Harvard Magazine 29

Globalization has brought littlebut good news to those with the products,skills, and resources to market worldwide.But does it also work for the world’s poor?

That is the central question around whichthe debate over globalization—in essence,free trade and free flows of capital—revolves.Antiglobalization protesters may have hadonly limited success in blocking world tradenegotiations or disrupting the meetings ofthe International Monetary Fund (IMF), butthey have irrevocably altered the terms of the debate. Poverty is now the defining issuefor both sides. The captains of the worldeconomy have conceded that progress in in-ternational trade and finance has to be measured against the yard-sticks of poverty alleviation and sustainable development.

For most of the world’s developing countries, the 1990s were adecade of frustration and disappointment. The economies of sub-Saharan Africa, with few exceptions, stubbornly refused to re-spond to the medicine meted out by the World Bank and theIMF. Latin American countries were bu≠eted by a never-endingseries of boom-and-bust cycles in capital markets and experi-enced growth rates significantly below their historical averages.Most of the former socialist economies ended the decade at lowerlevels of per-capita income than they started it—and even in therare successes, such as Poland, poverty rates remained higher

than under communism. East Asianeconomies such as South Korea, Thai-

land, and Malaysia, which had beenhailed previously as “miracles,” were dealt ahumiliating blow in the financial crisis of1997. That this was also the decade in whichglobalization came into full swing is morethan a minor inconvenience for its advo-cates. If globalization is such a boon forpoor countries, why so many setbacks?

Globalizers deploy two counter-argu-ments against such complaints. One is thatglobal poverty has actually decreased. Thereason is simple: while most countries haveseen lower income growth, the world’s

two largest countries, China and India, have had the opposite ex-perience. (Economic growth tends to be highly correlated withpoverty reduction.) China’s growth since the late 1970s—averag-ing almost 8 percent per annum per capita—has been nothingshort of spectacular. India’s performance has not been as extra-ordinary, but the country’s growth rate has more than doubledsince the early 1980s—from 1.5 percent per capita to 3.7 percent.These two countries house more than half of the world’s poor,and their experience is perhaps enough to dispel the collectivedoom elsewhere.

The second counter-argument is that it is precisely those coun-tries that have experienced the greatest integration with the

Time to change the rules—and focus

on poor workers

b y D A N I R O D R I K

Amid Argentina’s banking crisis, a demonstrator defaced a foreign bank branch in Buenos Aires in February.

Globalization for Whom?Globalization for Whom?

FORUM

P h o t o g r a p h b y E d u a r d o D i B a i a /A s s o c i a t e d P r e s s . I l l u s t r a t i o n © O r i o n P r e s s / C o r b i s

Reprinted from Harvard Magazine. For copyright and reprint information, contact Harvard Magazine, Inc. at www.harvardmagazine.com

30 July - August 2002

world economy that have managed to grow fastest and reducepoverty the most. A typical exercise in this vein consists of divid-ing developing countries into two groups on the basis of the in-crease in their trade—“globalizers” versus “non-globalizers”—and to show that the first group did much better than the second.Here too, China, India, and a few other high performers like Viet-nam and Uganda are the key exhibits for the pro-globalization ar-gument. The intended message from such studies is that coun-tries that have the best shot at lifting themselves out of povertyare those that open themselves up to the world economy.

How we read globalization’s record in alleviating poverty hingescritically, therefore, on what we make of the experience of a smallnumber of countries that have done well in the last decade ortwo—China in particular. In 1960, the average Chinese expectedto live only 36 years. By 1999, life expectancy had risen to 70 years,not far below the level of the United States. Literacy has risen fromless than 50 percent to more than 80 per-cent. Even though economic develop-ment has been uneven, with the coastalregions doing much better than the inte-rior, there has been a striking reductionin poverty rates almost everywhere.

What does this impressive experiencetell us about what globalization can dofor poor countries? There is little doubtthat exports and foreign investmenthave played an important role in China’sdevelopment. By selling its products onworld markets, China has been able topurchase the capital equipment and in-puts needed for its modernization. Andthe surge in foreign investment hasbrought much-needed managerial andtechnical expertise. The regions of Chinathat have grown fastest are those thattook the greatest advantage of foreign trade and investment.

