforcement of commercial contracts. It also involves
the elimination of arbitrariness, special privileges, and ad-hoc exemptions, even
where these are intended to encourage investment.
reforming
financial sectors
As the
Interim Committee observed during its April meetings in Washington, an open and
liberal system of capital movements is beneficial to the world economy.
However, rising capital flows place additional burdens on banking regulation
and supervision, and require more flexible financial structures. This aspect of
globalization thus confronts developing countries with a new challenge--to
accelerate the development and liberalization of their financial markets, and
to enhance the ability of their financial institutions to respond to the
changing international environment. Much remains to be done to reform and
strengthen Africa's financial systems, many of which are weak and poorly
managed.
achieving
good governance
National
authorities should spare no efforts to tackle corruption and inefficiency, and
to enhance accountability in government. This means reducing the scope of
distortionary rent-seeking activities; eliminating wasteful or unproductive
uses of public funds; and providing the necessary domestic security. Many
African countries will also have to undertake a comprehensive reform of the
civil service, aimed at reducing its size while enhancing its efficiency. In
short, governments must create confidence in their role as a valued and trusted
partner of private economic agents.
a
partnership with civil society
Finally,
African governments will need to actively encourage the participation of civil
society in the debate on economic policy, and to seek the broad support of the
population for the adjustment efforts. To this end, governments will need to
pursue a more active information policy, explaining the objectives of policies
and soliciting the input of those whom the policies are intended to benefit.
Globalization
and regional integration
With closer
economic integration, each country has an interest in ensuring that appropriate
policies are followed in its partner countries. This could be achieved by
coordination the relevant national policies within a regional context.
Throughout the continent, African governments are coming together to coordinate
components of their policies, and virtually all countries are now members of
regional organizations. Efficient regional cooperation allows the economies of
Africa to overcome the disadvantages of their relatively small size and, by
opening access to larger markets, to realize economies of scale. The
obligations of membership in some of these organizations also make it easier
for each individual country to achieve further progress in regulatory and
judicial reform (as is the case in the CFA franc zone); to rationalize payments
facilities and to relax restrictions on capital transactions and investment
flows (as in the Cross-Border Initiative); and to develop the mutual economic
infrastructure (as in the SADC). Enhancing the trade links among themselves
naturally also strengthens their ability to participate in trade on a global
scale, and could lead toward further progress in the direction of
nondiscriminatory multilateral trade liberalization.
The
challenge for the future will be to ensure that these regional organizations
are perceived as effective vehicles for the integration of African countries
into the world economy, providing mutual support to their members in their
reform efforts. They should not be considered as defensive mechanisms, intended
to ward off the "negative" aspects of globalization. Common regional
objectives should be set in terms of international best practices. And the
regional organizations should seek to push through reforms in the areas of the
legal and regulatory frameworks, financial sector restructuring, labor and
investment code reform, and exchange and trade liberalization that seek to
reach international standards as quickly as possible. The pace of progress
should be what is feasible, not what is comfortable for the slowest member.
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