But look closer at the Chinese experience, and you discoverthat it is hardly a poster child for globalization. China’s economicpolicies have violated virtually every rule by which the prosely-tizers of globalization would like the game to be played. Chinadid not liberalize its trade regime to any significant extent, and itjoined the World Trade Organization (WTO) only last year; tothis day, its economy remains among the most protected in theworld. Chinese currency markets were not unified until 1994.China resolutely refused to open its financial markets to foreign-ers, again until very recently. Most striking of all, China achievedits transformation without adopting private-property rights, letalone privatizing its state enterprises. China’s policymakers werepractical enough to understand the role that private incentivesand markets could play in producing results. But they were alsosmart enough to realize that the solution to their problems lay ininstitutional innovations suited to the local conditions—thehousehold responsibility system, township and village enter-prises, special economic zones, partial liberalization in agricul-ture and industry—rather than in o≠-the-shelf blueprints andWestern rules of good behavior.

The remarkable thing about China is that it has achieved inte-gration with the world economy despite having ignored theserules—and indeed because it did so. If China were a basket case

today, rather than the stunning success that it is, o∞cials of theWTO and the World Bank would have fewer di∞culties fitting itwithin their worldview than they do now.

China’s experience may represent an extreme case, but it is by nomeans an exception. Earlier successes such as South Korea and Tai-wan tell a similar story. Economic development often requires un-conventional strategies that fit awkwardly with the ideology of freetrade and free capital flows. South Korea and Taiwan made exten-sive use of import quotas, local-content requirements, patent in-fringements, and export subsidies—all of which are currently pro-hibited by the WTO. Both countries heavily regulated capital flowswell into the 1990s. India managed to increase its growth ratethrough the adoption of more pro-business policies, despite havingone of the world’s most protectionist trade regimes. Its compara-tively mild import liberalization in the 1990s came a decade after theonset of higher growth in the early 1980s. And India has yet to open

itself up to world financial markets—which is why it emerged unscathed fromthe Asian financial crisis of 1997.

By contrast, many of the countries thathave opened themselves up to trade andcapital flows with abandon have been re-warded with financial crises and disap-pointing performance. Latin America, theregion that adopted the globalizationagenda with the greatest enthusiasm in the1990s, has su≠ered rising inequality, enor-mous volatility, and economic growth ratessignificantly below those of the post-World War II decades. Argentina repre-sents a particularly tragic case. It triedharder in the 1990s than virtually any coun-try to endear itself to international capitalmarkets, only to be the victim of an abruptreversal in “market sentiment” by the end

of the decade. The Argentine strategy may have had elements of agamble, but it was solidly grounded in the theories expounded byU.S.-based economists and multilateral agencies such as the WorldBank and the IMF. When Argentina’s economy took o≠ in the early1990s after decades of stagnation, the reaction from these quarterswas not that this was puzzling— it was that reform pays o≠.

What these countries’ experience tells us, therefore, isthat while global markets are good for poor countries, the rulesaccording to which they are being asked to play the game areoften not. Caught between WTO agreements, World Bank stric-tures, IMF conditions, and the need to maintain the confidence offinancial markets, developing countries are increasingly deprivedof the room they need to devise their own paths out of poverty.They are being asked to implement an agenda of institutional re-form that took today’s advanced countries generations to accom-plish. The United States, to take a particularly telling example,was hardly a paragon of free-trade virtue while catching up withand surpassing Britain. In fact, U.S. import tari≠s during the lat-ter half of the nineteenth century were higher than in all but afew developing countries today. Today’s rules are not only im-practical, they divert attention and resources from more urgentdevelopmental priorities. Turning away from world markets issurely not a good way to alleviate domestic poverty—but coun-

China has achieved

integration with the

world economy despite

having ignored

every rule by which

globalization is played.

Reprinted from Harvard Magazine. For copyright and reprint information, contact Harvard Magazine, Inc. at www.harvardmagazine.com

Harvard Magazine 31

tries that have scored the most impressive gains are those thathave developed their own version of the rulebook while taking ad-vantage of world markets.

The regulations that developing nations confront in those mar-kets are highly asymmetric. Import barriers tend to be highest formanufactured products of greatest interest to poor countries,such as garments. The global intellectual-property-rights regimetends to raise prices of essentialmedicines in poor countries.

But the disconnect betweentrade rules and developmentneeds is nowhere greater than inthe area of international labormobility. Thanks to the e≠orts ofthe United States and other richcountries, barriers to trade ingoods, financial services, and in-vestment flows have now beenbrought down to historic lows.But the one market where poornations have something in abun-dance to sell—the market forlabor services—has remaineduntouched by this liberalizingtrend. Rules on cross-borderlabor flows are determined al-most always unilaterally (ratherthan multilaterally as in otherareas of economic exchange) andremain highly restrictive. Even asmall relaxation of these ruleswould produce huge gains forthe world economy, and for poornations in particular.

Consider, for example, insti-tuting a system that would allottemporary work permits toskilled and unskilled workersfrom poorer nations, amountingto, say, 3 percent of the rich coun-tries’ labor force. Under thescheme, these workers would beallowed to obtain employment in the rich countries for a periodof three to five years, after which they would be expected to re-turn to their home countries and be replaced by new workers.(While many workers, no doubt, will want to remain in the hostcountries permanently, it would be possible to achieve acceptablerates of return by building specific incentives into the scheme.For example, a portion of workers’ earnings could be withelduntil repatriation takes place. Or there could be penalties forhome governments whose nationals failed to comply with returnrequirements: sending countries’ quotas could be reduced in pro-portion to the numbers who fail to return.) A back-of-the-enve-lope calculation indicates that such a system would easily yield$200 billion of income annually for the citizens of developing na-tions—vastly more than what the existing WTO trade agenda isexpected to produce. The positive spillovers that the returneeswould generate for their home countries—the experience, entre-preneurship, investment, and work ethic they would bring back

with them—would add considerably to these gains. What isequally important, the economic benefits would accrue directlyto workers from developing nations. There would be no need for“trickle down.”

If the political leaders of the advanced countries have chosen tochampion trade liberalization but not international labor mobil-ity, the reason is not that the former is popular with voters at

home while the latter is not.They are both unpopular. Whenasked their views on trade policy,fewer than one in five Americansreject import restrictions. Inmost advanced countries, includ-ing the United States, the pro-portion of respondents whowant to expand imports tends tobe about the same or lower thanthe proportion who believe im-migration is good for the econ-omy. The main di≠erence seemsto be that the beneficiaries oftrade and investment liberaliza-tion have managed to becomepolitically e≠ective. Multina-tional firms and financial enter-prises have been successful insetting the agenda of multilateraltrade negotiations because theyhave been quick to see the linkbetween enhanced market ac-cess abroad and increased profitsat home. Cross-border laborflows, by contrast, usually havenot had a well-defined con-stituency in the advanced coun-tries. Rules on foreign workershave been relaxed only in thoserare instances where there hasbeen intense lobbying from spe-cial interests. When Silicon Val-ley firms became concernedabout labor costs, for example,

they pushed Congress hard to be allowed to import software en-gineers from India and other developing nations.

It will take a lot of work to make globalization’s rulesfriendlier to poor nations. Leaders of the advanced countries willhave to stop dressing up policies championed by special interestsat home as responses to the needs of the poor in the developingworld. Remembering their own history, they will have to provideroom for poor nations to develop their own strategies of institu-tion-building and economic catch-up. For their part, developingnations will have to stop looking to financial markets and multi-lateral agencies for the recipes of economic growth. Perhaps mostdi∞cult of all, economists will have to learn to be more humble!

Dani Rodrik ’79 is Hariri professor of international political economy at theKennedy School of Government and author of The New Global Economyand Developing Countries: Making Openness Work.

Rallying to the cry of “Enough!” thousands of demonstrators filled theplaza in front of the government palace in Buenos Aires last summer.

P h o t o g r a p h b y D a n i e l L u n a /A s s o c i a t e d P r e s s

Reprinted from Harvard Magazine. For copyright and reprint information, contact Harvard Magazine, Inc. at www.harvardmagazine.com